Very interesting viewpoint of the economy by a hedge fund manager

[avb3]

I found this fascinating especially the impact of the long-term debt cycle on economic performance. This hedge fund manager puts things in a simplified term on about 15 slides as to what really happens in economic cycles.
http://www.businessinsider.com/ray-d...on-2013-9?op=1

[The Elkster]

The most telling comment is this one...

"If that's a grim picture, what would an economy without credit look like? Well, the only way to boost spending (and thus growth) would be to increase productivity" Bingo! the way it should be.

Credit/debt has been used as smoke and mirrors to create the illusion of increased wealth ie. house prices. Todays debt model only serves to circumvent the reality that the only real increases in wealth come through increased productivity and I mean productivity for things we really need like raw resources and value added work to the physical network we all rely on to get through day to day life...things like trades, healthcare etc.

I'm not talking about money printing by way of issuing ever more debt nor derivatives trading or other casino like BS that the financial system has developed as a way to generate income for themselves without really doing anything to effectively increase productivity numbers for the nation. Bankers and the like have been masters at developing ways to strip off wealth for themselves whilst adding virtually no real value to society other than the façade of early retirement etc. (a totally impossible notion for the masses as you simply can't have a large portion of the population supported by a few...regardless of age or how much money it looks like they have in the bank. Its just a physical impossibility at some point).

Effectively most of the financial marketers are parasites...parasites that run gov't, make the rules and market themselves as utterly essential when they are completely the opposite. They are serving to drive false bubbles with there debt shell games and thereby destabilizing our nations all so they can make big dollars for effectively doing nothing but spinning the money of those that have actually contributed to REAL productivity.

Will there be pain in returning back to a model where wealth increases only as a result of real productivity improvements...absolutely specially for Bankers and the like. That doesn't change the facts though. A house that increases in value due to ever loosening debt rules is NOT a wealth increase at all but purely a facade. A house that increases in value because everyone is producing more thus making more money for bigger down payments ...now that is a REAL wealth increase. Most people don't have a clue about how debt is money printing and only serves to devalue your hard earned cash. Most just eat the banks "debt is good" line hook line and sinker. Ultimately people hear what they want to hear. An extra 0 on the end of their house estimate is all they see. The prospect of easy wealth is eagerly embraced without question even though it ain't real.

[coppercarbide]

Once you look at it on a micro basis, living without debt makes much less sense.

The house is the best example of this. You buy a house when you're young, maybe 25. You pay this out over 25 years. More or less, this means that you could have afforded to pay for the house when you are 50.

However, because of debt, you get to buy a house, raise your kids in a home, have a yard, etc.

Without debt, you'd be renting. Also, you'd likely be able to afford a house much later than 50, because part of your 'savings' would be eated by the monthly rent payment.


I agree that spending and productivity growth are a bit too de-coupled right now. There's never been so many people who borrow money to buy RV's, quads, boats, etc. Never before now have you been able to take a 15 year loan on an RV that will last 10 years.

So yes, definitely some stupid lending happening out there. Buying a house on credit makes sense, it matches your personal productivity to a loan payment. Many other things we do with credit (vacation on a VISA) are definitely detrimental to our future.

[The Elkster]

Copper you missed one very very important consideration. Without ever increasing debt allowances promoted by banks house prices would never have gotten where they are today nor would they be growing like they are far outside what the ecomomy itself is doing. With debt or with strict limits on debt things would correct to where housing was reasonably affordable to the masses based on REAL incomes. There would be no other choice and everyone relatively speaking would be just as well off other than the bankers who wouldn't be pilfering so much in interest on the same house...

I should add that there is something fundamentally wrong when people or companies are allowed to make money off money they haven't even earn yet through real productivity. IE. I make more on a house simply because I took on more debt. Its a stupid concept and totally ungrounded in reality, unsustainable and does nothing to encourage real productivity increases...in fact it does exactly the opposite. Which is a large reason why North America is losing the productivity battle with developing countries. We're busy creating facades in an attempt to create wealth whilst avoiding hard work they are making the real value added stuff we need for day to day life and thereby they are seeing the real gains.

[dantonsen]

Housing inflation driven by low interest rates and loosening borrowing standards will result in alot of pain or some very stagnant growth in an environment where bond yields are rising.

Canadian income has increased by something like 16-20% in the last 10 years while housing has doubled, tripled and even quadrupled in some areas.


The low interest rate is the real silent killer no one likes to talk about though, it is a wealth transfer from those that have money to those that live beyond their means in a pool of debt. The only real return on debt is the interest payments made so it also hurts lenders and makes their loan books riskier as it does not take near as many default to destroy the value of the loans they hold. It makes the whole house of cards very fragile in a society that basically thrives on debt to make purchases it seems.


Check out a retirement calculator.... the difference between 3% and 7% on a yearly contribution of 6000$ is something like 600 000-800 000 $$$ .... Do people really think their houses value inflating 600-800k over that same time period instead of having that money in cash is a better option?

Even if your house is worth 1 million... you will still need to live some where, you will have to buy another house for a million or get a condo or something and pocket the difference.

There is absolutely no value creation or real money as that inflated house will be sold to some one who buys it with another loan which is much bigger than your initial loan.

Where as some one who has a cheap house and saved lots for retirement plus got a decent return on healthy interest rates... That guy has a whack of money in the bank, house is paid off, helping out the kids and grand kids... putting cash into buying things.

I think a real telling tale of the times and low rate high inflation environment is the pace at which debt among people over 55 is growing... in the prime years of wealth generation debt is now climbing.

There are 35 and 40 year mortgages out there.... there will be people that are over 65 with mortgages.

Debt impedes real growth as the burden of servicing it hinders future spending.

Every one still makes the same amount of money... that will never change, the amount of debt one takes on will determine how much gets wasted in lost savings and interest payments. If you make 2 million in your life time and you are in debt all the time you will loose alot of the wealth you could have generated by saving on top of wealth lost to Interest..

[Drewski Canuck]

Increasing productivity is downright easy when going from a subsistence farming agrarian society to an industrialized manufacturing society (China, Vietnam, Malaysia, etc).

Not so easy for an industrialized society to switch from its manufacturing roots, to supplying trade goods for the emerging economies, who can meet their own needs.

Thank God we are huers of wood and drawers of water. We have something to sell at a high value added price, which can only be extracted domestically.

Otherwise, we would be like Germany, building the next mouse trap, only to have the mass production moved to the low cost manufacturing environments of Asia.

Drewski