The Blood Bath on Wall Street Is the Blood of Main Street

All hail the credit rating agencies. The Dow is tanking, at the time of this post down over 630 points, probably getting hit with margin calls. Gold is over $1700 an ounce. Oil is down $3 dollars a barrel as investors hunt for a place to hide. Currency exchange rates are bouncing. Panic is clear due to high market volumes and the fear index, otherwise known as the VIX, surged 40% in a day.


Debt Deal Delusions: Debt to Gross Domestic Product Ratio


The compromise "is a positive step toward reducing the future path of the deficit and the debt levels,” Steven Hess, senior credit officer at Moody’s in New York, said in a telephone interview yesterday. “We do think more needs to be done to ensure a reduction in the debt to GDP ratio, for example, going forward." Bloomberg, Aug 2 (Image: Okko Pyykko)

How many times have you read or heard about the magic numbers concerning the ratio of national debt to gross domestic product (GDP)? This was trotted out by both sides of the debt ceiling debate as a fact: if the debt-to-GDP ratio exceeds 90%, the results will be dire. Therefore, our current situation calls for a crisis reaction and extreme measures to get below the magic number.

A little more on revised Q3 GDP

You may have seen noticed Q3 GDP was revised downward to 2.2%. This is the third and final revision. Originally Q3 GDP was 3.5%. Here is the full BEA release.

A reminder, GDP is:



Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports.

What happened?

Here is the original breakdown of GDP components first reported:

  • Price index - +1.6%
  • Consumption - +3.4%
  • Non-Res. investment - -2.5%
  • Residential Fixed Investment + 23.4%
  • Exports - + 14.7%
  • Imports - +16.4%
  • Gov. spending - +2.3%
  • Private Inventories - + 0.94%

In the breakdown of Consumption originally we had:

The GDP of Stimulus

Now that the Great Recession has been declared dead and gone by everyone who failed to see the possibility of it happening in the first place, it is important to examine the reasons for its demise.

The White House has been busy declaring that its Stimulus policies have created or saved 640,000 jobs. We should note that the White House originally claimed credit for 1 million jobs, and only revised them down after realizing that they are spending $234,000 for each job saved. More revisions are sure to come.
It's also important to note that the job number is based on mathematical calculations and is impossible to prove.

One thing that can't be denied is that the stimulus did have an effect on the economy. It's this impact that needs to be examined further.

Productivity, GDP, jobs and outsourcing

You see the headlines, you see the cheers. Don't you know the recession is over! Graphs, statistics, tables abound. People argue over margin of error, data points, and debate the great mystery of increased unemployment statistics, then quickly dismiss them as a lagging economic indicator.

But you, down on the ground with the rest of us, say hell no, all of my friends are broke, I can't find a job, I'm in debt, this talk of recovery is bullshit!

You might very well be right and the problem is current statistics appear not to be capturing the true state of GDP, Productivity and thus jobs (in the United States).

No, this graph is NOT reassuring!

This week's edition of Barron's contains an article entitled, "Does Extreme Stress Signal an Economic Snapback?" the thesis of which is carried in the subtitle: "More than a decade's worth of equity gains has evaporated. But history suggests that stocks won't fall much further." The article includes the following graph offered in support of the main thesis:

We are supposed to all think that our 201k's (formerly 401k's) are undervalued now and will at least grow back to the historic norm.

Don't know about you, but I find that graph FAR from reassuring: in fact, it appears to support the opposing thesis.

The Elephant in the Room Gets Some Press - The Deficit

The Ultimate Question

So deadly I wonder if few dare to even ask it?

Can these massive bail outs cause the United States to default on it's own debt?

There. I said it.

Honestly I don't know the answer but it is something I sure want answered. Otherwise it's like we have the bad uncle here, the gambling addict who we bail out and bail out yet he keeps ending up in Las Vegas only to be killed by a gang of loan sharks after we're out our life savings.

Is that scenario possible?

Let's find out.

Economists are now tallying up the numbers and estimating the effect of the latest bail out on the federal deficit and it ain't pretty.

Bloomberg is now reporting