Guest Post: Debt Saturation And Money Illusion

Tyler Durden's picture

From Gordon T. Long of Tipping Points

Debt Saturation & Money Illusion

Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation.

Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells.

However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel.

The first thing you will need in your role of 'all seeing' is the back of an envelope, or a somewhat clean napkin at your next luncheon. You will need only a few simple facts to go along with your prop.


First, if you could total the world's balance sheets you would find that it would approximate $200 Trillion. In putting together this total you would discover that 75% of all financial assets are debt assets worth $150 Trillion. To most of us, debt is the epitome of a liability. To banks, however, it is not. It is considered an asset and recorded as such a banks ledger. Your liability is their asset.

The historical debt payment over a long period of time is 6% per annum. The Federal Reserve's dividend payment to its holders of capital was originally established in 1913 at precisely this 6% and is still accrued accordingly. Remember also, in a fractional reserve, fiat based banking system money can only be loaned into existence.

Today we have approximately $9 Trillion (6% of $150T) in annual debt payments that must be absorbed annually by increased productivity of the working classes.

Consider that the US Economy at approximately $15 Trillion is 25% of the global economy. Therefore the global economy approximates $60 Trillion ($62T officially, but we will use round numbers so we don't lose anyone in the arithmetic).

The working class therefore has to increase productivity by $9T divided by $60T or 15% annually to absorb the current global usury charges.

In the last few years of explosive debt growth we have passed the point of the global economy being able to grow and improve productivity at a fast enough rate, not to be literally consumed by this existing debt burden.

Unfortunately, it gets worse.

One of the problems in using GDP as a measure of growth is that it includes government spending. In the case of the US, it is approaching 25% of the output of the country. Within that, approximately $3.7 Trillion is $490B in interest payments or 13% of US expenditures. This actually means that there is an additional 3% that must be added to the 15% or nearly 18%.
This is called Debt Saturation.


A very unpopular chart to deficit spending hawks is the chart showing the change in GDP as a ratio to the change in debt. The easiest way to understand this chart is to consider how much the economy will grow for every dollar of increased debt. As you can see, the effect of increased debt has been steadily losing its ability to increase economic growth and since the financial crisis has decidedly turned negative.

Increased debt is now counterproductive to the growth of the economy because the economy simply does not have sufficient productive investments to absorb it. We may have plenty of investments but they are mal-investments. They are investments that simply cannot pay the debt financing utilized.

The Korean Times recently illustrated that despite a booming Asian environment, technology firms are now struggling to cover interest payments. One in three firms on the Kosdaq failed to earn sufficient money to cover interest payments in 2010.  The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments. 280 out of 876 Kosdaq-listed outfits, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio. 


1- Non Performing Loans

The mal-investment is just too large to contain and is showing up in ever-increasing levels of non-performing loans. This is despite rolling over loans at false asset values.

Non-performing bank assets are increasing globally! The above chart from Reggie Middleton's BoomBustBlog graphically depicts this indisputable trend. What is this signaling three years after the financial crisis?

The rise in the above US non-performing assets is alarming. It reflects a 9.5% change since 2005. Everything is not at all well in the US banking sector.

Equally concerning is what is happening in Central and Eastern Europe where the change is 7%.  I personally consider Central and Eastern Europe to be the unaddressed 'sub-prime' problem of Europe. I suspect it will eventually replace the PIIGS in financial media news coverage.

2- Chronic Unemployment

The money lenders look at unemployment in a different fashion than the average person and would have us easily confused by its adjustments, birth-death models and other deceiving statistics. To them it is not about how many of our  fellow citizens are unemployed, but rather simply how many net new jobs are being created to pay for the annual usury assessment fee of the $9 Trillion we previously discussed. Herein lies their problem.

The internet has had a profound impact on the increase in productivity. Schumpeter's creative destruction is an engine running at full throttle. Vast swaths of jobs are being made obsolete through the adoption of new technology. The 'clerical' industry has almost disappeared in the span of 15 years through operational innovations such as supply chains. This has been tremendous for corporate profits allowing them to maintain highly leveraged balance sheets. The problem is that it has been solely at the expense of real job growth. No matter what a corporation does to make money, it eventually comes down to a consumer having the money to pay for the goods or services it produces.


We have reached the saturation point where we have insufficient real income growth to maintain the leveraged balance sheets of corporations. Government social nets are becoming burdened with making up the difference in either transfer payments (i.e.45 Million on food stamps in the US) or subsidies ( North Africa paying 28% of country budgets toward food subsidies for the unemployed population to survive). There are examples everywhere if you care to look. I have written extensively on this in my series on Innovation and in articles such as "Fearing the Gearing".

3- Money Velocity Doesn't Increase with Money Printing

Debt Saturation occurs when aggregate income no longer supports debt burdens. When governments print money, eventually Money Velocity increases as people incorporate inflation expectations into their buying behavior. When we examine the Federal Reserve's Money Velocity statistics we see that something is very different this time.

Despite increases in MZM, M1 and M2 money velocity maintains its downward slope with little suggestion of wanting to reverse trend.

We presently have inflation in what people NEED along with shrinking real disposable incomes. Since people must pay for their NEEDS with short term money (cash, check or credit card), there is little ability for them to adjust to inflation when they are living from paycheck to paycheck. If their disposable incomes were higher they would stockpile and turn their money over faster.  Additionally, money as a multiplier would flow through our society. Instead, today the money does not move through multiple hands but is returned almost immediately to the banks as debt payment, since most intermediaries are also burdened with debt.


First, You must understand the impact of  mal-investments and the brake that debt is now applying to the Global Economy.

World Real GDP, adjusted for inflation on a year-over-year basis has plummeted. According to the World Bank this growth indicator has gone negative with the world's real GDP actually shrinking Y-o-Y.

The global growth engine has not only stalled but has clearly hit an unexpected brick wall.

Secondly, You must understand the significance of the stalled and possibly fatally ill  "Shadow Banking" Credit Engine.

Similar to moving about on an airplane or train it is hard to determine the speed you are traveling, because you have a limited frame of reference. In a casual conversation with your fellow travelers it is easily forgotten or unnoticed that you are moving at a rapid speed. This is the situation we find ourselves in as the Shadow Banking System fails to rebound and the debt it once created is not being replaced. The liabilities of the Shadow Banking System are shrinking. These leveraged liabilities are now shrinking the global money supply despite every effort of central banks to combat it. The Central Banks are losing the battle. Like glacial tectonic shifts they are undermining the abilities of financial institutions to continue to carry and roll-over non performing debt. 

Finally, You Must be Aware of: "Money Illusion"

The overlay below of the Nominal and Real (ShadowStats inflation-adjusted) Dow illustrates the concept of Money Illusion, the tendency of people to think of currency in nominal, rather than real, terms. Below the Dow series is the Consumer Price Index (CPI) from 1913 and with estimates for the earlier years.

The above chart reflects what is actually going on in the financial markets. The secular bear market that began in 2000 is still underway. Since the 2009 lows we are experiencing a Cyclical Bull Market counter rally that is to be fully expected as part of a Secular Bear Market.

The chart above is adjusted for inflation based on published CPI numbers. If ShadowStats inflation numbers are used, as is the case in the above chart, then the chart to the right would more clearly resemble longer term secular bear markets already experienced.


There is nothing magic in any of this and it has all been well documented, unfortunately by the Russians when they studied the capitalist system to identify its fundamental weaknesses. The Kondratieff long wave shows that the capitalist system suffers the build up and purging of debt on a generational basis on the frequency approaching 55 year cycles. We have extended this natural cycle by means of un-natural acts which I have written about in my extensive "Extend & Pretend" series of articles. Even in the days of old the king resorted to "jubilee" to cleanse the system. Of course we are much too sophisticated for such a simple solution today.

We have papered over the realities of "Too Big to Fail" by not allowing the proven tenets of capitalism to work. We have Anti-trust laws under the Sherman act to address 'too big', Control Fraud Laws to address questionable ethical behavior for the sake of profit (like mortgage fraud, liars loans etc) and Bankruptcy laws to liquidate failed enterprises to force debt holders to take haircuts and swap debt for equity. Instead we allow the prevalent game of Regulatory Arbitrage to run without restriction or detection.  Existing laws are not being exercised in an attempt to protect what amounts to the emergence of a crony capitalist system. Benito Mussolini had a somewhat different world for the merging of corporate and government interests that I will leave for readers to recollect who have a historical penchant. It is not a word easily digested in the polite 'cocktail chatter' of today's genteel upper middle class.

Welcome to Kondratieff's Long Wave Cycle


In your new role as 'Nostradamus' to your friends you can safely predict a decade ahead to be a secular bear market in financial assets, in real terms. Nominal values may not show this clearly but it will be very evident in the reduced standard of living most Americans will experience.

You are going to have to work harder and harder, for less and less to survive at a lower and lower standard of living.

This will all be required to support the annual $9T debt bondage we have assumed as our politicos add additional 'stimulus' to a suffocating and debt saturated global economy.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
dexter_morgan's picture

“Gold is the money of kings, silver is the money of gentlemen, barter is money of peasants,  debt is the money of slaves, & fiat is the money of fools.” 

That Peak Oil Guy's picture

Gord overlooked a critical point; productivity is tightly coupled to energy.  Whether or not you believe that peak oil is here we all know that oil is getting harder and more expensive to extract.  More expensive energy = lower productivity.


Peak Everything's picture

Yes. To write a long article on debt and the ability to service it without mentioning net energy is a good indication that the author does not have a clue what he is talking about.

Sam Clemons's picture

It is not related to this comment, but I tried recreating that chart showing delta GDP / delta debt because I believed that it made sense that that would happen.

However, I used the same data and tried it for both real GDP using official statistics, real GDP using Shadowstats CPI and nominal GDP and the corresponding values for debt, and had no such luck recreating that chart. 


I asked the creators how they got around the problem of it actually being negative EVERY TIME delta GDP is negative (every recession) as long as delta debt was positive and there was no answer. 


Therefore, although I'm not going to argue that our economy is destined for failure, I take that chart with a grain of salt until I get an explanation on it.


Thoughts anyone?

defender's picture

Wouldn't it be better to plot delta (GDP) / delta (debt to GDP)?  I am assuming this is what was done, even though the graph doesn't say anything about it.

Personally, even though it would take a fair amount of work, I would be very interested in seeing a graph of delta GDP / delta [total interest paid annually (as a % of GDP)].  Me thinks this would be the more telling metric.

Archimedes's picture

Totally off topic and perhaps I am becoming paranoid from being on this site too much but Tyler, are you monitoring my web activity?

Last week I went to look at umbrellas at Amazon and then saw an ad on this site from Amazon with umbrellas, earlier today I looked at guitars online and saw a guitar ad here seconds later. I just looked at Mother's Day Rings and just saw an ad for Rings from Zales...What gives?

Tyler Durden's picture

Google adsense keeps track of your cookies from sites you visit. You should as a precaution, clean your cookie cache at least once a day.

FOC 1183's picture

but then i wouldn't see ads for hot single girls in my area when i come here...

Sudden Debt's picture

or get the discounts on lesbian porn dvd collections...


Archimedes's picture

Ah...thanks for the response. It is not a huge deal but it happened too many times to be a coincidence. It is not a big deal, actually pretty smart on Google's part. But I still ain't buying their stock!

scratch_and_sniff's picture

Ban them, all these parasite companies are popping up everywhere looking to track movements of anyone and everyone then making a mint from selling the information. Opt out of the lot

Absinthe Minded's picture

S & S, thanks man. I had like 10 active cookies on my Ipad. I had just started getting crap e-mails and no doubt it was from one of these guys. If not I'm still glad they can't track me, that's bullshit. If I wanted to read their ads I would.

wisefool's picture

Clearing cookies or implict privacy mechanism in the browser is one good way to do it, but

.... Sun Tzu says, turn your enemies strengths against him.

take a couple minutes out of your day and use search engines for non-sensical questions, and click through to end up at places like where _____ is yahoo, ask, etc.

"Which macaroni and cheese is the cheesiest?"

"Is it possible for a dog to run when wearing a collar?"

"Do women have hair under thier arms?"

"Does the sun rise in the east or the north?"

"Should I let my pet goldfish drink water?"


uhb's picture

Strange , i'm seeing not a single ad ;) Firefox rules!

tmosley's picture

Gotta love the folks who were complaining about Tyler putting up all the APMEX and Cramer ads.

"What's in there?"

"Only what you take with you."

Dr. Richard Head's picture

That explains the SEC help wanted ads I keep seeing around here.  I guess my RedTube tranny surfing cookies suggested I apply for a job at the SEC.  I am a shoe-in.

scratch_and_sniff's picture

Im keep getting 'Fish Pedicure' adds, wtf? Everywhere i go i am seeing images of Goldfish sucking dead flesh off bendy toes...

Andy_Jackson_Jihad's picture

You can also edit your hosts file on your machine. Or more better yet, google for one and replace yours. Its nothing harmful, it just redirects known ad servers to your own machine (who then doesn't find them).

6_7_42's picture

Firefox with AdBlock Plus & Ghostery extensions (all free) means never seeing an ad, being tracked or having to be paranoid.


FuturistCorporation's picture

A more aggressive add-on than Ghostery is NoScript. Google analytics and haven't seen hide nor hair of me in months.

drink or die's picture

Clear out your cookies once in awhile.

MolotovCockhead's picture

Yeah, it's good investment! After reading about the hardship for years to come, you may need the guitar for some loose change singing at some street corners.

Hephasteus's picture

Buy Yamaha. For all your guitar synthesizer, amplifier, atv, motorcycle, outboard marine engine, boats, generators, insert every product here, needs......

gordengeko's picture

It's just aliens.  They've been here a while, don't mind them tho they just monitor and conduct research.

Absinthe Minded's picture

And anal probes! Don't forget about the anal probes.

MrPike's picture

It's a tracking cookie.  Go into your browser settings and delete all the cookies if it makes you uncomfortable. It's not likely zerohedge that gave you the cookie either.

RockyRacoon's picture

That explains all the bouncing boobies at the top of my web page.

I'm not paranoid after all; they ARE out to get me...

sabra1's picture

i heard umbrella sales are in the dumpster 'cause of rain!

Gene Parmesan's picture

Do we actually have to lay in this bed that "they" made for us?

Dr. Richard Head's picture

If you do not lay down in the bed you will be labeled a terrorist.  Now go max out your 401K like a good little serf.

Gene Parmesan's picture

I would have yanked my 401k and paid the taxes and penalties or whatever, but I recently found out that my company's is a qualified plan, which means that it's out of reach until I quit or retire. How's that for some shit? The government lets the company deduct the matching contributions as long as there's a clause in the agreement prohibiting us from getting our mitts on our own money when we want to. Now why, pray tell, would the government give two shits about whether or not I cash out and pay my taxes/penalty early? Oh - that's right. None of us are trusted to look after ourselves anymore, what with the death of individual accountability and all. I don't want to think about the other reasons the gov't might want to force people to keep gambling in the markets.

FreedomGuy's picture

I am not so sure 401k plans are worth it any more for the reasons you state. It's theoretically OUR money but in reality it is controlled by the State. I cashed out one of my old plans last year, took the taxes up the wazoo but invested about half in metals. Made up all the taxes already. Now it's my money to do as I please.

topcallingtroll's picture

No, but it requires the boomers give up something and they wont do it voluntarily.

Dammit I am on vacation and still cant put zero hedge away.

topcallingtroll's picture

Thank you boomers for this wonderful debt present.

Except Dexter of course, who has thrown his lot in with gen x,y and millenials.

This would have been a tough winter decade even without all this debt

cossack55's picture

It goes way beyond the boomers. IMHO, back to Jackson who had the guts to kill the last central bank.  All down hill since he left office.  I am certainly down with the Guy Fawkes solution.  I always at least try to cleanup my own mess.

strannick's picture

"you (bankers) are a brood of vipers and I intend to rout you out, and by the immortal God, I will rout you out!"

and he did. now there was a man.

Sophist Economicus's picture

Every generation has to bear its own special cross

I had to deal with seeing commercials for the Ice Capades in the 70s or was it the 80s...


EDIT:  And, BTW, If i start seeing pictures of Dorothy Hamil showing up in banner ads, I'll know there is more than adSense cookie snffing going on  ;)

RockyRacoon's picture

We'll just give you another Great War!  That'll fix everything.

Look how the U S recovered from WWII.  And did you see how much debt was accumulated then?   War is the answer.  

What was the question again?  Alzheimer's is a bitch.

Sudden Debt's picture

Like in Japan now, people where buying the war bonds.

We don't need a war.

They just need to find a way to make people dump their money in the wasteland of government debt.

Why? Because it's cool to own worthless bondpaper. What will your friends say if you don't buy it?

Sooner or later, it will come to that.



Sudden Debt's picture

I wonder how the youngsters will cope with this.

We still had enough time to accumulate money and reserves. They have to start low and hope mom and daddy can chip in to build something.

I now hear that people need to pay over 370K for a average house over here. That's 1850euro in monthly downpayments for a normal house.

When I see how much my assistants make, no way in hell they can buy that. They can only buy a chack which used to be the homes of the poor 20 years ago and still have a hard time to make ends meet.

I'll make sure my kids get a house before they start. I'll even give them their first car. And I always, constantly will remind them that debt is just evil.

I wonder how a 18 year old must feel now if he has to enter the jobmarket without the proper education.

Even the 22 years old who do.

It's pretty sad.


Andy_Jackson_Jihad's picture

Do what they have for the last 2 decades?  Turn their hat backwards/sideways/whatever black people are doing and turn on MTV.