Two methods, same diagnosis

Karl Denninger calculates how much excessive credit exists in the US economy:

[T]here is no recognition here or elsewhere that the problem is overspending compared to taxation, and counterfeiting credit into the economy by private banks. That’s what led to the mess in the first place and nothing has been done to withdraw that excessive credit — indeed, the distortions to maintain that excessive credit have become extreme as the market would otherwise force it back out all on its own! How bad is this? In the United States alone it’s $37 trillion in size, or about 70% of the total credit in the system today! How did I compute that? Simple — I added up the “extra” credit between GDP and credit growth in the below chart from 1980 to 2008.

Those who have read RGD know that I use a different method, which is the Z1/GDP ratio. It is a little more accurate than Karl’s method, being inherently more up-to-date, but it is better seen as a supplement to his method than a substitute. Z1 is presently $54,134.3 billion, which is currently 3.5x more than the $15,454 billion GDP. So, after four years of economic stagnancy, the debt ratio has marginally improved from 375 percent down to 350 percent. (Note that by my method, we can see that about 10 percent of the $37 trillion excess calculated by Karl has already been eliminated.) Since the historical post-Depression norm that the economy can sustain is around 150 percent, this means the amount of excess credit currently present in the system is around $31 trillion.

In other words, all of the economic pain that the global economy has been through over the last four years is about one-tenth of the amount that is eventually in store for it. Contra most observers’ perceptions, the situation is not getting worse, and at least in the United States it has objectively gotten a little better. The problem is that the situation was much, much worse, and orders of magnitude larger, than anyone who wasn’t looking at the debt figures realized. While it may be shocking to learn that there has been no real economic growth in the USA since 1980, a coldly analytical look at the shabby state of the national infrastructure tends to support the statistics.