Thursday, May 1, 2008

So how much debt have we ran up as a nation versus GDP?

Please click on this to enlarge the picture.
Well the bulls took us to the moon today. I wanted to put this up to show you why we should all be afraid of what is happening in our economy. This is how bad our debt bubble has gotten versus GDP. Right now it sits at 330% of our Gross Domestic Product!

Folks, you can't keep borrowing when you are not bringing in enough to pay off your debts. Eventually what happens is you cannot afford to pay the interest on the debt and it ends up going KABOOM.

At some point we will be forced to dip into a severe recession or depression as the debt either gets payed off or defaulted on.

As you can see, the only debt bubble that's even close to the one that we are in now was the Great Depression. In 1929 the credit debt was 170% of GDP before peaking at around 260% of GDP when we were in the middle of the Great Depression.

What the Fed is trying to do now is throw massive amounts of liquidity into our system so that we can keep servicing the debt. They want us to keep borrowing like drunken sailors so that the party can keep going.

The problem is like any other bubble, its simply unsustainable. The government is pulling out all the stops in order to keep this sucker inflated. Everyone thinks that the Fed saved us when we bailed out Bear Stearns.

The problem they face now is people don't have the incomes to keep borrowing. They have borrowed as much as they possibly can. Now throw inflation into the fire and you further tighten our ability to borrow in order to keep the bubble going. The Fed cannot force us to continue to borrow, and this will eventually lead to the bubble bursting.

Bottom Line:

The market is in rally mode because everyone thinks the bottom is in and the party is back on. This will be a temporary fix. How long can they keep the bubble inflated? That I can't answer.

The Fed has already shown you it will try everything in its power to keep this debt bubble from popping. They may have a few more tricks in the bag that keeps the debt party rolling for a short time.

I don't think there is a person on the planet that can predict what the market is going to do in the short term these days. The market has been all over the place. I have never seen a market in such dislocation from reality. Rome is now burning, and when you look at the market, you would think that we just won a world war and were ready to head into an era of prosperity.

When this bubble pops, and it will, we are going to see the worst economic downturn since the Great Depression. The scary thing is we ran this debt bubble up to 330% of GDP versus 260% in the 1930's.

How this ends is any ones guess but I can tell you one thing, any rise in the markets will be a temporary one.

Could it last another 6 months? I doubt it but who knows? It depends how bad the Fed fights it. In the end they will lose. All bubbles pop because they are unsustainable. We will be forced to either pay this debt down or default on it. When this happens its going to be ugly

The violent moves up and down in the market tell you we are heading towards some type of tipping point. When the debt bubble popped in 1929 you saw what happened. Lets hope the result is different this time.

1 comment:

Jeff said...

Warning to all that are up. Major breaking news

Countrywide basically blew up tonight.

BAC is trying to write off $38 billion of countrywides debt.

Come over to the forumn to read more under the stocks page.

Or click the link in the upper right hand side. I want to keep the current page up for morning readers on the blog