Wednesday, November 21, 2012

Richard Duncan quote

Kyle Bass made a similar point to the quote below on page 5 of his latest letter

“There is a limit to how much debt an economy can bear. That limit is determined by the economy’s ability to generate sufficient income to service the debt. Exhibit 3.18 helps put the relationship between credit and the economy into perspective. It shows the ratio of economic output (i.e., GDP) to total credit market debt in the United States. That ratio represents the return on credit. The sharp decline in the return on credit indicates that in recent decades, the economy has generated steadily less output per dollar borrowed. In other words, there has been a sharp decline in the marginal efficiency of credit. That decline reflects the extraordinary malinvestment that has occurred during the last three decades in particular. It also raises uncomfortable questions about how much more of the financial sector’s capital will be destroyed during the years ahead.”

–Richard Duncan, The New Depression