
Sorry to burst your bubble - prostoalex
http://www.economist.com/news/finance-and-economics/21657817-new-research-suggests-it-debt-not-frothy-asset-prices-should-worry?frsc=dg%7Ca
======
derf_
_" According to two new papers, the crucial variable that separates relatively
harmless frenzies from disastrous ones is debt."_

Also according to, like, Irving Fisher in 1933:
[https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf](https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf)

"I venture the opinion, subject to correction on submission of future
evidence, that, in the great booms and depressions, each of the above-named
factors has played a subordinate rôle as compared with two dominant factors,
namely _over-indebtedness_ to start with and _deflation_ following soon after;
also that where any of the other factors do become conspicuous, they are often
merely effects or symptoms of these two. In short, the big bad actors are debt
disturbances and price-level disturbances."

~~~
danieltillett
Very hard to have sustained deflation when you are using a fiat currency. The
only example in history has been Japan and this only occurred because of a
political decision.

We really should stop looking to the GD as a lesson for today’s problems. We
don’t use the 30 Years War as means of explaining religious conflict or the
Crusades to explain the state of the middle east.

~~~
Tloewald
> We really should stop looking to the GD as a lesson for today’s problems. We
> don’t use the 30 Years War as means of explaining religious conflict or the
> Crusades to explain the state of the middle east.

I don't know anything about the Thirty Years war, but I doubt that there's any
major recent act of stupidity that was caused by excessive cleaving to (or
knowledge of) historical experience.

I suspect we'll keep on looking back at the great depression until it ceases
to seem salient.

Oh, and the Crusades explain quite a bit about the state of the middle east.

~~~
danieltillett
>I don't know anything about the Thirty Years war, but I doubt that there's
any major recent act of stupidity that was caused by excessive cleaving to (or
knowledge of) historical experience.

Let me introduce you to Balkans war(s) of the 1990s. People who had been
living side-by-side peacefully for decades decided to rehash hundreds of years
of historical conflicts which to outsiders looked insane.

>I suspect we'll keep on looking back at the great depression until it ceases
to seem salient.

The Great Depression is no longer relevant since we don't live in a world on
the gold standard. The factors that drove the economy into the ground in the
1930s (massive deflation and bank failures) are not going to happen again.
Deflation because countries can print as much cash as they like (Greece
excepted), while in regards bank failures we now know banks (and bankers) are
too big to fail.

>Oh, and the Crusades explain quite a bit about the state of the middle east.

Nothing about the middle east today is the result of the Crusades except some
misguided people thinking the Crusades are relevant.

~~~
Tloewald
There's a difference between knowing history and bearing grudges. Generally
folks who bear grudges have a very poor (and one-sided) view of history.

The Great Depression was not solely caused by the gold standard, although
getting rid of it certainly seems to have aided recovery (worth noting since
some argue for returning to it).

Iraq wasn't going to be like Vietnam either because the people loved us, and
our weapons were so much awesomer. Incidentally, Bremer was reading about the
occupation of Germany and Japan after WWII on his way to Baghdad. History can
be instructive, but you need to use it wisely, not cherry pick the instances
that support your existing view. There's plenty of Roman history (for example)
that maps beautifully onto modern America, even though we are very different
from the Romans.

~~~
danieltillett
History can be a guide, but an untrustworthy guide. Use history, but always be
aware that today is not a repeat of yesterday.

In regards the Great Depression the gold standard seems to be mostly
responsible. The countries that left the gold standard first were the first to
recover and those that delayed suffered longer. The USA is an interesting
exception since Roosevelt revalued gold by fiat in 1933 which had the effect
of getting the USA effectively off the gold standard and introducing inflation
into a deflationary spiral.

~~~
Tloewald
Replace "history" with any body of knowledge and you get an equally valid
truism.

------
Retric
I don't know if the 1929 stock market crash was really the start of the great
depression. It seems like the real issue was far more widespread and the stock
market simply accurately reflected what was going on.

Even just the timing is suspect as many indicators started to fall in the 1928
while the market was still going strong. IMO, if you want to point out just
one thing it was probably waves of bank failures which created and sustained a
deflationary spiral.

~~~
kvcc01
I listened to Bernanke talk about this once. The academic view seems that
things weren't that awful until 1931, when a large Austrian bank failed
(Google Creditanstalt), which triggered a wave of global bank failures [1].
The resulting lack of credit was the cause that made the depression Great.
When Creditanstalt went down, Dow was off ~50% from its 1929 high, which still
happens every now and then. We went through a similar decline during the
2007-08 financial crisis and came out all right thanks to aggressive and
globally organized central bank activity. Unfortunately such an organized
response didn't happen in the 1930s so the economies kept contracting, and the
Dow eventually ended up losing 90%. Check out the charts in that period, it is
fascinating.

[1]
[https://fraser.stlouisfed.org/docs/meltzer/bermac95.pdf](https://fraser.stlouisfed.org/docs/meltzer/bermac95.pdf)

~~~
Gibbon1
I've heard other somewhat contrary things, one is the birthrate started
falling well before the '29 crash indicating that working class and especially
farming communities were actually not doing well economically. You can look up
graphs if you want, but the birthrate drops relentlessly from 3.2 in 1920, to
2.2 by 1930. As the economy improves post 1935 the rate picks up again.

My take on recessions and debt is to consider that when an entity (family,
business, etc) pays off debt they are foregoing some consumption. Key thing.
Now in normal times foregoing of consumption frees up economic output that is
invested in the real economy. As I pay off my mortgage, the bank reinvests
that money in building more houses. A virtuous cycle, depending how much you
like concrete, sprawl and freeways.

In a debt driven recession there is a problem, the economy isn't limited by
available production. There is a lack of demand. Because as people frantically
pay of debt they are foregoing consumption that doesn't free up more physical
or labor resources for investment. It just creates a lack of demand. The money
instead goes to correct balance sheets which is something that exists on paper
(or in modern times le computer machine).

That's the situation many parts of the developed world are in today. The
solution is for the government to step in an manually rebalance consumer and
commercial balance sheets. A political problem exists when the people in
charge can't let go of the 'paper wealth'. And that's the current issue.

------
zitterbewegung
You know it's bad when the Economist says debt is a problem :( . If Zero
Hedge, Seeking Alpha, and the Economist start agreeing things start getting
scary :(

~~~
partiallypro
I think the biggest voice to say there is a debt problem, at least in high
yield and junk bonds, is Carl Icahn. It seems that the biggest problem is that
the underlying debt market is very illiquid and people are using ETFs and
other financial instruments to create liquidity. This is why Icahn called
BlackRock a dangerous company. Icahn is not a man I'd want to bet against.
Though, this so called bubble could go on for years.

I think the market will have a minor "taper tantrum" but I don't know if that
will be the needle or not. As the housing market of 2001-2008 showed, this can
go on for a lot longer than people expect. People were sounding the alarm in
2005, but it didn't take full fruition until late 2007.

IMO, the bubble will pop in the private market before we even see it pop in
the public markets.

~~~
Solanaceae
At this point, I think it's pretty obvious that these cycles track with a
subliminal fear of U.S. Presidencies that reach their term limits.

There's this sort of instinctual dry-up, right before the eight-year mark on
an incumbent president, sort of like geese flying south for the winter. No one
says anything to one another, but the angle of the sun changes, the summer
weather is gone, and all the birds hit the road at the same time.

Regardless of the parties and there representation in whichever offices, and
under whatever titles, everyone knows that different people will be sitting in
different chairs when the dust settles, for some, there will be a new-car
smell, and for others there will be painful hours stepping through a debugger,
converting data from one format to another. Either you'll be comfortable while
the bugs shake out, or you'll be in for a cold winter in a drafty house, but
since the immediate future is up in the air, everyone stocks up for a harsh
winter.

~~~
saryant
Other than a few top posts, our bureaucracy is non-partisan and doesn't change
with the whims of the White House.

~~~
Solanaceae
Human behavior is not precisely rational. Take Iraq as an example. Would you
have predicted such things in 1999?

~~~
eli_gottlieb
Conditional on a Republican presidency and some national disaster happening?
Conditional on the son of the first Gulf War's President getting elected
President? Some people were certainly speculating in that direction.

~~~
akgerber
As reflected in this classic Onion article of January 2001, "Bush: 'Our Long
National Nightmare Of Peace And Prosperity Is Finally Over'"
[http://www.theonion.com/article/bush-our-long-national-
night...](http://www.theonion.com/article/bush-our-long-national-nightmare-of-
peace-and-pros-464) "During the 40-minute speech, Bush also promised to bring
an end to the severe war drought that plagued the nation under Clinton,
assuring citizens that the U.S. will engage in at least one Gulf War-level
armed conflict in the next four years."

------
kitcar
On a related topic, can anyone point me to articles / research related to how
bubbles continue to inflate during recessionary periods? From my
uninformed/simplistic viewpoint it seems like the two are opposing concepts
(i.e. popped bubbles lead to recession), other then the fact that governments
use low interest rates to try and dig themselves out of recessions, and cheap
money tend to fuel bubbles. The reason for my interest is this seems to be
what is happening in Canada right now ( see
[http://www.cbc.ca/news/business/canadian-house-
prices-35-ove...](http://www.cbc.ca/news/business/canadian-house-
prices-35-overvalued-economist-magazine-says-1.3040698) \+
[http://www.leaderpost.com/business/Johnstone+Canada+recessio...](http://www.leaderpost.com/business/Johnstone+Canada+recession+what/11223333/story.html)
)

~~~
tsotha
In fractional reserve systems you create money when you borrow from the bank.
So governments will often deliberately (if not openly) stimulate real estate
prices in an effort to inflate the money supply and stimulate the economy.

A great many people believe the 2008 US real estate crash can ultimately be
traced to the government's inflationary reaction to the bursting of the dotcom
bubble in 2000.

~~~
skylan_q
_In fractional reserve systems you create money when you borrow from the bank_

This isn't true. Banks can only loan out money deposited with them.

~~~
tsotha
>Banks can only loan out money deposited with them.

This is emphatically incorrect, and the slightest bit of research would have
been enough for you to realize it, too.

When you take out a home loan at the bank the bank doesn't lend you anyone's
money. Your promise to repay is assigned a monetary value on one side of the
leger, and they cut you a check from the other side.

This video is a bit melodramitic, but it's pretty accurate:

[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&sqi=2&ved=0CCQQtwIwAWoVChMItfT93_joxgIVRRY-
Ch0RpA82&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DjqvKjsIxT_8&ei=nIKsVbW2OsWs-
AGRyL6wAw&usg=AFQjCNGETcFMDD8EIkbyE3bcU2GNNfpErw&bvm=bv.98197061,d.cWw)

~~~
philwelch
It doesn't do wonders for your credibility when you're both wrong and arrogant
about it:
[https://news.ycombinator.com/item?id=9914210](https://news.ycombinator.com/item?id=9914210)

~~~
tsotha
I'm _not_ wrong. You are. Please. Do a little research.

You have no idea how the system works, and I'm not sure where the certainty is
coming from. This is right from the wiki page you refuse to read:

"Because bank deposits are usually considered money in their own right, and
because __banks hold reserves that are less than their deposit liabilities __,
fractional-reserve banking permits the money supply to grow beyond the amount
of the underlying reserves of base money originally created by the central
bank. "

~~~
philwelch
That doesn't even remotely contradict my post.

The money multiplier effect you're alluding to means that if I have $1000 in
the bank, the bank can lend $750 of it out to you, so between the two of us we
have $1750 of liquid assets despite the $1000 of hard cash backing it. If you
spend your $750 on a house, and the guy selling the house puts the $750 in his
bank account, the bank lends out $562.50 which means that from my $1000 hard
cash, there is now $2312.50 of liquid assets floating around. It does not mean
that the bank can fiat $4000 into existence the second I deposit that $1000.
If that were the case, there wouldn't be such a thing as a bank run, because
the bank would still have my $1000. Bank runs are widely acknowledged to be
the biggest risk of fractional reserve banking.

From the very Wikipedia article you're citing:

"Fractional-reserve banking is the practice whereby a bank accepts deposits,
and holds reserves that are a fraction of the amount of its deposit
liabilities"

"The relending model begins when an initial $100 deposit of central bank money
is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside
as reserves, and then can theoretically loan out the remaining 80 percent, or
$80. If the bank does in fact issue loan proceeds in the form of $80 in
central bank money, the money supply actually totals $180, not $100, because
the bank has loaned out $80 of the central bank money, kept $20 of central
bank money in reserve (not part of the money supply), and substituted a newly
created $100 IOU claim for the depositor that acts equivalently to and can be
implicitly redeemed for central bank money (the depositor can transfer it to
another account, write a check on it, demand his cash back, etc.)".

(The editors of Wikipedia are evidently fond of their run-on sentences.)

~~~
tsotha
>The money multiplier effect you're alluding to means that if I have $1000 in
the bank, the bank can lend $750 of it out to you, so between the two of us we
have $1750 of liquid assets despite the $1000 of hard cash backing it.

Which was my entire point, that when I take out a loan the bank is creating
money. I have the $750 I borrowed, the bank has $250 and _also_ a document (my
promise to repay) that's worth about $750.

If a bank starts with $1000 in assets, loans me $750 and still retains $1000
in assets, how can it be said the bank can't loan money it doesn't have?

EDIT: In the real world what happens is the banker charges you loan fees (like
"points" on a mortgage), and reserve ratios are more like 10% than 25%.
Theoretically, if the banker can get you to pay 10% in loan origination fees
(and assuming nobody defaults), he can loan as much money as he can find
people willing to borrow.

And where does the money for those fees come from? At that point they're still
just a promise.

~~~
philwelch
Money owed to the bank is still the bank's asset. It's simple accounting:

I deposit $1000 in the bank. The bank has an asset of $1000 cash and a
liability of $1000 deposit payable to me.

The bank loans $900 to Jimmy. The bank has an asset of $100 cash and another
asset of $900 of Jimmy's debt, payable to the bank. The bank has a liability
of $1000 payable to me.

The bank profits from fees we pay to the bank and from interest on loans from
the bank, but they have to have the money before loaning it out in the first
place. They can't just loan you money out of nothing. If Jimmy shows up at the
bank before I do, and Jimmy and I are the first two customers, the bank has no
money to loan Jimmy and has to turn him down. They don't get to print it,
which is what it sounded like you were saying. If that was a misunderstanding,
I apologize; I've just run into a lot of misinformed and deluded goldbugs on
HN before.

Really, what's going on is more of a double booking. Like on airlines, where
they sell more tickets than they have seats based on the assumption that not
everyone will show up, banks get to say my $900 belongs to me and Jimmy at the
same time, and depend on having enough customers that we don't all ask for it
at once, or else if there is a run on the bank, they've bought an insurance
policy from the FDIC to cover that eventuality, and can borrow their own money
from the FED as well.

Also, I'd be really surprised if anyone paid loan fees in the neighborhood of
10%. People these days can't be bothered to put down a 20% down payment for a
house and you think they pay 10% in fees for a loan from the bank? Even if you
could pull off that scheme, I'm pretty sure that's not how the reserve ratio
works. The reserve ratio has to do with what percentage of a bank's deposits
must be held in cash; it has nothing to do with money loaned by the bank, and
it doesn't mean the bank can loan money it doesn't even have.

~~~
tsotha
>The bank profits from fees we pay to the bank and from interest on loans from
the bank, but they have to have the money before loaning it out in the first
place. They can't just loan you money out of nothing.

Oh, I agree they have rules they need to follow. The way modern lending works
is the bank makes you a loan and then goes looking for funds to cover its
reserves by borrowing against your loan document. I'm sure they like to lend
out depositors' money because it's cheaper, but they certainly don't need it.

They borrow from other banks if they can, but if not they borrow straight from
the Fed at the "discount window". And when the Fed lends money it _is_
literally created by changing a number in a computer somewhere. So ultimately
that $1000 has been injected into the economy though the creation of money
(which will get destroyed slowly as the loan is paid off).

The point, way back in the beginning, was that the money supply is really only
constrained by the amount credit-worthy borrowers are willing to borrow at a
profit to the banks. That's why the Fed discount rate has such a big effect on
the money supply - by raising it they make unprofitable some portion of loans
that would have been profitable at the lower rate.

I'm not sure if the central bank is technically part of the fractional reserve
system. But is there fractional reserve system currency issuer without a
central bank? I'm not aware of one.

Let me apologize for my tone as well.

~~~
philwelch
Yes, it does sound like we're violently agreeing. Thanks for the informed
discussion; I am so used to arguing with goldbugs and nutjobs, even on HN,
that I was unprepared for an informed discussion.

------
netcan
Here's something I don't understand. It's probably more relevant to a country
Greece's size than the US:

Why isn't consumer banking more international, like every other major
industry?

In Greece, interlocking government & bank failures have brought down the
country and it's causing this seized up state. People are now afraid of
leaving money in a bad banking system. So banks have no deposits, and can't
provide financial services. But, if Greeks had easy access to large & stable
foreign banks they wouldn't need to worry about the sorry state of Greece's
own banks.

I mean, if Greece's local canning industry had collapsed they would be buying
foreign canned goods and everything (at least on the consumer side) could
continue undisturbed.

What is the big advantage of a local banking industry anyway?

~~~
zo1
It's not about advantage/better. It's all about regulation.

I.e. You simply _can 't_ bank across a border due to all sorts of regulations
and laws. And I think that applies to both sides of the fence, both on the
Greece side, and on all the "foreign" countries that you think can provide a
"global" service to the Greeks.

The bank and the state are intertwined due to this, and any failure on one
_will_ most likely affect the other. This will be the case until a true free-
market approach is taken by banks.

Are there decent middle-grounds between regulation and free-market? Sure,
things could chug along.

~~~
tim333
>You simply can't bank across a border

In my experience that varies. I have bank accounts in the UK, US, and Spain
and in terms of saving money and transferring it there's usually no problem.
Where it is localised is borrowing money against property. If you want a
mortgage against a Spanish flat you have to use a Spanish bank and so on. That
kind of makes sense as if you run off and don't pay the mortgage then the bank
is stuck with the property and it's easier to deal with one down the road
where you know the laws and regulations than one in some random other country.
Especially if evicting tenants and so on is involved, things get pretty
complicated.

~~~
zo1
Okay, but let's assume this in the context of Greece. I understand that
everything sorta "works" semi-smoothly when everything is fine. I too have
managed to move money over borders, between accounts, etc.

But in the context of the Greek situation? I.e. Imagine someone wanting to
come in now (or at the start of the crisis?) in order to open up a new
"foreign" bank and offer it to Greek individuals? Because the regulation is so
intertwined, and this mess of the loans and ECB, means that no one dare do
that.

They'd have to jump through mountains of regulation, come up with some sort of
initial capital to fund the bank (with no idea whether they could have legal
access to it again), and on top of that all, give the new Greek depositors any
sort of guarantee. A tall order, to say the least.

Another point, sorta tangential. You can also barely have an "informal" bank
by virtue of transferring money to a foreign bank. Have a look at:
[https://en.wikipedia.org/wiki/Hawala](https://en.wikipedia.org/wiki/Hawala)

I haven't confirmed, but I'd bet that almost every single country in the world
defines that sort of transfer as illegal. Or additionally:
[https://en.wikipedia.org/wiki/Foreign_exchange_controls](https://en.wikipedia.org/wiki/Foreign_exchange_controls)

------
7Figures2Commas
The notion that bubbles are not all equally bad, and that bubbles fueled
primarily by debt tend to be the worst, seems reasonable on the surface, but
it's not always so easy to separate bubbles into two camps: those fueled by
exuberance and those fueled by debt.

Margin debt, for instance, has increased significantly in China[1] and in the
US, stock buybacks financed by debt offerings have been a prominent feature of
the current bull market[2].

Central banks have taken so much unprecedented action since 2008 that it
requires a lot of faith to rely on analyses of past bubbles to predict what
will happen when the current ones burst.

[1] [http://www.bloomberg.com/news/articles/2015-04-13/china-
walk...](http://www.bloomberg.com/news/articles/2015-04-13/china-
walks-264-billion-tightrope-as-margin-debt-powers-stocks)

[2] [http://fortune.com/2015/02/11/stock-buyback-
binge/](http://fortune.com/2015/02/11/stock-buyback-binge/)

~~~
lingben
> Margin debt, for instance, has increased significantly in China

It is even more insidious than that. Chinese companies have pledged their
stocks as collateral for loans so the whole thing is a pile of circular
promises, one built on top of the other.

This is the real reason why the Chinese authorities suspended so many shares
from trading before they stabilized the market. If the shares had continued to
go down, it would have resulted in a massive credit crisis since billions and
billions in loans would go into default.

For more details see:

[http://www.bloomberg.com/news/articles/2015-07-08/this-is-
wh...](http://www.bloomberg.com/news/articles/2015-07-08/this-is-why-so-many-
chinese-companies-are-suspended)

------
deevus
Correct me if I'm wrong, but it seems as though Australia is in for a disaster
when the current housing bubble bursts. Median house prices in Sydney are
around $1M, which is shutting out the majority of people in the 25-44 age
range from buying their first home.

[http://www.sbs.com.au/news/map/housing-
affordability](http://www.sbs.com.au/news/map/housing-affordability)

~~~
RussellDussel
Sydneysider here, 24 years old and pretty-decent salary. Maybe if I save for
several more years, and buy with a partner, we may be able to afford a 1
bedroom apartment, with some financial help from our parents, in the outskirts
of Sydney.

~~~
Cub3
It's now more expensive to buy in Wollongong (Sydney outskirts) then in New
York [http://www.wsj.com/articles/worry-over-debt-as-australian-
ho...](http://www.wsj.com/articles/worry-over-debt-as-australian-house-prices-
rise-1430207189)

------
somberi
This hit a chord with me:

"Be it tulips, land, housing, derivatives or shares, they find that the
consequences of a bursting bubble depend less on the type of asset than on how
it is financed. High leverage is the telltale sign of trouble..."

I see this today not just in the Valley but elsewhere in the world too
(witnessed it in India and Sub-Saharan Africa). When wealth sloths in a 1%
interest rate economy, it gets restless to find better results, often with
disastrous results.

------
acjohnson55
Interestingly, this reminds me a lot of the view espoused by Bill Janeway in
_Doing Capitalism in the Innovation Economy_ [1], which, among many other
things, studies the history of business cycles. It's a great book.

[1] [http://www.amazon.com/Doing-Capitalism-Innovation-Economy-
Sp...](http://www.amazon.com/Doing-Capitalism-Innovation-Economy-
Speculation/dp/1107031257)

------
ilaksh
Economics discussions are like a bunch of 1980s mechanics talking in a garage.
Or nuns discussing their faith.

The fundamental technology and premises are outdated.

You can't just have one number to try to track everything while
'externalizing' all the stuff that matters, like human and environmental
health. And in our high tech world, relying on lawyers and politicians rather
than building automated systems is dumb.

------
bobbygoodlatte
Assuming one agrees that debt is the problem and we're on the brink of a
crash, how would you protect your assets?

------
brock_r
Funny the 2008 housing bust wasn't specifically mentioned. I'm still walking
funny from that.

~~~
unethical_ban
> Five years after the bursting of a debt-laden housing bubble, the authors
> find, GDP per person is nearly 8% lower than after a “normal” recession (ie,
> one that is not accompanied by a financial crisis).

I read that as the 2008 one specifically, but that was an assumption.

------
api
Two words: student loan.

------
crimsonalucard
So is the US in a bubble or not? If we are, why? If we aren't why not?

~~~
adventured
I'd say no. The US is one of the few developed nations that has been busy
paying down household debt for the last five years. It's in far better shape
than its peers. [1]

Most major economies have been taking on increasing amounts of household debt,
or are already carrying too much. That includes: Norway, Sweden, Belgium,
Denmark, Finland, Switzerland, the Netherlands, France, Canada, Australia, New
Zealand, Spain, Ireland, Portugal.

Others like Italy have taken on more debt (30% more in ten years), but started
from a relatively low base. Or Japan, which has a bit too much household debt
but has been flat for 20 years.

The US, Germany and the UK are among the few that have been actively reducing
household debt.

In the US assets are richly valued due to the former QE and low interest
rates, but there isn't a bubble (yet anyway). If the US continues to reduce
household debt, while boosting employment and wages (the US unemployment rate
is half that of the Eurozone), that will only improve the situation. The US
will very likely substantially outperform its peers over the next decade; the
strong dollar has reclaimed a lot of lost purchasing power for the middle
class, effectively giving Americans a 20% pay raise versus the rest of the
world (and that's before interest rates climb).

[1] [http://i.imgur.com/718Coeb.png](http://i.imgur.com/718Coeb.png)

~~~
adebtlawyer
> The US is one of the few developed nations that has been busy paying down
> household debt for the last five years.

In the US, the people with the highest debt-to-income ratios have been briskly
filing for bankruptcy over the last five years. I wish I had time to dig up
another graph to match yours, volume of personal bankruptcy filings over the
same period. It's correlated. It's also a much stronger effect than paying
down, often someone with over 100% debt-to-income goes to 0% over a matter of
months, with no change in income at all.

~~~
eli_gottlieb
Yeah, but the point is, once the debt is cleared, by being paid _or_ by
bankruptcy, the private sector steadily regains its ability to plan rationally
and pass information around in price signals. That's why fairly "easy"
bankruptcy laws are usually considered more pro-business, while "moralizing"
bankruptcy laws, as more often found in Europe, are actually considered to
depress the economy (by simultaneously mobilizing vast machinery to pay out on
"bad bets" _and_ heavily penalizing business failure, thus increasing the
risk-up-front of entrepreneurship and investment).

------
hartator
They might need to focus a lot more on public debt that has been growing
steadily for the past decade everywhere in the world. This might be the next
bubble and it might be way worse than 2008...

~~~
omarchowdhury
Yeah, so what happens if a country like the US defaults?

~~~
hartator
They won't default, they will just print more USD. Anyway, that will be still
bad for everyone.

~~~
Suncho
Why? As we produce more stuff, we also need to spend more to keep prices
stable. Printing money and throwing it at the economy is one way to make that
happen. As long as our rate of spending remains in line with our level of
production, we shouldn't see inflation or deflation.

Why do we need a balanced budget?

If you're Greece and you can't issue your own currency, your national debt
matters. But the U.S. can always issue new currency to cover its liabilities.

I guess I have a hard time understanding why we should care about the amount
of the U.S. national debt.

~~~
adventured
Because the rate of production never stays in line with the rate of spending;
you can't force it to stay inline. If you debase a currency, consumers will
typically seek to spend it before it loses more purchasing power, which
automatically unbalances your economy because you can't control exports or
production in a way that you can match the consumption. We saw this disastrous
effect during the 2000s, when the dollar lost a large amount of value due to
budget deficits, and the middle class lost a lot of ground as wages failed to
outpace the currency devaluation.

Why should you care about the US national debt? Because at just ~3.5% interest
on that debt, it'll eat up a share of the Federal budget larger than either
Social Security or Medicare/Medicaid, at a time in which the US already can't
afford its entitlements. Each year that goes by, the US can only afford to pay
a lower and lower interest rate on its national debt, and it has to 'print' to
cover the deficits today - tomorrow when the red ink on entitlements is
greater and the interest costs are greater, the deficit will be greater
(projected to explode higher in the near future). That will lead to further
devaluation of the dollar, which will further wreck the middle class as it did
last decade with the weakened dollar. Exports didn't come even remotely close
to making up for the weaker dollar hit last decade, and they won't next time
either. The US runs a massive trade deficits, it takes a far worse hit on a
weaker currency than it benefits from such.

The only large buyer left for US debt, is the Federal Reserve. The US
Government is insolvent without monetizing its own debt via the central bank.
Once a nation hits that point, it never recovers.

~~~
Suncho
Hmm. I wouldn't characterize what happened in the 2000s as a debasement of the
dollar. Real wages have decreased, but shouldn't we want to spend less money
on labor as we develop labor-saving technologies and take advantage of cheap
foreign labor that substitutes for domestic labor?

Why is a trade deficit a bad thing? It means we're sending dollars overseas
and other countries are sending us real stuff in return. Sounds like a pretty
good deal to me.

What's wrong with the fed being the only large buyer for U.S. debt? If the fed
holds all our treasury securities, then the interest payments don't really
matter, right?

Is there any reason why it's bad for this to be a permanent arrangement?

I still don't see why an ever-growing deficit is a problem. Do you think it
will necessarily lead to inflation? If so, why?

When you say that the U.S. can't afford its entitlements, what do you mean by
that?

------
x3n0ph3n3
Does anyone see an author attribution to this article? I can't find one
anywhere.

~~~
theseatoms
Standard practice for The Economist. Really hurts accountability...

~~~
ghaff
The idea is that the accountability is at the level of the magazine, not the
individual author. It's not the norm today (outside of many newspaper
editorials) but doesn't mean there's an inherent problem with it. I'd also
observe that, in many/most cases, when organizations like analyst firms put
out reports they're widely viewed as the opinion of the firm even if they're
bylined. Which isn't unreasonable given that they're presumably peer-reviewed.

In general, bylines have become standard practice because writers, etc. want
it. Not because publications and other content producers prefer it that way.

------
michaelochurch
I think that this article is basically right, but would add that bubbles are
generally dangerous based on what they represent, financially and culturally.
If Bitcoin hits $1,000 again, it's not innately dangerous (unlike housing, no
one needs Bitcoins to live). It might represent a bad thing, like the collapse
of a currency.

We're still in a housing bubble (although not as much as one, and one with a
sharper geographic profile) but what's propping it up now is industrial
decline and extremely lopsided job availability. Much of the country is
starved of economic activity while a few metropolitan areas (e.g. New York and
the Bay Area) have healthy job markets but extreme real estate costs.

All of that said, I have no way of predicting how that bubble will resolve or
when it will crash. We could see it happen in 2 years or in 25, and it will
probably vary with geography (just as Vegas and Florida got hit hard in the
last one, but the Bay Area and Manhattan remained unscathed). Housing bubbles
are weird because there's so much corruption (foreign money, NIMBY
regulations) involved that makes them political and therefore unpredictable.

The 2001 tech crash didn't do a lot of damage to the rest of the world (9/11
did far more). The 2008 crash is still being felt in Southern Europe. I can't
predict how much of an effect the ~2017 VC-land crash will have. To be honest,
the numbers don't look that bad; when Silicon Valley drops a turd like ZNGA on
Wall Street, the Street usually reacts with proper skepticism. So I think that
this one's going to be relatively limited in terms of its impact on the rest
of the world. I don't like what it represents about our society, and what it
may continue to represent, because _that_ is corrosive. The truth about VC-
funded startups in the Bay Area is that 98% of that stuff has nothing to do
with creating new value, but with devising ways to profit from widespread
organizational decline.

~~~
iambvk
What is ~2017 VC-land crash in your opinion? Specifically, who loses money?
How would it effect common-man who is not involved in stock market directly?

~~~
S4M
People whose pensions are invested in VC funds would lose money. Don't forget
that VC money comes in a large part from pension funds.

~~~
saryant
But do pension funds actually have that much invested in that asset class?
Around $48 billion went into VC in 2014 but in the US alone there is $18
_trillion_ in pension assets.

~~~
stillsut
Good point. But, a crash will lower the historical experience thus lowering
future expectations for market yields. For pensions that need to hit a defined
amount in the future, this means that have to come up with more capital in the
present to hit the future target.

------
jkldotio
I have flagged this because it's paywalled.

edit. unflagged, apparently that's against the rules (that I disgree with but
will follow)

~~~
dang
That's not an ok reason to flag something on HN.

[https://news.ycombinator.com/item?id=9717733](https://news.ycombinator.com/item?id=9717733)

Paywalls are not banned on HN, especially when there are standard workarounds.

~~~
jkldotio
I wasn't aware of that rule and I've been on here for many years, it should
perhaps be made more prominent. I also genuinely think it's wrong, people
should be able to flag things which are inaccessible for them.

To expand on that, what's the point in sharing a link where you have to pay or
sign up to get access on a public link sharing site? As you can see from my
other reply all I get is a sales pitch from the Economist. If someone shares
an article I will read it and maybe upvote it. If someone shares what seems to
be an article which isn't, it's actually a sales pitch for the Economist under
another headline, then it's worse than blogspam, in my book at least.

I run a news aggregator and I know for a fact there are a great many free
alternatives to "NYT, New Yorker, Economist, WSJ" for both news and opinion,
and that's just for the USA let alone the huge number of non-US sources. I
don't particularly see why they should get a free pass when a smaller site
would get blasted for having a paywall.

I also have university access to academic journals that aren't public. They
frequently contain very interesting things but I wouldn't post anything from
them here because a large number of people would just get a paywall asking
them for $30 to download the pdf. Thankfully more and more academic
publications are going open, but a great many remain closed and they wouldn't
be appropriate to share.

But, if that doesn't persuade you, I will not flag paywalled sites now I've
been informed of the rules (rules published in a comment 34 days ago).

~~~
prawn
And if the content is inaccessible because of censorship within their country?

~~~
saryant
I think most people know if they're linking to paywalled content. Knowing what
the Great Firewall is blocking today is not nearly as simple.

I, for one, have no clue if The Economist is blocked in China or not.

