Wednesday, November 9, 2011

Our Ability to Pay Interest

Click to enlarge.

The black line is the GDP to total credit market debt owed ratio. The red line is the yield of the 10-year treasury note.

Who thinks the similar movements in both lines since 1980 are just a coincidence? Check out where the red line was compared to the black line in 2006/2007. How did that work out in hindsight? Oops!

As seen in the chart, there was plenty of untapped ability to pay higher interest rates before 1980. We no longer have that luxury.

If I am correct to think this way then those who expect a renewed bull market in stocks *AND* dramatically higher interest rates must be completely detached from the real world.

November 9, 2011
Dow off 3.2%: Stocks plummet as Italy struggles with debt

"In our view, 7% is a 'tipping point' for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance," Rod Smyth of Riverfront Investment Group told clients in a note this week titled "Europe's attention turns to Italy."

Source Data:
St. Louis Fed: Custom Chart


Fritz_O said...


Why were we able to maintain the declining GDP/debt ratio during the credit bubble period of 1981 to 2008 but not since the "stimulus" money kicked in? (I'm assuming the turn-around in the trend line occured right around early 2009.)

If we've been borrowing like mad for wars since 2003 why did the borrowing for the stimulus derail the trend?

Stagflationary Mark said...


The borrowing for the stimulus did not derail the trend. I think it would be more accurate to say that the borrowing for the stimulus was dwarfed by the gaping hole left by a tapped out consumer and a banking system at the edge of the cliff.

In other words, if the government had borrowed even more money then that GDP/debt trend would still be intact. Krugman certainly would have been in favor of it. Borrow, borrow, borrow!

We'd then be debating the sanity of trying to keep that unsustainable trend intact of course. Keep in mind that we did manage to get oil back to a whopping $100 per barrel again even with our "feeble" government borrowing efforts (said mostly tongue-in-cheek).

I would also point out that unemployed workers would prefer to borrow more money to fund food purchases if nothing else. The banking system is not exactly enthused about loaning money under such conditions though. Go figure.

Troy said...

^ yeah, it's important to note that stimulus borrowing *took over* for household borrowing:

As for the fpp, I got into a recent exposition on that topic here:

Troy said...

. . . but what has really delevered since 2008 is financial sector debt:

Stagflationary Mark said...


It will be interesting to see where that black line goes next.

If today's stock market is any indication, more chaos is coming.

Fritz_O said...


It seems you had the last word on that exposition, nice job.


Can you tighten up that chart some, say restrict the data to 2001 to present? So we can magnify the effect of the battle b/w stimlus and consumer de-leveraging.

So, have we been lied to regarding GDP since 4Q07?

Stagflationary Mark said...


Here's the same chart from 2001 to present. Unfortunately, the scales are not the same as they were in the chart I originally posted. That means the red line and black lines don't sit in quite the same places relative to each other. Without taking it into Excel I can't adjust for that.

I should probably do a scatter chart based on the data from 1980 to present to better align the two series and then use that to determine where the red and black lines should be relative to each other. Maybe I'll do that in a future post.

As for the lying...

The GDP, debt, and yields are what they are. In my opinion, most of the lying we've been doing is to each other (from a denial standpoint). We've clearly been using debt to enhance GDP. Who was complaining? How long did we expect it to continue?

Of course, when oil first hit $145+ a barrel people were complaining. It was a bit too late then though.

Fritz_O said...

Concerning oil, I am inclined to agree with what I read from the link tj and the bear posted a few days ago, I'll try to put it in a brief:

There is a lot of oil out there. Everywhere. But there has been a shift from the oil that was relatively inexpensively extracted with relatively primitive technology to oil that is increasingly more expensive to extract and produce with extremely sophisticated technology.

It seems to me that we've had the knowledge of where this oil is for a long time now, but now we've been able to unleash some real computing power to figure out exactly where we can most economically extract the best sources.

Another way of putting it is, the good news is we know where the oil is, but the bad news is we know where the oil is. It is very unlikely that there will be any large quantities that have not already been located and the cost of the extraction has been figured. Cost-push. That equates to prices going up.

We're putting a lot more energy ($$) into extracting less and less energy. Energy independence or not, the $$ of a barrel is going to go to $200 and only up from there. How long, I don't know.

Militaries around that world are paying attention to this, and corporations also have it on their radars so to speak. They'd be foolish not to IMO. I'm amazed that during a debate that was predicated on the US economy this evening, not one question was asked addressing the resilency of the US to ever increasing fuel prices. My island must be sinking.

Here's a link to an article that attempts to describe the amount of oil we'll be producing in the US going forward:

Pendulum Swings On Energy Independence

Assuming you have a "freebie" FT readership.

Troy said...

It's important to note that $10 gas is still a reasonably good value for the utility it provides.

I get 20 mpg in town so 5 miles of errands only costs $1 with $4 gas and $2.50 @ $10.

$2.50 beats taking the bus!

And it's my thesis that higher energy costs from those with actual commutes will come directly out of land values and housing rents, but that's just a thesis : )

Fritz_O said...


I've spent some more time with the tighter chart you posted. Thanks for doing that one.

I don't mind the difference of relativity between the two lines. I did find one thing out: What an enormous head-fake that was in 10yr yield when we heard the news of auto and bank bailouts in very late 2008.

That head-fake has been repeated in the last several months. Except this time it looks like it might not be a head fake.

If it is a HF we'll shoot right back to 3.5% on the 10 year. I have a feeling you would not be planning on that.

If it is not a HF then we're heading back to scenario's equal to the mid-80's and early/mid-90's. Illusory prosperity or otherwise those were good times to be alive.

I'm torn between that reversal in the GDP/TCMDO and the possibility that we get a R in the WH next year who will "manipulate" a new era of Illusory Prosperity.

Fritz_O said...


I see what you mean about the declining land values of those who decided to reside outside of the "city" boundries.

And that the reduction of value will translate into the owner of those properties paying more at the pump. A transfer of wealth.

What I don't know is when do we reach the point where commuters realize that selling their future to the tranferees is no longer desirable?

Personally, I'd like to see that point reached sooner than later. IMO OWS could branch into this very idea. Could.

Stagflationary Mark said...


If it is a HF we'll shoot right back to 3.5% on the 10 year. I have a feeling you would not be planning on that.

I am not planning on it but I would welcome it.

Picture my situation. I'm planning to hold TIPS to maturity anyway so what yields do between now and then doesn't really matter all that much to me.

Further, since I have a TIPS bond ladder there will be bonds maturing over the years and I'd like to buy more TIPS with them. Clearly I should root for higher real interest rates.

I don't want higher real interest rates based on a currency falling apart though. I'd much prefer low real yields that would pay me rather than high real yields that we would default on. Sigh.

Fritz_O said...

And if the other scenario is more possible...that we go down in 10/yr yield, what then?

In that case, is my suggestion -- that the decrease in 10/yr yield relative to the GDP/TCMDO line would lead to prosperity -- blindsided by the fact the the GDP/TCMDO is now moving up instead of down? That really is the question that I'm trying to answer.

Based upon the fact that during times when the red line was most below the black line are times when the economy was seemingly good. At the risk of trying to make it sound too simple...

Stagflationary Mark said...


If we can keep the GDP/TCMDO line moving up then that would be an extremely good thing over the long-term.

If we could also keep the 10-year treasury yield low while we do it then I think you'd make a real case for renewed prosperity.

Those are big ifs of course, especially since the global economy is seemingly coming apart at the seams and the ECRI recently made a recession call for us in the US.

But hey, I suppose it could happen and surprise many a bear. Heck, the run from 2004 to 2007 in the stock market surprised me. I just watched it rise, then watched it fall. Your scenario would certainly offer more hope than that fake rally did.

Stagflationary Mark said...

There's a new post up related to this one.

Fritz_O said...


"I just watched it rise, then watched it fall"

You're telling me!

"If we could also keep the 10-year treasury yield low while we do it then I think you'd make a real case for renewed prosperity."

I just watched my hopes rise...

"Those are big ifs of course, especially since the global economy is seemingly coming apart at the seams and the ECRI recently made a recession call for us in the US."

Then watched them fall...

Oh well.

Scott said...

If Treasury yields stay low and US exports keep improving, the optimistic scenario is reasonably probable. If PRC stops subsidizing fuel use, could see a meaningful drop in crude prices.

Stagflationary Mark said...

Fritz_O, Bitterness ;)

Stagflationary Mark said...


If those things are true then things could get better.

I have an uneasy feeling about our exports though. How much is just commodity inflation driving the results?

Our Top 20 Fastest Growing Exports

If much of it is simply inflation driving our exports higher and that trend continues then...

1. It won't get rid of our trade deficit (for inflation will also drive our imports too).
2. It is unlikely to keep interest rates permanently low.

Just a thought. Sigh.