Monday, December 03, 2007
For those unfamiliar with the concept of ‘Zero Hour’, it is the moment at which creation of new money no longer has an impact on GDP, or the real economy.
The data below is truly sobering. It reflects the fact that money growth is having less and less of an impact on GDP growth decade by decade. I am sorry if this bothers me, even if it goes unnoticed by the masses, but sooner or later, debt must be repaid. If not, debt goes unpaid, interest payments go unpaid and the rest of us get left "holding the bag." I don’t wish to hold that bag. Do you?
The concept, while complicated, can be boiled down to layman’s terms rather easily. Imagine it is the holiday season, and while you have a first and second mortgage (the second one paid for your plasma TV, your second car, and a vacation to Cabo and a new boat), you have to service the debt. Just the interest cost on your debt is consuming all of your money creation (income). You are now left with several choices. Get yet another mortgage (except you can’t as lending standards have become tighter), get a second job (there aren’t any new jobs as the economy has slowed) or, sadly, buy less gifts. The prudent individual would simply consume less and pay the debt service. Think about it—any other choice is disastrous in the longer-term. In my mind, sadly, is that this is what the U.S. is facing now.
“Are we there yet?” Perhaps the U.S. is. If not, it is close or, at a minimum, it is on its way there. Zero Hour. How do we know we are at zero hour? We know we are because M3 has now exploded to an 18% year over year rate while the Fed has downgraded 2008 GDP growth expectations to 1.8-2.5%. Yes, money is growing at a rate ten times that of new economic output.
this is the underpinning logic as to why what probably awaits in this credit unwind is a deflationary episode. more borrowing is a self-defeating option, and i deeply suspect orchestrated money supply growth at some point simply cannot provide in the face of so much debt.