Thursday, April 29, 2010


There are three types of economic thought: classical economics, behavioral economics and Austrian economics. Classical "Wall Street" economics has morphed into a make believe world where debt doesn't exist. The only variable that is measured is the debt payment. I have a degree in economics but unfortunately I am also an accountant, so thinking about both schools of thought gives me a headache.For my own sanity I have given up most thoughts of classical economic theory.

Once in a while I let myself think about Austrian economics where total debt is actually a variable. But this thinking is mostly just folly. The accounting balance sheet in the Austrian model does not allow for limitless debt so it presently can't be used by our government or our financial sector. If a real balance sheet was put it in place now it would be like opening the covering of a glass bottomed airplane at 45,000 feet without warning your passengers. And of course this event would be worse in our country's current condition because most of our population thinks we are on the ground and not flying high at the peak of maximum attainable debt load.

Anyway in my folly, I have heard some of the more thoughtful Austrian and behavioral economists use the idea of "bubble-nomics" to describe economic events like our recent period of excess. This would be the fiscal and monetary manipulation of an economy by a government creating a false period of prosperity followed by a real period of slower economic growth.

But I don't think that the idea of "bubble-nomics" is a true representation of our present situation. A bubble is a balloon that inflates to the point of maximum expansion. This is a very rigid and boring concept to describe a period of very extreme human behavior. Plus no matter how big the bubble gets it doesn't really burst. It just creates a hangover as the economy goes back to normal growth minus the false growth from the bubble.

It's more like a party. Our government spikes the economic punch with either fiscal or monetary manipulation and our country starts buying a lot of drinks for the house. If our citizens become really intoxicated we start to use extreme debt to keep the party going. And if the party gets really, really out of hand we bring our kids to the saloon, sit them on a stool by the bar and tell the bartender to charge the drinks to "them".

Borrowing money from children to keep an economic party going has happened only once in human history to my knowledge. But boy this has been a great party. The bartender is just now getting the tab ready for our kids to sign. Hold that thought! I think our kids still have a little credit left with China and The Middle East.

Hey maybe we could invite Iceland, Spain, Portugal, Ireland, Italy and Greece to the party? They are all in extreme debt but I don’t think that their kids have a Chinese credit card yet.

Well, it's just a thought.

But anyway, eventually someone has to sign the bar tab and we will need to get back to our lives of working and saving. The economy will get back to normal - minus the distortion caused by the bubble or the party or whatever metaphor floats your boat.

At the end of the 1920's that's what happened. We partied until we couldn't party anymore. Then the government spiked the punch and we started the party again until 1933 when we just couldn't borrow anymore. The bar tab seems to be the tipping point that shuts down the extreme party.

In 1933 total debt to GDP shot to 350%. At no time in our country's history has it been even close to that number. Well not until now. We have raced past 350% and now we mostly don't even keep track of the number anymore. All tiers of government, federal, state and local are using unfunded liabilities instead of stated debt so no one knows the exact amount of what has been borrowed. Our financial sector has learned this trick also.

How much debt does our country hold? No one really knows and nobody really cares. In Wall Street economics debt doesn't exist so it never needs to be paid back. But as an accountant I have been trained to assume that debt does need to be paid back by someone, at sometime in the future. I am sure that Japan, China and The Middle East would agree with me on this point.

Anyway, since we have been allowed to bring our children to the bar and charge their Chinese credit card to party we might be able to create more debt than was humanly possible before. Of course no one knows the number but let's say that "real" debt to GDP is 450%. Once we hit the debt wall in the next few years like we did in 1933 then GDP could go down 20% thus spiking the debt to GDP ratio to 563%.

It's really a shame that our government and our financial sector are using hidden accounting tricks to state their debt ratios. If they were required to use real accounting standards then we could have an all time record. Over 500% of debt to GDP! No one has done that before – Yee Haw!

Hey has anyone thought of asking North Korea to give us a hard money loan?

Just kidding.

It's not wise to take money from countries that don't like us. Maybe we should just stick with borrowing large amounts of money from China and The Middle East.

Once we are through partying and "our friends" decide not to lend us any more money then our kids will set up high interest payments to all of “their” creditors.

The bar tab will shut down the party. Everyone will have to go home.

Then and only then will our country go back to a normal life. Back to just worrying about working and saving.

And of course paying off the massive debt from the past 15 years.

Calling the last 15 years a "bubble" does not do it justice.

The biggest party the world has ever known will be over.

Let the hangover begin.

No comments:

Post a Comment