Global Economy (split from US Economics)

[SergUpstart]

On 9/8/2021 at 3:22 AM, craigtempe said:

If simply put, debt is loss of opportunity, what does that mean to distant future if nothing is done soon?

We should talk not only about the American, but in general about the world economy. 

Global debt could reach $300 trillion by the end of the year.

https://psm7.com/money/mirovoj-dolg-mozhet-dostignut-otmetki-v-300-trln-uzhe-v-etom-godu.html

[iNow]

4 hours ago, SergUpstart said:

Global debt could reach $300 trillion by the end of the year.

And what is the consequence you see coming from this, especially if transactions and money flows are still occurring unimpeded regardless of aggregate debt levels? 

[SergUpstart]

19 minutes ago, iNow said:

And what is the consequence you see coming from this, especially if transactions and money flows are still occurring unimpeded regardless of aggregate debt levels? 

I don't see anything good in this. Something must eventually happen, either hyperinflation or a parade of defaults. The question is when. How long can an atom be in an excited state? How long can water vapor be in a supercooled state?

[iNow]

21 minutes ago, SergUpstart said:

I don't see anything good in this.

But that's not what I asked you. Please be clear, what do you see bad in this?

22 minutes ago, SergUpstart said:

Something must eventually happen, either hyperinflation or a parade of defaults

Again, if debts are being paid, why would inflation and default rates increase? You are conflating them, but they're different things. Debt is not a problem so long as it continues being properly serviced. 

Do you disagree? If so, why and for what reason?

[SergUpstart]

1 hour ago, iNow said:

Again, if debts are being paid, why would inflation and default rates increase? You are conflating them, but they're different things. Debt is not a problem so long as it continues being properly serviced. 

The financial system is gradually losing its stability. The Fed already does not have the opportunity to significantly raise rates, since this will cause problems with debt servicing.

[iNow]

1 hour ago, SergUpstart said:

The financial system is gradually losing its stability.

According to what metric? You may as well say the financial system is losing it's pizazz... It's meaningless as currently phrased. 

1 hour ago, SergUpstart said:

The Fed already does not have the opportunity to significantly raise rates

Given that rates are historically low and practically zero, they have literally nothing BUT opportunity to raise them, significantly or otherwise. 

1 hour ago, SergUpstart said:

since this will cause problems with debt servicing

How so?

You're being evasive I suspect because you don't really understand what you're talking about and are just throwing around buzz words. I'm asking you to be more specific. Can/Will you?

[SergUpstart]

6 minutes ago, iNow said:

How so?

If you have a debt of $ 1,000 at a rate of 1%, then you will have to spend $ 10 a year on debt servicing, and if the rate increases to 2% , then you will need $ 20 for debt servicing.

And there is another problem with debts. If the population is heavily credited, then it can no longer take out loans for the purchase of goods, including electronics, cars and real estate. This should inevitably cause a decline in demand, which can develop into a sales crisis.

[MigL]

9 minutes ago, iNow said:

1 hour ago, SergUpstart said:

The Fed already does not have the opportunity to significantly raise rates

Given that rates are historically low and practically zero, they have literally nothing BUT opportunity to raise them, significantly or otherwise. 

1 hour ago, SergUpstart said:

since this will cause problems with debt servicing

How so?

One of the 'controls' used to keep inflation at manageable levels is variance of lending rates.
Once the citizenry has taken on too much personal debt, the ability to raise lending rates has to be used very carefully ( or not at all ) as it would lead to massive defaulting on debt, bank failures and recession.
As in 2008. 
We realized, then, that unrealistic debt levels were a problem, and stricter controls over borrowing were solutions, yet in my area, home ownership has become impossible or young pople, due to house prices doubling in the past two years ( over 1/2 Million is entry level ). Scarcity of rental property ownership has resulted in skyrocketing rents, and increased homelessness
Have we already forgotten ?

[iNow]

16 minutes ago, SergUpstart said:

If you have a debt of $ 1,000 at a rate of 1%, then you will have to spend $ 10 a year on debt servicing, and if the rate increases to 2% , then you will need $ 20 for debt servicing.

Yes, that's correct, but existing agreements would be unaffected by future rate changes. If you lock in your mortgage at 3% for 30 years, that doesn't bump up to 11% just because that's the going rate 5 years from now. 

Your use case just means there'd be less borrowing, which according to you is a good thing... so what's the problem, exactly? 

17 minutes ago, SergUpstart said:

And there is another problem with debts. If the population is heavily credited, then it can no longer take out loans for the purchase of goods, including electronics, cars and real estate

Right, but that doesn't apply to countries. As long as others are willing to lend, it doesn't matter (so long as that debt can be serviced). Sorry, you're not making sense, and you're continuing to conflate a household budget with the global economy. 

2 minutes ago, MigL said:

Have we already forgotten ?

Not at all, but what I did forget was to remind our OP in my previous response that this isn't like a household debt. We're talking about the global economy... nations that can print their own money... nations that can write and sign trade agreements... change their revenues with the stroke of a pen. I can't do that in my house. Maybe you can?

[MigL]

Yet we saw th case, in 2008, where house hold debt, brought world economies to their knees.

[iNow]

Only until the government promised to spend MORE money. According to our OP, that should’ve made the problem worse, yet it managed to solve it / prevent the knee dropping catastrophe you cite. 

It was an issue with household debt. Credit given to households that shouldn’t have been given credit…. Credit backed up solely by assets that lost their worth all at once… And insurance companies being unable to pay what they’d promised when those households defaulted. And banks being unable to write more loans… again, global economy was saved by a promise by GOVERNMENTS to spend more. 

Government debt is different than household debt. I’ll need to keep repeating this core point, apparently. 

Edited September 15, 2021 by iNow

[CharonY]

21 minutes ago, iNow said:

Only until the government promised to spend MORE money. According to our OP, that should’ve made the problem worse, yet it managed to solve it / prevent the knee dropping catastrophe you cite. 

It was an issue with household debt. Credit given to households that shouldn’t have been given credit…. Credit backed up solely by assets that lost their worth all at once… And insurance companies being unable to pay what they’d promised when those households defaulted. And banks being unable to write more loans… again, global economy was saved by a promise by GOVERNMENTS to spend more. 

Government debt is different than household debt. I’ll need to keep repeating this core point, apparently. 

I think that is the crux of the matter. The terms are similar and the to some extent the mechanisms, so it is intuitive to apply individual debts, which folks arguably are more familiar with, to national debts. However, it of course neglects the fact that personal debt is actually not the norm when to think about debts, to some extent it is an exception. There are huge differences between debts and debts that even a small company can and should take on. Or even between low and high income debts.

Many folks make the mistake debts for lost money rather than investment opportunity. As long as you are not dependent on debts to sustain minimum operations, it often increases your ability to expand and increase net revenue. There is a reason why companies who do have huge cash reserves and record revenue (like, Apple) still maintain a huge chunk of long-term debt. Even without governmental mechanisms, it is net more profitable to do so.

And just to re-iterate, the subprime mortgage crisis was not because household debt was too high, it was more related to how it was distributed.

[MigL]

During the 2008-9 deflaton, GDP dropped by about 5% ( biggest drop in the postwar era ).
Government spending ( in effect, printing money ) increases inflation ( in the 4% range after 2008 -9 ), and while inflation is good for those who can manage to service their personal debt ( they owe the same amount, but their house has increased in value, ie. investment opportunity ), it is no consolation to the thousands who could not, and lost their homes.
Are they not part of the economy ?
How many small-industry towns became ghost towns after 2008-9 ?

 

edit
Not saying Government spending, or borrowing, is bad, but it has to be carefully weighed against what it could lead to.
Exactly the same as personal debt.

Edited September 15, 2021 by MigL

[iNow]

1 hour ago, MigL said:

Not saying Government spending, or borrowing, is bad, but it has to be carefully weighed against what it could lead to.

Such as? 

[SergUpstart]

7 hours ago, iNow said:

Government debt is different than household debt. I’ll need to keep repeating this core point, apparently. 

However, after 2008, the European Union had its own debt crisis, related specifically to the government debts of the PIGS countries

[iNow]

21 minutes ago, SergUpstart said:

However, after 2008, the European Union had its own debt crisis, related specifically to the government debts of the PIGS countries

And this is in any way whatsoever relevant to my point in the text you quoted… how exactly?

[MigL]

7 hours ago, iNow said:

8 hours ago, MigL said:

Not saying Government spending, or borrowing, is bad, but it has to be carefully weighed against what it could lead to.

Such as? 

Greece .

[Endy0816]

1 hour ago, SergUpstart said:

However, after 2008, the European Union had its own debt crisis, related specifically to the government debts of the PIGS countries

Assuming debt can be worthwhile if it better binds a group together. Federal Government, urged on by Hamilton did this for the States in US early on.

[iNow]

13 minutes ago, MigL said:

Greece .

So, too much spending from world governments leads to copious enjoyment of baklava and saganaki and sips of ouzo while viewing beautiful sea vistas and ancient sculptures?

Seriously… That sounds lovely. Either governments need to hurry up and start doing more debt spending, or you need to be ever so slightly more specific. 

Greece’s economy tanked bc of rampant tax evasion and lost revenues experienced in parallel with not having their own currency to adjust. It was made worse by the fact that they were far less productive in terms of foods and services relative to other nations also using that same one currency…. Then when a bailout was ultimately offered to save them, they refused to adhere to the conditions set forth for receiving those funds. 

That’s not a problem stemming from debt. It’s from fraud, hubris, and gross incompetence. 

Edited September 16, 2021 by iNow

[MigL]

Never did like ouzo; I prefer sambuca 😀 .
But the vistas, ancient sculptures/architecture and seafood on the islands are fantastic.

12 hours ago, iNow said:

It’s from fraud, hubris, and gross incompetence. 

I would submit that Italy , Spain and Portugal suffer from similar levels of fraud, hubris and incompetence.
Their economies aren't in nearly as bad a shape as Greece.
So what do you think is the real reason for Greece's economic meltdown ?

[Phi for All]

1 hour ago, MigL said:

So what do you think is the real reason for Greece's economic meltdown ?

A combination of reasons, as one would expect. Regulatory craziness is part of it, like how in the US you have to buy a car from a local dealership instead of a national chain or even direct from the manufacturer. Iirc, competition laws in Greece and Italy make forming large business groups difficult, so they don't benefit from economy of scale (such as small pharmacies that can't merge to form a CVS or Walgreen's). Then the small businesses have to employ a certain amount of people no matter what their industry is, and iirc more than half of Greeks work at small businesses. It's hard to make some efforts pay off if you have too many workers. They don't have a healthy mix of large and small business, imo.

Unfortunately, corruption is worse usually in small business practices. Big corporations are more heavily watched and audited, and don't deal with as much cash. And corruption is what keeps many small businesses afloat that would otherwise have gone under. If you have a great business, it deserves to start small and grow on merit into a big business where it will be of more use to the economy, so the framework of small business tends to simultaneously give people a lot of potential to succeed and grow, as well as limiting their growth and making short cuts tempting. 

Plus the Greeks had borrowed heavily when they entered the EU (which they shouldn't have qualified for), and they suffered massive tax evasion from wealthy entrepreneurs so they had no revenue to pay back the loans. They also weren't as productive when using the new EU metrics, but still had access to all the borrowing power of an EU country. 

[iNow]

6 hours ago, MigL said:

So what do you think is the real reason for Greece's economic meltdown ?

Pretty sure we had this same conversation about 6 years ago, but for purposes of this thread it suffices to say that it wasn’t debt. 

 

Summarized: It was forcing them to implement austerity from the outside when they needed the opposite. It was also a refusal to let them move to their own currency to make improving revenues more possible. Finally, the situation was made worse than it needed to be bc folks kept treating it as a moral / political issue instead of an economic one.