Saturday, February 26, 2005


The Credit Bubble

Since a picture is worth a thousand words, let's look at two charts from Jesse's Charts The Credit Bubble is illustrated by these two charts showing that today total credit in the US is at the highest percentage of GDP ever. The second chart shows that it now takes over $4.50 of new credit to generate $1 of new GDP. Notice the effect of abandoning the Gold standard by Nixon in 1971! If it takes more and more credit creation to generate a $1 of GDP, we seem to be pretty far out on the limb. No credit creation, no growth in GDP

From Investment Outlook by Bill Gross | March 2005, we see that the supply of Treasurys has increased four-fold since 1985, and almost 70% of the new debt is purchased by foreigners.

The second chart shows net purchases rising at a parabolic rate. Because we are flooding the world with our dollars, foreign countries are recycling those dollars into the purchase of our debt at an ever increasin quantity. Parabolic curves do not end well!

It seems to me that we are between a rock and a hard place. We can complain about the ever increasing debt of the federal government and individuals using home equity to finance purchases, but we are like an animal on a tread mill. We will not like the consequences of slower debt creation.

Mover Mike

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