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Mix-Ansicht- DEBT BUBBLE UPDATE - leibovitz, 10.03.2003, 10:06
DEBT BUBBLE UPDATE
-->DEBT BUBBLE UPDATE
The main factor that has surprised me since the"Bubble of 2000" peak has been the continued strong growth in debt. In fact, just released Fed flow of funds statistics show U.S. non-financial debt grew 7.1% last year, the fastest since 1989. Household borrowing grew 9.8%, the fastest since 1988. Given the continuing bear market in stocks and sluggish, muddling economic growth, the rise in debt is surprising. I have mixed feelings on the debt growth. The positive side is that the so-called"liquidity trap", where the Fed is impotent ("pushing on a string"), assumes that monetary policy can lead borrowers and spenders to water (liquidity available at low interest rates) but can't make them drink; that clearly did not happen. It is my view that the deflationary case depends almost totally on borrowers who are retrenching and demoralized. But the negative side is that the debt bubble is just that
much bigger, meaning the risks are still quite high. Debt continues to explode at rates well in excess of economic growth. Total non-financial debt to GDP is shown on chart E500 (below, top). As to two main factors in non-financial debt, chart E0504 (top of page 2) shows that corporations are trying to cut debt while household debt relative to disposable personal income rose to another high as mortgage debt exploded, as shown on chart E516 (bottom of page 2).
I have spent a lot of time studying secular turns in the stock market/economic outlook. From the late Hamilton Bolton I learned that besides a liquidity trap, another key to deflation was a sharp turndown in the velocity of money. On chart E0521 (below, bottom) one can see that money velocity has turned down sharply. That leads me to say, no deflation, yet.
In conclusion, as long as debt grows sharply, deflation is unlikely. On the other hand, the size of the debt bubble and the falling velocity of money still warn that risks are high, and economic growth will be sluggish, at best.
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