Comments on: A new Nouriel Roubini Blog

By: Steve Keen

Steve Keen — Mon, 26 May 2008 05:04:43 +0000

You’ve pretty much given the answer for me Ken,

But I will also do next two posts on these topics–why the current debt overhang matters, and why the debt to income ratio is the best guide to it.

Also Iain, there is a common tendency to think that “now is different” and propose that, as you say, we have a higher debt servicing capacity now than in the past. That may be true–though I doubt it–but even if so, it could be turned around very rapidly with a global-warming/peak oil induced spike to commodity prices.

The point is that we should have managed our financial affairs so that there was a large buffer between us and changes in external circumstances. Instead, we’ve so increased the debt servicing costs of the economy that we are extremely vulnerable to a change in circumstances. I think that change is coming, on top of astronomical debt servicing costs despite comparatively low interest rates.

By: Ken

Ken — Sat, 17 May 2008 23:02:43 +0000

The problem is that we’re using the stimulus provided by the new debt to pay the interest on the debt. Once debt stops expanding at ridiculous rates it will become difficult to pay the interest on the existing debt as wages and profits drop and unemployment increases. Steve in another comment mentioned that there were ways of determining where the economy was going and I assume a good one is the flows of money into the economy through debt. What is happening in America is the reduced borrowing is now starting to affect the wider economy.

To show that risk is real all that is needed is a look at the early nineties. Only this time the starting interest rate is much lower which will probably result in a lot less ability to reduce interest rates. The world seems to have some faith in the US dollar but I’m certain they wont be buying Australian dollars to invest at 2%. Our interest rates drop too low and the Australian dollar collapses.

By: Al the Pal

Al the Pal — Thu, 15 May 2008 20:54:38 +0000

I agree these are dangerous debt levels. However

1)You make the comparison as to what is a safe debt level by comparison to the values just before the great depression around 1929-1932. However isnt a higher level of debt safer now, as there is more capacity as part of normal income to service that debt. A greater percentage of income is available now that then to service debt as a result of higher living standards.

2) The graphs show US debt at 260% of GDP and ours around 160% of GDP. That indicates that if the US hit a level of collapse at 260% levels with a 5% interest rate on homeowners. So with 160% and 9% are we also at this point or lower than this point?

I dont think you can build a logical argument for danger without addressing these two areas as well.

By: Iain

Iain — Tue, 13 May 2008 09:52:38 +0000

Your comments open up a whole new vista with respect to economics and how we measure and understand economic performance and well being. For instance enabling the effective measurement of externalities in terms of the environmental impacts of increased economic activity and growth and the underlying causality within the economy - that is expenditure on A to do B does not always result in an overall economic benefit. An example would be that increased expenditure on crime prevention services and technology is measured as positive contributor to GDP growth but this is may be a response to a decline in personal safety and security which not adequately measured and considered.