The global economy is now addicted to debt. Once debt stops expanding, the economy shrivels. But expanding dent forever is unsustainable. Welcome to the endgame.
Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to “grow our way out of debt” is not supported by data. Correspondent David P. recently shared this chart of Total Credit Market Debt Owed and GDP and this explanation:
The purpose of this chart is to examine the relationship of total debt to GDP. Since Debt is not factored into GDP, just exactly how much debt is being used to create growth, and over what time periods. But absolute numbers don’t work so well, since they don’t let you examine particular years, seeing what the 1950s look like vs the 2000s, for example.
Red Line: Annual Change in TCMDO (Total Credit Market Debt Owed) * 100/ That year’s total GDP, showing that year’s % increase in TCMDO/GDP.
Blue line: % change in GDP over last year.
Any gap between the red line and the blue line is what I would call the creation of debt in excess of income. And that gap is the ANNUAL gap, not a cumulative gap. As an example, in 2008 TCMDO grew by an average of 30% of that year’s GDP, while GDP itself grew by around 5%. Ouch.
So projecting forward, how much debt growth do you think we’d need to get back to business as usual? 50s was 8%, 60s about 12%, 70s 15%, 80s maybe 20%, 90s back down to 15%, and 00s probably 25-30% per year. We’d probably need a surge of 35% or more, per year, to bring back those exciting bubble years. But who could possibly have the income to support that? To quote the parable of the Little Red Hen: “Not I”, said the goose.
Thank you, David. Note what happened to GDP the moment debt ceased expanding in 2008: it tanked. This is the chart of debt addiction: the moment the expansion of debt is withdrawn, the economy implodes. Here is a chart which shows debt has outrun income for decades:
Debt can be expanded at a rate that exceeds the rise in real income in only one way: by lowering interest rates so the same income can support a larger debt.
This is of course the reason the Federal Reserve has lowered interest rates to near-zero with the ZIRP (zero-interest rate policy).
Eventually the buyers of newly issued debt at near-zero (or even negative) yields start to fear they will never get their capital back or they will be paid back in depreciated currency, and so they demand a higher yield. Since income has already been stretched to the limit to support a towering mountain of debt, this rise in yield catapults the borrower into insolvency.
That is Greece, Spain, Italy, and eventually, the entire debt-dependent global Status Quo.
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