Fascinating analysis from Jeffrey Gundlach, Chief Investment Officer from TCW, titled The Jalopy Economy. Jeff places much of the blame for the nation’s current woes on our addiction to credit — a “Great Debt Binge — A Tragedy in 3 Acts.”

The chart is especially telling:

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Total Credit market Debt as a % of US GDP

total-credit-market-debt-gdp

chart courtesy of TCW

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Excerpt:

Once upon a time, not really very long ago, the world was a simpler place. There was self-sufficiency. Men could fix their own cars. And a loud whine from the gearbox warned the driver to replace its crudely milled gears before they failed completely. Today the racket from America’s financial gearbox is earsplitting, but unlike Grandpa, our government has chosen to forego repairs. Instead, Washington is acting like an “Honest John” car dealer from those old days. Back then, stuck with a beater with a noisy transmission, a bad dealer would pack the gearbox with extra-heavy lube, sometimes mixing in sawdust. The thickened gel would quiet the gears long enough to sell the car off the lot. The buyer wouldn’t notice a thing – until a week or so when the transmission burned out for good.

The financial breakdown of 2007-2008 marked a bursting of America’s long-running debt culture. Now Washington is trying to “solve the problem” with much more of the same: a massive upsizing of deficit spending combined with unprecedented monetary stimulus. These measures amount to the economic equivalent of a lube-and-sawdust fix. The fundamental gear works needed to honor America’s IOUs are stripped. On its present trajectory, our economy cannot honor its existing IOUs, let alone pay back a further build-up in future claims. The new debt binge might buy a little time, maybe even a spell of economic growth. But once the gears churn up the lube and sawdust, the old jalopy will grind to a stop. Then we will witness the sequel to 2007-2008. All this implies a range of default and inflation scenarios; the task before us is to prepare for those possible outcomes.

Good stuff . . .

Hat tip Scott

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Source:
The Jalopy Economy
Jeffrey Gundlach
TCW, 06/15/2009

http://www.tcw.com/cmRoot/Funds/CIOLetters/JGLetter_061509.pdf

Category: Consumer Spending, Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “The Jalopy Economy”

  1. mcrcr4 says:

    What do you mean I can’t pay off my Visa bill with my Mastercard? Oh, I guess I forgets my place, only the government can do that.

    Best regards,
    RF

  2. DL says:

    And yet, people are happy to buy 10 year Treasury notes with a yield of 3.64%.

  3. franklin411 says:

    Almost everyone agrees that we can’t go back to the old days–ie the last 30 years, where this nation produced nothing and consumed everything. Does he offer a solution (pdfs are a little too much for my berry)?

    At any rate, the stimulus included measures designed to build a new economy, including unprecedented investments in education, research and green tech spending. No one can say the President doesn’t understand how vital it is that we become a producing country once again. AFAIK, however, all the GOP has offered us in this matter is the same old tax cut song and dance that got us in this mess. Somehow, we’re to believe that “it’s different this time!”

  4. DL says:

    Franklin411,

    What proportion of GDP would you like to see government consume (both federal and state)…?

    Would you like to see the government consume a higher share of GDP than is the case in France?

    How high does the tax burden (federal + state) have to go before it begins to impede economic growth?

    (Just curious).

  5. DL:
    The tax burden was higher during the Clinton years and there wasn’t much of a problem. What about the tax rates of the 50′s? The economy did fine then.

  6. mysterious eggs says:

    “How high does the tax burden (federal + state) have to go before it begins to impede economic growth?”

    It already impedes economic growth. We tax the wrong people for the wrong transactions so we have enough cash to bailout our “growing” FIRE sector.

    I have to see some concrete numbers on how serious Obama is about turning us into a producing country. Total up the money being dedicated to education, research and green tech, what fraction of the bailouts+alphabet soup is that? Actions speak louder than words.

    The bailouts and alphabet soup are flagrant organized crime. Until we get smash the criminal racket all of our economic might will be corralled into keeping the federal ponzi scheme going.

  7. jc says:

    Hard to look at that chart and not feel like it’s 1932 on steroids. None of the gummint actions are really stemming the collapse in RE, it’s just a time out with the big banks sitting on a huge inventory of foreclosures waiting for a mega bailout at “fair” not foreclosure auction prices.

    Now think of the gummint as landlord for 5-10% of primary residences scattered thru mid and upper class neighborhoods collecting a “fair” rent based on the tenants ability to pay and the gummint responsible for maintenance.

  8. danm says:

    Maybe we should have a conversation about the various devaluation techniques and which one is most probable.

    It’s pretty straight forward in a fixed exchange rate environment or when the currency is pegged to gold but what about one where the US needs to devalue but the ROW just won’t let it.

  9. DL says:

    Calvin Jones and the 13th Apostle @ 2:43

    “The tax burden was higher during the Clinton years …”

    I don’t believe it’s true that the government (federal + state) consumed a higher percentage of GDP during the Clinton years. But in any case, the top marginal tax rate is an issue which is entirely different from that of overall tax burden as a percentage of GDP.

    There’s also the matter of the tax liability that Obama is imposing. The higher the debt, the greater the tax liability. And the future tax LIABILITY has very little to do with the overall tax burden at present.

    There are a number of different issues here; it’s important to be clear about exactly which one of the issues you’re referring to.

  10. Jim C says:

    Yeah Reagan’s and Bush’s policies were great for us…heh.

  11. DL says:

    Jim C

    I’ll take Reagan over Carter (or Nixon, for that matter).

  12. TripleSigma says:

    Then:
    They called Greenspan a hero when he revived the economy by throwing easy money at the problem. In reality he swept the problem under the Rug.
    Now:
    They called Bernanke a hero when he revived the the economy by throwing easy money at the problem. In reality he swept the problem under the Rug.

  13. franklin411 says:

    @DL
    You had your chance: Bush received his $1 trillion tax cut for the rich and his $1 trillion war on Iraq. All we got for it was a depression.

    More tax cuts aren’t going to produce a new economy any more than they did in the jobless “recovery” in 2003. I’m open to alternate strategies, but tax cuts and government investment are the only two menu options we’re offered atm. Tax cuts have failed to restore the economy time and time again, but investment has never failed us.

  14. sinomania says:

    According to the Fed data “Households and nonprofit organizations credit and equity market instruments liability” account for only around 25% of the total. The big explosion – occurring under W – seems to be in “Federal government credit market instruments liability” which more than doubled since 2002 and in corporate equities.

  15. [...] The Big Picture reprinted a chart from TCW Chief Investment Officer Jeffrey Gundlach’s analysis of our debt culture’s breakdown. The analysis concludes that “unintentional or otherwise”, federal government entitlements have the same characteristics as Ponzi schemes and inflows could stop supporting them well before 2016. [...]

  16. DL says:

    Frankin411,

    Please don’t characterize me as being supportive of Bush(43).

    As for “investment”, that’s a word that politicians like to throw around when they want to give money to important constituents.

    Probably 90% of Obama’s “stimulus” package would fail to qualify as “investment”.

    I’m just of the view that government tends to waste money; the less we give them, the better off we’ll be in the long run.

    But you still haven’t answered, do you really want our economy to be more like that of France?

  17. cvienne says:

    My goodness these ELEPHANTS vs. DONKEYS arguments are tedious…

    It’s like watching a dog chase its tail…

  18. ab initio says:

    Nice clear presentation of the financial situation and the complexities of the investment landscape. The political system and the economic intelligentsia are wedded to serial bubble blowing. According to our wizards the solution to the problem of excess debt is even more debt. At the end of the day any grandma (as a moniker for a person with common sense) will tell you that this debt will either have to be inflated or defaulted. Green shoots, brown shoots – debt cannot be a substitute for real economic value – income from productivity. It looks like we are well past the marginal utility of the next increment of debt.

    And now the Chinese are getting into the game. Bank lending in China for the first half of 2009 was over $1 trillion – a 40% increase than ALL of 2008! Think of it in terms percentage of GDP. Yikes!!

    Hang on tight and enjoy the roller coaster ride of financial volatility!

  19. Onlooker from Troy says:

    cvienne
    “My goodness these ELEPHANTS vs. DONKEYS arguments are tedious…”

    Yep, you beat me to it. Oh goody, another pointless political argument rehashing the past 3 decades. That’s always productive.

  20. cvienne says:

    @OT

    I want to give kudos to ab initio comments…

    “And now the Chinese are getting into the game. Bank lending in China for the first half of 2009 was over $1 trillion – a 40% increase than ALL of 2008! Think of it in terms percentage of GDP. Yikes!!”

    That’s pretty much what I was going to say next…Instead of getting into the donkey versus elephant debate (which is OLD), why don’t we take a passive look and see how all that spending turns out for them?…

  21. DL says:

    cvienne,

    My biggest holding is FXI.

  22. jimcos42 says:

    Help! Toward the end of the paper was this sentence:

    “The fixed income investor who worries about inflation should buy high cash-flowing credit.”

    WTF is “high cash-flowing credit?”

  23. danm says:

    The fixed income investor who worries about inflation should buy high cash-flowing credit.”
    ———
    Probably means coupon as high as possible so you can reinvest one coupon at higher rates.

  24. DeDude says:

    Didn’t Ronald Reagan teach you that debt dosn’t matter :-)

  25. [...] The Jalopy Economy | The Big Picture (tags: economics debt credit history spending government) [...]

  26. jimcos42 says:

    The chart looks a lot less troubling if viewed in log scale. Like it works out to less than 1% annually, peak-to-peak, in about 76 years. So if the magnitude of the de-leveraging that’s underway now anywhere approaches that of the 1933-56 period (almost 50%), then we’re looking at something akin to Reagan Era numbers. I’ll let the traders fuss over the gyrations between here and there. My glass is half full.

  27. dougc says:

    The chart is less troubling if viewed in log scale is the logic that got us in this problem. The problem is huge and a simple painless solution is not available. Also confused about deleveraging that occured in rwr presidency, one of us is looking at an inverted version of the chart.

  28. [...] to “When you stack it all up…,” another bulletin from Barry Ritholtz: Fascinating analysis from Jeffrey Gundlach, Chief Investment Officer from TCW, titled “The [...]

  29. [...] consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing [...]

  30. [...] The story of the US credit binge (it’s shorter than you think) Posted on July 20, 2009 by chetanroy Came across this very good analysis by Jeffrey Grundlach, Chief Investment Officer from TCW, on Barry Ritholz’s blog The Big Picture . [...]

  31. [...] consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing [...]

  32. [...] week, we looked at the Total Credit Market Debt to GDP ratio.  Here’s another variation of the chart showing, looking at 2 differing periods [...]

  33. You might want to look at the following graph regarding the repartition of income amongst workers and managers 1970-2006 :

    http://guerby.org/images/salaires_us.jpg

    I don’t remember where I got it but the inflexion point is again 1981.

    I’d love to know what were legislative and regulation changes which triggered this whole mess.