Another day older, and deeper in debt…

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Further to “When you stack it all up…,” another bulletin from Barry Ritholtz:

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:

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.

<snip… pdf download of full text here.>

Gundlach is certainly not alone in attributing our current woes to (way) too much credit.  But his piece is especially interesting to me as a long-time scenario planner in that he forthrightly addresses the profound uncertainty of the moment.  While it may be clear that debt that got us into this mess, Gundlach cops to being deeply unsure where we’re headed, acknowledging compelling arguments that we may be on the verge of serious inflation… or deep deflation… (or, I might add, their bastard child, stagflation).

We can hope that our policy-makers will act effectively; and the major players in the economy, responsibly.  But as a practical matter– as individuals and as managers– we’d best stress-test our strategies to be sure that they are robust against any of these outcomes.

Or we can advocate more radical action on the part of the authorities:  Nassim Nicholas “Black Swan” Taleb and Mark Spitznagel argue along lines resonant with Gundlach’s debt concerns in “Time to tackle the real evil: too much debt“; but while Gundlach is offering investment counsel, Taleb and Spitznagel are arguing for public policy reform, and for authoritative action:

The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option…

<snip… full article here>

So far, desperate times have elicited desperate (re)actions, compromised attempts to prop up the very incumbents whose choices sailed us into this storm.  But what these desperate times really call for are more fundamental and proactive initiatives–  responses that treat causes, not symptoms; responses with the “heft” of the problems they address…  If we’re going to find a constructive way out of this mess, we’ll need to take action that’s sweeping enough, basic enough, and drastic enough to make a real and lasting difference.

And if we’re going to make that change, we are going to have to play an active role.  Any hope that we can leave it to our elected representatives (and to the officials that they appoint) is fading fast.  We need to educate ourselves, and then educate them.  (No need to despair that they are so conflicted as to be “unteachable”; all they need to understand is that it going to take something different, something new to get our votes… or someone new gets them.)

Desperate times don’t call for desperate measures; but sometimes they do call for radical action.

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