Friday, July 14, 2006

Why an inflationary bust is inevitable

From Money Week:

So, in order to generate nominal GDP growth of US$751 billion, in 2005, total credit market debt had to increase by US$3,340 trillion — 4.4 times faster than GDP. Now, as is the case for the current account deficit, which hovers around 7% of GDP at present, the optimists will say that debt growth that is four times larger than GDP growth is sustainable. This may be the case for now, but the point is that, in the 1950s and 1960s, debt and GDP grew at about the same rate, with the result that in 1980, when Paul Volcker tightened meaningfully, total credit market debt was “only” about 130% of GDP.

Then, in the 1980s, debt grew at about two-and-a-half times GDP, in the 1990s at about three times GDP, and now at more than four times. In other words, as GaveKal Research pointed out, in order to sustain the asset bull markets and the economic expansion, debt growth will have to accelerate soon to initially five times GDP, later to six times, and if we extrapolate the trend that has prevailed since the 1960s, eventually to more than 20 times GDP.

Debt growth at 20 times GDP? Yowch. Not to worry, I'm sure Ted Stevens can help out.


Anonymous Anonymous said...

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7/21/2006 5:11 PM  
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7/23/2006 1:49 PM  

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