Debt bears say Grant’s optimism is bull (update)

One of the biggest bears on Wall Street has turned bullish: James Grant, author of the inimitable Grant’s Interest Rate Observer, argues this week in the Wall Street Journal that great downturns are followed by barn-burning recoveries. The bears are not taking this in stride.  The Big Picture blog writes that Grant ignores “aspects to the current unraveling that are historically unique and extraordinarily unsettling.”

Specifically, guest poster Michael J. Panzner parenthetically notes that “total credit market debt relative to gross domestic product is well beyond anything this country has ever witnessed.”  In a comment on The Big Picture blog, Steve Barry, chief investment officer at Goldman Sachs Asset Management’s fundamental equity, provides the numbers on credit vs GDP :

We are now at 373%, basically flat from the 375% as of 1Q09. The highest ever before this run was 260% in 1935. The level at which the market crashed in 1929 was only 170%…the spike to 260% came as GDP plunged and the New Deal started. Total credit has basically been up non-stop since 1953, going really nuclear starting in 1980 at 160% up to 373% now. We will soon find out if deficits and debt don’t matter (low likelihood)…or perhaps we are in deep, deep trouble.

And I have the charts (click on the graphics to enlarge). The first shows the change in credit as a percent of GDP from the 1920s to 2008:

Steady rise in credit as a percent of GDP keeps bears growling

The second is an up close and personal illustration of credit market lift-off from 1980 to the first quarter of this year:

Credit rockets upward through good times and bad (pink are recessions)

And, of  course, I would add that all this debt accumulation won’t do any good going forward for the dollar or the ability of the US to borrow cheaply to fund its liabilities.

Graphic on top RGE Monitor; chart on bottom Economagic.com