Wednesday, March 31, 2010

Debt Hangover

Spring is here in the Northeast and along with green shoots in the ground there is continued talk in the financial media about green shoots in the economy. There will be conflicting bits of data reported, but no matter what anyone tells you to the contrary, there is no way we can experience any meaningful recovery as long as we continue to have the debt overhang in our system. The chart at the top of the post is a staple in articles written by Denninger, Mauldin, Mish and Jesse among others. It really deserves a second and a third look.

It's real simple, most of the reported growth we experienced going back to the early '80's was the result of adding leverage to the system. The thing is, we have to service that debt with interest payments and ultimately pay back the principal. How are we going to have future growth with that mountain in front of us? Many people I read believe that default is inevitable, whether that be through inflating the currency or outright default. The math just doesn't work.

The pathetic state of many of our individual states is finally being brought to light by the mainstream press. If California, New York and others end up getting a bail out the debt line will only get bigger. Is it possible? I guess we'll find out.

No comments: