Guest Post: Death By Debt

Tyler Durden's picture

Submitted by Chris Martenson

Death By Debt

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can't be fixed.  By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past.  At least they are for the debt-encrusted developed nations over the short haul -- and, over the long haul, across the entire soon-to-be energy-starved globe. 

The sooner we can accept that idea and make other plans the better.  To paraphrase a famous saying, Anything that can't be fixed, won't. 

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

All economic depressions share the same root cause. Too much credit that does not lead to enhanced future cash flows is extended.  In other words, this means lending without regard for the ability of the loan to repay both the principal and interest from enhanced production; money is loaned for consumption, and poor investment decisions are made. Eventually gravity takes over, debts are defaulted upon, no more borrowers can be found, and the system is rather painfully scrubbed clean. It's a very normal and usual process.

When we bring in natural limits, however, (such as is the case for petroleum right now), what emerges is a forcing function that pushes a debt-based, exponential money system over the brink all that much faster and harder. 

But for the moment, let's ignore the imminent energy crisis.  On a pure debt, deficit, and liability basis, the US, much of Europe, and Japan are all well past the point of no return.  No matter what policy tweaks, tax and benefit adjustments, or spending cuts are made -- individually or in combination -- nothing really pencils out to anything that remotely resembles a solution that would allow us to return to business as usual.

At the heart of it all, the developed nations blew themselves a gigantic credit bubble, which fed all kinds of grotesque distortions, of which housing is perhaps the most visible poster child.  However outsized government budgets and promises might be, overconsumption of nearly everything imaginable, bloated college tuition costs, and rising prices in healthcare utterly disconnected from economics are other symptoms, too. This report will examine the deficits, debts, and liabilities in such a way as to make the case that there's no possibility of a return of generally rising living standards for most of the developed world.  A new era is upon us.  There's always a slight chance , should some transformative technology come along, like another Internet, or perhaps the equivalent of another Industrial Revolution, but no such catalysts are on the horizon, let alone at the ready.

At the end, we will tie this understanding of the debt predicament to the energy situation raised in my prior report to fully develop the conclusion that we can -- and really should -- seriously entertain the premise that there's just no way for all the debts to be paid back.  There are many implications  to this line of thinking, not the least of which is the risk that the debt-based, fiat money system itself is in danger of failing.

Too Little Debt! (or, Your One Chart That Explains Everything)

[Note: this next section is an excerpt from a recent Martenson Blog entry, so if this seems familiar to any site members, it's because you've seen it before.]

If I were to be given just one chart, by which I had to explain everything about why Bernanke's printed efforts have so far failed to actually cure anything and why I am pessimistic that further efforts will fall short, it is this one:


There's a lot going on in this deceptively simple chart so let's take it one step at a time.  First, "Total Credit Market Debt" is everything - financial sector debt, government debt (federal, state, and local), household debt, and corporate debt - and that is the bold red line (data from the Federal Reserve). 

Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).  

Then if we perform an exponential curve fit (blue line) and round up, we find a nearly perfect fit with a R2 of 0.99.  This means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's.  In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again, from $52 trillion to $104 trillion. 

Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008, and it has not yet even remotely begun to return to its former trajectory.

This explains everything.

It explains why Bernanke's $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits), which were positioned to directly benefit from the money.  It explains why things don't feel right, or the same, and why most people are still feeling quite queasy about the state of the economy.  It explains why the massive disconnects between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed during and are utterly dependent on exponential credit growth.   Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin.  This is why Bernanke can print a few trillion and not really accomplish all that much, because the main engine of growth expects, requires, and is otherwise dependent on credit doubling over the next decade.

To put this into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation each year of that decade.  Nearly three years has passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

What will happen when credit cannot grow exponentially?  We already have our answers; it's been the reality for the past three years.  Debts cannot be serviced, the weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas housing, etc.), and the dominoes topple from the outside in towards the center.  Money is dumped in, but traction is weak.  What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.

Debt and Europe

The debt situation in Europe is fairly typical of the developed world and mirrors the debt chart of the US seen above.  There's entirely too much debt, and most of the unserviceable amounts are concentrated in certain spots (i.e., PIIGS), while the amounts owed are concentrated in the German, French, and British banks.

This New York Times graphic did an excellent job of summing everything up:

(Source - click to view larger graphic at source

Here is a slightly less-complicated image that expresses the same dynamic:


If everybody owes everybody else, then kicking the can down the road only works if there's more wealth, more growth, and sufficient economic activity down that road to service the past debts. If any one participant drops the baton in the debt relay race, the absurdity of the situation becomes unavoidable and the cause is lost.

When we hold this view, it is abundantly clear that adding more debt along the way only increases the burdens and is therefore ultimately counterproductive, although it does grant the gift of additional time to avoid facing the truth.  

When all of the most indebted countries are stacked up, we see that all but Russia carry a total indebtedness greater than 100% of GDP and that nine are carrying debt levels higher than any that have ever been repaid historically.

(SourceNote: 260% debt-to-GDP is the all time record for repayment, accomplished by England between 1815 and 1900, but required both massive cuts in spending and an industrial revolution. 

Without mincing words, the world does not face a crisis of liquidity, nor a crisis of insufficient debt, but one of entirely too much debt.  That's the entire predicament in three words:  too much debt

More debt is only going to compound the predicament, yet that is what the world's central banks and political structures are busy manufacturing.  More debt.

Of course, debt is only one component of the story; there are also liabilities to consider.  The above chart merely graphs the legally defined debts involved.  If we bother to add back in the liability components, which are pensions, social security and government medical plans, the predicament is seen to be three to six times larger: 

Whereas the prior chart showed all debts incurred by all sectors of each nation, the above chart only displays government debt and liabilities.  For reference, the red bars, above, are the amounts that you read about in the paper when commentators note that the US, for example, still has a debt-to-GDP ratio that is under 100%. It's a comforting tale, but not an accurate description of the situation.

Again, there are no historical examples of any country ever digging itself out from so deep a hole, and yet we find that the entire developed world has bravely pushed itself deep into unknown territory, seemingly without any serious discussions about whether or not this made sense.

Where We Are Now

So here we are, just a few weeks away from the end of the second round of quantitative easing (QE II) , with massive public debts and liabilities having only grown larger instead of shrinking during the Great Recession, everybody in nearly the same boat, and no clear plan for how all the sovereign debts will be funded from current productive cash flows (i.e., existing GDP).

This is why so many commentators, myself included, are convinced that more thin-air money printing is on the way. My thesis, laid out back in early March is that the Fed will stop QE II on schedule and that the financial markets will react exceptionally poorly to this loss of support. Commodities will tank first, then stocks, then bonds; from riskiest and most-leveraged to least.

It is time to face the music; the levels of indebtedness now require permanent support from thin-air money in order to avoid a deflationary collapse. Given this reality, we explore key questions in detail in Part II of this report: Understanding the Endgame:

  • How will the global debt crisis play out?
  • What does a world economy without growth look like?
  • What steps should we, as individuals, need to take in preparation?
  • How can investors safeguard their purchasing power during the coming rout in the finanical markets?

Click here to access Part II of this report (free executive summary; paid enrollment required)  

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oogs66's picture

Yes, we need to stop "fixing" a debt problem by issuing more debt!

Vampyroteuthis infernalis's picture

The debt fix will end in tears. Deflation bitchez!!!

ursus.peracto's picture

There will no longer be any faith in paper after this scheme implodes.

topcallingtroll's picture

There may still be paper, but there will be no faith in governments. This lack of faith, a huge cultural shift, will be the end of socialism and transfer payments.

Argentines still use fiat even after a fifty percent collapse and the certainty of a future devaluation.

ursus.peracto's picture

Good point, but I mean the entire system, not just one component.


The Government of Argentina has promised that it will be different this time.

tiger7905's picture

A great Turk interview on gold and hyperinflation and how what the US is living now is exactly like when they lived thru the continental currency.

chartcruzer's picture

This is a great article - and yes a currency crisis is inevitable.   Throughout time fiat currencies have allways failed.  What's amazing is that the breadth of the worlds major economies are all beyond the tipping point of the fiat/debt pozi play.  Read this.

The question that kills me is; how long will these debt loaded economies be able to extend and pretend?

Im monitoring long term interest rates, the price of gld, and the $ for clues...[s218718281]&disp=P[s172502148]&disp=P[s218820698]&disp=P


Spastica Rex's picture

Jesus would never have created a world with limits. Limits are for atheists and pussies.

ursus.peracto's picture

They come in handy for calc.

A champagne bottle is about the limit for a pussy though.

falak pema's picture

I prefer Hegel he was more bubbly and incomprehensible sober or drunk...also closer to god than infinitesimal as to be devilish.

alien-IQ's picture

Debt is slavery and a nation that commits itself to endless debt commits it's people to endless slavery.

monkeys.pick.bottoms's picture

You have described the last 300+ years of our civilization. Where is John Galt when you need him? Hurry up, will he?

ursus.peracto's picture

I hate to break the news but Galt died of a massive coronary after the end of Bretton Woods.

Hedgetard55's picture

Debt = cancer.


Hard to get cured unless removed early. We haven't removed it, but let it grow.

TruthInSunshine's picture

Not just cancer, but cancer suffered under slavery.

Azannoth's picture

Remember the scene from Titanic where the Captain asks the Architect, if the ship can float with 5 ruptured containers, and the Architect says no it can't, the Captain asks 'are you sure?' the Architect responds, 'yes it's a mathematical certainty'

Cui Bono's picture

Volunteer philosophy on the velocity of time or something....

Chung Mee: Opium is my business. The bridge mean more traffic. More traffic mean more money. More money mean more power.
Lawrence Bourne III: Yeah, well, before I commit any of that to memory, would there be anything in this for me?
Chung Mee: Speed is important in business. Time is money.
Lawrence Bourne III: You said opium was money.
Chung Mee: Money is Money.
Lawrence Bourne III: Well then, what is time again?

WonderDawg's picture

Classic scene in a hilarious movie that largely flew under the radar. Laughed myself to tears the first time I saw it, and I'm sure it had nothing to do with what I was smoking at the time.

Mad Cow's picture

I love that movie, thanks for the chuckle.

LawsofPhysics's picture

True price discovery will come eventually, so long as fraud remains the status quo, that coming will be much more chaotic then if we had actually dealt with it 30+ years ago.

The world economy depends on cheap energy and exponential growth, neither is sustainable for extended periods of time.  Without drastically changing our monetary and economic systems the BRIC countries have the choice of bailing out the rest of the world, taking a big haircut on the poor investments (in all debtor countries), or invading the rest of the world and taking all physical assets by force.  There simply are no other alternatives moving forward with the current system.


Possession of real value added assets rapidly becoming 100% of the law around the globe.  Even the folks in the middle east are considering the possibility that their oil may be more valuable to them instead of being sold for anything, including gold.  

Bay of Pigs's picture

Especially when some countries invade others for their oil and gold, you know, like Libya.

Nonanonymous's picture

Accruing to the benefit of the status quo, and not the general weal.

MolotovCockhead's picture

How can it be worth anything when it can be so easily taken away, whether Oil or Gold? Look at Iraq, Afghanistan, Libya....

akak's picture

Hey BoP, how went the Vancouver Cambridge House Investor's Conference?  Did our hero Jon Nadler dare rise to the podium, and was he soundly heckled if he did so?

Bay of Pigs's picture


As usual, he was completely irrelevant, but the crowd was polite (as they usually are). He's lucky he doesn't post here. He would get torn to shreds. LOL.

Sadly, I wasn't able to confront him publically as I had hoped to do.

I might try again at the Silver Summit in Spokane, WA in October. 

akak's picture

Thanks for the update, BoP!

But I must admit, I have a very hard time believing that ANY semi-informed investor audience would or could politely sit through any presentation of the disingenuous anti-gold propaganda endlessly spouted by that lying, pro-bankster shill Nadler.  Where is the outrage?  Where are the rightfully indignant challenges to mindlessly pro-status-quo disinformation and lies?  Had I been in that audience, you can be sure that I would NOT have sat quietly and let that bastard repeat his vile anti-gold bullshit!  Did NOBODY at least snort or guffaw in contempt?  What is WRONG with these meek Canadians anyway?

SheepDog-One's picture

The world fiat usury fractional banking system is collapsing. Theyre doing everything they can to keep it alive, because its the only way 'those people' know how to make a living in the world, but make no mistake its imploding.

TruthInSunshine's picture

The Bernank is searching high and low for that killer app algorithm that allows him to ignore the fact that he can flood the system with more liquidity, even though demands for loans/debt/credit and the willingness to issue loans/debt/credit is contracting against a backdrop of weakening employment and wage trends (you could say employment is in a secular bear market).

MayIMommaDogFace2theBananaPatch's picture

acceptance of the fact that the economy can't be fixed

But, but, but...

I am still amazed at the (il)logical extremes some people will go to to try and explain some scenario by which it "corrects itself."

Actually after thinking for moment longer about it, most of these folks are just dutifully repeating some convoluted meme that they've attached themselves to.  I think this is to keep themselves from totally freaking out.

topcallingtroll's picture

But there is rebirth after collapse and contraction.

Doesnt that fix the problem eventually?

DosZap's picture


hell yeah, been using this scam for YEARS.

What do you think all this QE shite is?

SheepDog-One's picture

Theyll freak out one morning soon when they announce all their 401K's and pensions have been seized.

Dr. Richard Head's picture

They'll be pleasantly suprised one morning when it is annouced that all all 401K's and pension have been reallocated in the form of lifetime income distribution options and will be required for defined contribution plans.  Uncle Sam loves you and you will love him.

There you go...muuuuuuuuuuuch better.

JailBank's picture

They have already kicked that off by confiscating government TSP 401k.

Mentaliusanything's picture

August 15th 1971 - He did it ! He unleashed the anchor and said farewell. We can't grow debt being tied to it, they pleaded. Thnx Tricky

topcallingtroll's picture

The economy cant be fixed?

Kondratiev winter always turns to spring eventually doesnt it?

Now i wonder if the fifty year jubilee throughout the middle ages was their solution to the kondratiev winter.

NotApplicable's picture

I think he means it can't be fixed within its current broken paradigm. Which is why he probably thinks The Bernank can't just write a check for $5T a year to re-engage the debt tower (which I believe to be the likely outcome). Why? Because I expect the current system to be replaced by the paradigm, "ZIRP Along the Entire Yield Curve," ending the idea of lending at interest as a profit seeking endeavor (nationalizing all financial entities in the process).

To me, Martensen's "chart that explains everything" is indicitive of the cumulative cost of debt service overtaking the ever shrinking marginal utility of debt, (which has gone negative as a result), along with the debt driven consumption and malinvestment he mentions.

While ZIRP4EVA will not occur overnight, I see it being ushered in because first, "We have to do something!", and second, "There Is No Alternative" (TINA). Over time, as the "muddle-through non-recovery" progresses people will start to think it normal for the Central Banksters of the world to provide interest free loans to governments to spend, because, "why else would they need to exist?"

It's really all about changing the perspective known as "conventional wisdom" over time as they change the underlying convention. While a 30 year Treasury paying .0000001% may seem asinine today, well so did the idea of $14T in US gov. debt back in 1971.

Yet here we are today, squarely in Asinieland.

nobusiness's picture

The real purpose of our massive military might just be to protect us from the Chinese debt collectors who are coming either because we default or print so much that the debt they hold is worthless.

SheepDog-One's picture

A military more overextended than the Roman military was, and also troop morale at all time lows, military suicides all time highs.

falak pema's picture

they say the roman legions in Africa declined due to sexual exhaustion. They found the Numidian women too enticing. Imagine that beaten by a pussy, or a pack of pussies...

Ben Dover's picture

Being beaten by a pack of pussies is a tradition that goes back at least to the Greeks -

A_MacLaren's picture

Not when jack-booted thugs in Government are the debt collectors...

Acting on orders from the U.S. Department of Education, a S.W.A.T. team broke into a California home Tuesday at 6 a.m. and reportedly roughed up a man — all because of his estranged wife’s defaulted student loans. She wasn’t there.


Yet, Kenneth Wright of the city of Stockton was grabbed by the neck by handcuffed before he and his three young children were put in a police car as the officers searched his house, he told ABC News10. He said he was in his underwear the whole time.


“They busted down my door for this. It wasn’t even me,” Wright told the local news station. “All I want is an apology for me and my kids and for them to get me a new door.”


Local police were reportedly not involved in the incident.