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Ray Dalio’s concern about debt levels

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In today’s WSJ, columnist Greg Ip (“Capital Account” – Hedge Fund Titan Puts Away the Punch Bowl), writes about a number of concerns expressed by Ray Dalio, the well-know hedge fund manager, the biggest one being that “Americans have accumulated far more debt than they have assets and income to support.”

The Great Recession has been described as a balance sheet recession, and we understand that households have been digging themselves out of their deep holes since the financial crisis.

I’d like to what Cullen and everybody else who chimes in on this site thinks about the health of our balance sheets. I know wage growth has been mostly absent, but I thought that from a macro standpoint, that our balance sheets were in much better shape now. Debt service (interest plus amortization) as a percentage of GDP is pretty high – so I get that part of Dalio’s point. On the other hand, I’ve seen several charts on the trends of private sector credit expansion – and many of them are flat, which suggests (to me) that we’re still in a muddle through situation – and I don’t see the Fed tightening a whole lot more in the next year or two.

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Posted by (Questions: 23, Responses: 68)
Posted on 01/04/2018 3:55 PM
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Hi Steve,

I wrote this in the middle of last year:

https://www.pragcap.com/why-im-not-worried-about-household-debt/

Dalio seems to be overstating the concern there. The bigger concern is how leveraged corporations are right now. That seems to be a much more rational concern in this environment.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/04/2018 5:03 PM
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Mosler continues to be concerned about the deceleration in bank lending. I realize that doesn’t mean that aggregate debt levels are going down, but it does seem to me that the Fed may not have reason to tighten much in the coming year:

http://moslereconomics.com/2018/01/08/bank-loans-macro-analysis/

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Posted by (Questions: 23, Responses: 68)
Answered on 01/08/2018 4:37 PM
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Mosler and the MMT people have been bearish for the entire bull market. They said the shrinking deficit would hurt the economy and the stock market. I remember this 2011 piece by Stephanie Kelton which said the economy was about to collapse:

http://wallstreetpit.com/77705-time-to-panic-you-betcha/

I’ve learned that MMT is a very useful model for understanding a financial crisis, but it’s a bad model for understanding economic expansions.

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Posted by (Questions: 8, Responses: 29)
Answered on 01/08/2018 5:05 PM
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Thanks VG – I certainly take Mosler’s views with a grain of salt and I’m not part of the MMT crowd. The main reason I look at Mosler’s site is because he compiles a lot of the FRED charts, saving me time from hunting them down myself. I shared the Mosler post on bank lending trends only because Ray Dalio has expressed concerns about how much debt Americans are carrying.

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Posted by (Questions: 23, Responses: 68)
Answered on 01/08/2018 5:42 PM
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VG,

I’d actually argue that MMT and other Post-Keynesian econ schools are pretty solid for understanding expansions and contractions. But you need to put things in the proper context. I’ve been critical of MMT because I think their model is too government centric. We got in long arguments about this back in 2011/12 when we were trying to show that the deficit could contract and private investment could offset that in a manner that would be stable and sufficient for growth. That was the whole purpose of all those S = I + (S – I) debates. People like Randall Wray called me “retarded” for emphasizing that point, but it’s turned out to be precisely right. MMT, in the process, has been very wrong about the recovery in part because they view the economy thru the lens of the deficit to a large degree.

Still, I’d say MMT is a fine theory for understanding the economy. Better than much of what mainstream econ is putting out there. But you have to be careful not to get too caught up in some of their excessively government centric perspectives.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/08/2018 9:09 PM
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Would things have been different in 2012 but for Draghi’s “We will do all it takes” and Fed’s QE3?

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Answered on 01/09/2018 2:25 PM
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Mike Norman certainly doesn’t believe in the deficit is too small arguement. Mike and Matt Franko have argued with Warren for years about it. Mike and Matt are pure MMT.

Mike was buying the market all last year when people were selling because he studies the fiscal flows from the Daily Treasury statement.

Bill Mitchell in his is blog post today to Jared Bernstein states clearly.

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” This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.

It might be that a 6 per cent deficit with full employment might be too expansionary. But then it could be that a 1 per cent of GDP surplus might be too expansionary.

It all depends on the state of non-government spending and saving plans.

There is nothing intrinsically interesting about a 6 per cent deficit or a 2 per cent deficit or any deficit or surplus outcome. It all depends on the spending contributions from the three sectors (government, external and private domestic).”

Unquote.

So it’s a bit unfair to lump all of the MMT body of work into “deficit is too small” when it clearly isn’t the case.

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Posted by (Questions: 6, Responses: 100)
Answered on 01/09/2018 10:04 PM
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Let’s be honest – MMTers are generally bearish about the state of the economy and the markets.

There is an inherent conflict in MMT because the MMT view of an economy at full employment is one in which all people who want a job get a job. So, in an environment without a Job Guarantee you are pretty much always operating well below capacity. Therefore, when you’re operating outside of a MMT regime (which we are) then you’re operating below capacity.

Maybe there have been a handful of MMTers who are optimistic, but I’ve seen a pretty steady dose of pessimism from the MMT crowd over the last 8 years.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/09/2018 10:25 PM