Monday, June 2, 2008

Debt is the Financial system's Carbon Dioxide

There are at least five strong similarities between this ecological issue and the economic one

Of accumulating debt:

While in one sense this slowing down in debt growth is a good thing--in that an unsustainable trend may finally be coming to an end--it also may presage very tough economic times ahead. One aspect of my focus on the debt to GDP ratio is the contribution that change in debt then makes to aggregate spending. Aggregate demand in the economy, for everything from commodities to net asset transfers, is the sum of both income (GDP) plus the change in debt

Today, the annual change in debt is the source of over 19% of aggregate demand. Should that turn around–as it must even to stabilise the debt to ratio at its current historically unprecedented level–then demand in the economy could “unexpectedly” evaporate.

Since the world has experienced a global boom it would only make sense that a global economic contraction will take place. The run up in gas prices as I suggested would happen if any type of reflation attempts would occur just have made the problems worse. Long term indicators clearly show the global economy continues to decelerate.


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These are my own views, please enjoy these insights