Monday 2011-03-14

Debt and Delusion by Peter Warburton

Warburton wonders when our debt-structured economies will collapse. He needs to answer two questions:
(1) How much debt is too much?
(2) How much inflation is too much?

While he doesn't answer the first (indicated to be when issued gov't debt / GDP exceeds 80% in ThisTimeIsDifferent), he points to an IMF-sponsored paper by Michael Sarel, entitled Nonlinear Effects of Inflation on Economic Growth, which indicates a performance knee occurs when inflation exceeds 8% per year.

Minus a lot of charts, data, and doomsayer-ism, that's the book. He does have one nice synthesis, though:

Fire prevention officers often refer to the fire triangle: fuel, oxygen, and heat, which are the essential ingredients of every fire. The 'fire triangle' for property speculation consists of access to bank credit, optimism regarding future property prices and rapid market turnover.
-- Banks Reroved and Re-Invented

Further Speculative Notes:

When we talk about inflation, we get into lots of trouble because our common language overloads an economic definition with everyday observations. In economics, inflation (1) only means an overall increase in general price levels, and (2) is generally accepted by mainstream economists to be solely due to changes in the supply or demand of money.

People then argue over how we measure inflation (gas has gone up, a MB of RAM has gone down). That basket of goods measurement matters when it comes to investing, as changes in the price level will alter the real return of an investment that you are buying or selling in a marketplace of many people.

It's probably better to take a micro approach and create your own measure of inflation out of your purchasing history.

The purchasing power of an individual at any moment is not measured by the money actually in his pocket, whether we mean by money the metals, or include bank notes. It consists, first, of the money in his possession; secondly, of the money at his banker's, and all other money due to him and payable on demand; thirdly, of whatever credit he happens to possess.
-- John Stuart Mill