Why It's So Slow

Hedge fund billionaire Ray Dalio has a simple way to explain why the economy is so slow. Imagine someone who makes $100,000 a year and has a net worth of $100,000 with no debt. That person can safely borrow about $10,000 a year for several years, meaning they can spend $110,000 a year, even though they only make $100,000. The flip side to all that spending is that someone else is earning $110,000 a year. "For an economy as a whole," Dalio writes, "this increased spending leads to higher earnings, that supports stock valuations and other asset values, giving people higher incomes and more collateral to borrow more against, and so on."

But it can only last so long. Eventually, debt service payments take up too much of income, and the tide shifts. "The person spending $110,000 per year and earning $100,000 per year has to cut his spending to $90,000 for as many years as he spent $110,000" to pay down the borrowing spree, Dalio says. That means someone else can now only earn $90,000.

It's called deleveraging, and it's by far the largest reason our economy is so slow.

Some of the debt figures are truly staggering. According to hedge fund manager Kyle Bass, global credit rose from $80 trillion in 2000 to $210 trillion today. In America, household debt rose from $6.5 trillion in 2000 to almost $14 trillion by 2008. As a percentage of disposable income, household debt rose from 59% in 1960 to 130% by 2007.

It all adds up to an incredible amount of consumers like those in Dalio's example, spending more than they earn, which allows others to enjoy a higher income, which allows even more borrowing, and so on. That created an illusion of prosperity: Without drawing down on home equity loans, the economy would have been in or near recession for most of the last decade.
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imagep said:

At least we are already through 4 years of that decade (recession officially started in Dec of '07).

I don't disagree with the analysis, but it's got a lot of "zero sum theory" in it, which conservatives are always telling me doesn't exist. I'm wondering if this was Morgan Housel is a liberal or a conservative, and if conservatives will disagree with his analysis.

The other thing I am wondering is where did the money that he was borrowing come from, and where is it going now?

Conservatives will tend to argue that it is going back into the investment pool and will be utilized for business expansion now that it's not being "wasted" on consumer spending. Of course that theory is disproved because our businesses expanded while consumer lending was huge, now that there is not so much consumer lending, businesses are not expanding.

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mbig said:

It doesn't matter who is/was President It was and is going to be slow.
Blaming Obama for no big recovery is ridiculous.
His mistake, thinking there would be a quicker recovery. He didn't get that this was no usual 18 month recession.

Why It's So Slow
By Morgan Housel
November 29, 2011

The Borrowed Bush 'prosperity' first six years just the final irresponsible straw.
Blame aplenty to go around: Consumers/us, Banks/Wall St, Presidents, Congress, Fed, etc.

Spending has to be Axed and Taxes Raised.
It's probably going to be Worse as soon as we start getting responsible/not borrowing 40% of our budget.
Until then, let's hope we get a small recovery. We face another 'dead Decade' as the 1930s.

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Missed AB said:

How much of a tax increase do you expect to put a dent into the debt? Realize cutting spending and raising taxes each have a negative effect on GDP.
What percentage of GDP do you expect to be able to extract from society? I have seen several very informative posts here that shows around 18% is the best that can be expected...

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mbig said:

On the Tax side, I think it's a Foregone conclusion the Bush Tax cuts have to expire- for openers.
Perhaps add the the Buffett Bracket/s; ie, 40/50 or 50/60% on over 1 Mil/10 Mil as well.
Cap Gains and Divs were [also] lowered from 28% to 15% under Bush. Those will be at least returned to at least 20% if not taxed as regular income.
Top rate definitely has to go up tho it should be for a multiple of 250k.

On the Spending side, it's mostly entitlements; Medicare/SS etc.
But the whole govt Bureaucracy is bloated and unwieldly. Can we afford Full pensions and Benefits for govt workers? Do we need whole Departments in light of the problem?
This is where Ron Paul has some appeal, if draconian to most.
Some BIG stuff Has to go to save the most important/other Big Stuff.
States/Cities/etc are dealing with this now. Laying off hundreds of Thousands.
Medicare has to be gutted and/or co-payed. No way we can afford 7% a year increase medical cost from Inflation and more people on the roles.
SS benefit age will of course go up. Probably 70.
http://www.debatepolitics.com/economics/110574-kyle-bass-confessions-dangerous-mind.html

Yes, 18-19% of GDP is all we traditionally get in income tax. It's 15½% now.
So taxes have to not just return to pre-Bush-Cut levels but rise above them.
Most of the developed world with Social programs takes more than 19%. MUCH more.
I believe this table includes FICA etc in addition to just income tax.
List of countries by tax revenue as percentage of GDP - Wikipedia, the free encyclopedia
We pay 25% less than Canada, 1/3 Less than Germany, and 40% less than France.

Everything has to be on the Table.
The $1.2 Trillion over 10 years they're haggling about now is Chicken feed. And they can't even agree on that! This spells disaster.
All the Democrat's revenue/tax suggestions should be enacted...
and All the GOP Spending cuts..
Then... Double or Triple Them Both.

Yes, Reality is Pain. Little-to-no GDP growth for at least 5 years from That point- which probably start next year with payroll tax increases IF not extended.
The consumer, at least, has had almost 4 years of deleveraging and maybe just 3-4 more to go.
But he's going to be paying more taxes and there will be less Govt consumers.
Of course, Govt sponsored consumers account for All our job growth in the last dozen years!
'Private' jobs in Education, Health, Defense, etc are 'private' but all govt supported/funded.
minute 11:45, again here Kyle Bass @ AmeriCatalyst 2010 | 'Confessions of a Dangerous Mind' - YouTube

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Missed AB said:

What percent of GDP do you expect to be able to extract? Consider the top tax rate in the 60's was what 80 or 90%? What was the greatest percent of GDP that went to paying taxes?

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Democratic lawmakers and Gov. Jerry Brown had hoped for a $4 billion increase in tax revenue through the current fiscal year when they passed the state budget last summer. The analysis released Wednesday said revenue — a majority which comes from income, sales and corporate taxes — will run $3.7 billion lower than the state assumed.

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Medland's economy was 60 percent private sector, 40 percent public sector. It financed its public sector with a 25 percent income tax on all workers and a 20 percent VAT levied on the private sector. The VAT left the private sector with only 48 percent of GDP to pay its workers and investors, so total income tax collections were 22 percent of GDP. Coupled with VAT collections of 12 percent of GDP, revenues were 6 percent of GDP short of the 40 percent of GDP being spent.

The Prime Ministers of Medland and Kaiserville and the head of the Uberalles Central Bank (UCB) agreed on a Grand Plan to fix the problem. The Medland VAT would be raised by 10 points to generate the 6 percent of GDP needed to fix the primary budget deficit.

The sovereign bond crisis was averted and markets rallied as the banks in Kaiserville would no longer take losses on their bond holdings and it looked like Medville's fiscal problems were solved. But the higher VAT posed a problem. In many countries higher VATs are passed on to consumers in the form of higher prices. But the UCB favored price stability and there was sufficient slack in the Medland economy that firms lacked pricing power. Medland could only respond by cutting costs (in this case wages) from the old rate of 48 to the new rate of 42, which is what they had left after the higher VAT. Income tax collections on private sector workers immediately dropped from 12 to 10.5, so state revenues declined and the primary deficit reappeared. With after-tax wages now down, demand for private sector goods and services dropped by 7.5 percent. Layoffs rose. Both VAT and income tax receipts began to drop. Worse for the long run, Medland's most productive private sector workers and entrepreneurs began leaving as their current compensation was now unattractive relative to both the public sector and to Kaiserville's private sector and their prospects were bleak.

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Missed AB said:

What percent of GDP do you expect to be able to extract? Consider the top tax rate in the 60's twas what 80 or 90%? What was the greatest percent of GDP that went to paying taxes?

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"...Harvard economist Kenneth S. Rogoff calls the recent period "the second great contraction," the first being the Great Depression and one from which "there is No quick escape...the real problem is that the global economy is badly overleveraged." My colleague Alain Sherter notes that one way to accelerate the deleveraging process is to transfer wealth from creditors to debtors. "The government would write down the value of distressed mortgages in return for a share of the upside when home prices rebound." But with a political system deadlocked and worries about the nation's $15 trillion debt heightened, the possibility of fast-tracking deleveraging seems remote.

When Rogoff and his co-author Carmen M. Reinhart wrote their seminal work on financial crises, "This Time is Different: Eight Centuries of Financial Folly," there seemed to be disbelief that advanced economies like the U.S. and Europe would encounter a similar pattern. Even some economists were slow to acknowledge that the recession that the economy just suffered was quite different than those in the past. (They appear to have gotten on board with the idea: a survey by the National Association for Business Economics found that economists are worried about narrowing corporate profits; the potential impact of Europe's financial crisis; and the impending fiscal cliff.)

No matter how much we think we have learned from the past, there is no escaping that "financial crises are protracted affairs." According to Rogoff and Reinhart, the post-crisis slow-growth period usually lasts as long as the boom that preceded it, though sometimes even longer. The U.S. housing boom spanned 7 years (prices doubled from 2000 - 2007), which means that a best-case scenario could mean that it will be June 2016 before the economy returns to pre-recession levels of growth, employment and output.

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Missed AB said:

What percent of GDP do you expect to be able to extract? Consider the top tax rate in the 60's was what 80 or 90%? What was the greatest percent of GDP that went to paying taxes?

Click to expand...