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Charles Hugh Smith: Why The Debt-Dependent Status Quo Is Doomed In One Chart

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Why The Debt-Dependent Status Quo Is Doomed in One Chart

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 This is the chart of debt addiction: the moment the expansion of debt is withdrawn, the economy implodes.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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Fri, 06/29/2012 - 11:49 | 2573433 LULZBank
LULZBank's picture

Welcome to the endgame.

Again?

Fri, 06/29/2012 - 11:57 | 2573469 Short Memories
Short Memories's picture

but the lines in the 2nd graph are converging again at the end....

It's all fixed again then!!! Just like the EU today!

no worries! time to sell my gold!

Fri, 06/29/2012 - 12:28 | 2573611 Stock Tips Inve...
Stock Tips Investment's picture

Agree. The problem is sufficiently large that the solution comes accompanied by a major crisis. It is our obligation as people, put our money in the right place. Not just for or lose in this crisis, but to benefit from it.

Fri, 06/29/2012 - 17:08 | 2574706 economics9698
economics9698's picture

You guys are missing the real story, how have these central bankers been able to keep the balls in the air as long as they have.

Fri, 06/29/2012 - 12:47 | 2573686 Kayman
Kayman's picture

The BERNANK, " Kruggy, I've been beating my head against a brick wall for 4 years now and the wall won't move."

KRUGGY, "Oh, you silly bunny, you must re-read the General Theory again, you know the chapter just after JMK gets out of the steam bath.  It clearly states that if results are insufficient you must bang your head harder and faster."

 

Fri, 06/29/2012 - 12:02 | 2573486 battle axe
battle axe's picture

Just wait until our Lenders (China/World) figure out there is a better place to put their money, then GAME OVER.

Fri, 06/29/2012 - 12:08 | 2573512 Doña K
Doña K's picture

China is already doing it silently. PM's. The more JPM supresses PM's the more China buys.

Fri, 06/29/2012 - 12:11 | 2573533 LULZBank
LULZBank's picture

Good for them.

In the end, its the one with the Biggest Guns who owns the PMs.

Bu ha ha ha ha!

Fri, 06/29/2012 - 12:18 | 2573562 Clint Liquor
Clint Liquor's picture

Ha ha ha ha. The idea that the USA could kill it's way out of its debt is hilarious.

Fri, 06/29/2012 - 12:24 | 2573594 LULZBank
LULZBank's picture

Who said I was referring to USA? "US Citizens nature is eternal!"

Secondly, just keep looking at the "debt clock" and some day you will wake up and notice... Its gone.

Just like that. Like it never existed, like some of those subprime mortgage holders with fake details.

Sat, 06/30/2012 - 00:39 | 2575429 sablya
sablya's picture

Compare the demand for gold in China vs. the US :: 32 million oz. vs. 6 million.  More than 5:1 !!

http://www.usdebtclock.org/gold-demand-by-country.html

Mon, 07/02/2012 - 14:22 | 2581254 mumbo_jumbo
mumbo_jumbo's picture

can i eat or drink gold?

Fri, 06/29/2012 - 12:23 | 2573587 Zaydac
Zaydac's picture

Elbowing my way as near the top as possible to say that Mauldin has been writing about this (including a book) for years, and you're using Denninger's charts. Nothing original here.

Fri, 06/29/2012 - 12:39 | 2573653 hedgeless_horseman
hedgeless_horseman's picture

 

 

...and you're using Denninger's charts.

Denninger is the St. Louis Federal Reserve?  Wow!  Now it all finally makes sense!  So, Tyler must be Mayor Bloomberg!  Holy crap!  Have you ever seen them both in the same room at the same time? 

Fri, 06/29/2012 - 13:18 | 2573782 Zaydac
Zaydac's picture

Denninger builds his charts off the same base but the point I made, which you are too stupid to see, is that this article has nothing new in it, Denninger has been saying the same thing for years. And Mauldin virtually coined the term "Endgame" in this context.

Fri, 06/29/2012 - 13:50 | 2573894 LULZBank
LULZBank's picture

Mauldin also said Biotech/Pharma is the next bubble. Are you all in?

Is that you Mauldin, by any chance?

Sat, 06/30/2012 - 04:57 | 2575540 Zaydac
Zaydac's picture

No. And No.

Sat, 06/30/2012 - 04:59 | 2575541 Zaydac
Zaydac's picture

.

Fri, 06/29/2012 - 14:11 | 2573978 malek
malek's picture

And Denninger says it never makes sense to own gold...

Sat, 06/30/2012 - 04:59 | 2575543 Zaydac
Zaydac's picture

No he doesn't. And in his annual reviews he has always admitted that he has been wrong about the price of gold thus far.

Fri, 06/29/2012 - 11:49 | 2573434 Lost Wages
Lost Wages's picture

Hooray!

Fri, 06/29/2012 - 11:59 | 2573437 francis_sawyer
francis_sawyer's picture

Bug... meet windshield... (Hey Max Fisher ~ there's that year 1980 again in the charts ~ seems obviousl to me that when debt is created out of thin air, paper assets swell ~ but I'm sure this time it's different... When you finish rocking out to 'Muskrat Love', perhaps you'll fancy us with some more of that Harry Potter wisdom)...

Fri, 06/29/2012 - 12:20 | 2573577 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1 Ha ha

I haven't seen World Citizen Max for a while...

Took his marbles and went home because he was junked?  Cry me a river.

Fri, 06/29/2012 - 12:37 | 2573654 BigJim
BigJim's picture

Sophist Mundane still comes by occasionally to drop his little Statists stinkbombs and then runs away to lick his wounds when he's been refuted and shown to be intellectually (and morally) bankrupt.

Fri, 06/29/2012 - 17:05 | 2574695 Rogue Trooper
Rogue Trooper's picture

Inner Party Candidate MAX was trolling a thread yesterday the 1980s Silver Chart.... I think he truly believes.

+10 DoChen

Fri, 06/29/2012 - 11:52 | 2573438 Cognitive Dissonance
Cognitive Dissonance's picture

Explains the 10 year "bull" market between 1990 and 2000 pefectly.

And why we have gone no where since then.....except down in inflation adjusted terms.

Fri, 06/29/2012 - 11:54 | 2573455 centerline
centerline's picture

That plus general prosperity over the last 60+ years makes for some serious normalcy bias - particularly among older baby-boomers who are likely the most vulnerable to what is about to happen.

Fri, 06/29/2012 - 12:07 | 2573514 Cognitive Dissonance
Cognitive Dissonance's picture

While I was dissapointed with Harry Dent's emotion ladden response in this "debate" with Jim Rickards....

http://jimrickards.blogspot.ca/2012/06/inflation-and-deflation-debate-harry.html

....Harry did say one thing that rang very true (around 14:00 in the video). While the young folks will (eventually) be out rioting, the old people are sitting on assets praying for inflation. Now we know who is really supporting the banksters.

Tuned to WIIFM (What's In It For Me)

Fri, 06/29/2012 - 12:17 | 2573560 lasvegaspersona
lasvegaspersona's picture

Cog

except for a few wise old fellas eh...

I have given up hoping for reflation but appreciate every 'normal' day I get. So many things to do. So much to get ready. So many sorry stories to hear.

Fri, 06/29/2012 - 12:23 | 2573589 Cognitive Dissonance
Cognitive Dissonance's picture

"except for a few wise old fellas eh..."

Actually I have been trying to shift what little "assets" I have from paper to plastic "real".....aka PMs and (paid for) income producing real estate. :>)

Fri, 06/29/2012 - 12:41 | 2573663 BigJim
BigJim's picture

 While I was dissapointed with Harry Dent's emotion ladden response in this "debate" with Jim Rickards....

http://jimrickards.blogspot.ca/2012/06/inflation-and-deflation-debate-harry.html

Thanks for the link.

Rickards, as ever, is impressive with his grasp of detail.

Dent is blowhard who is so busy enjoying venting his anger he doesn't realise he's preaching to the choir, and has strayed from the point - which is not what our Money Masters should do, but what they will do.

Fri, 06/29/2012 - 13:03 | 2573732 JohnKozac
JohnKozac's picture

James Rickards book, "Currency Wars" is a great  must read.

 

http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495

Fri, 06/29/2012 - 13:09 | 2573743 centerline
centerline's picture

Dent, like so many others, play the game for profit / for business.  They wind up in the timing aspect of what is going on - which is tough business for sure.  I am surprised more of these guys aren't completely losing thier marbles.

 

Fri, 06/29/2012 - 12:01 | 2573477 francis_sawyer
francis_sawyer's picture

@CD

You mean to tell me it wasn't the 'Clinton Economic Miracle'?

Fri, 06/29/2012 - 12:08 | 2573515 Bluntly Put
Bluntly Put's picture

Hey, right I was thinking along these liines. These charts say more than can really be expressed, I believe, in words.

It's sort of like the wealth generation machine (for the 1% to coin a term) of creating increasingly cheaper quality credit has a toxic by-product as we all would normally call inflation in the price of goods and services.

However, the 1% has so much wealth that if this inflation was really allowed to enter into the general economy it would wreak havoc on the remaining 99% and thus destroy the foundation of their wealth creation machine.

Thus, in comes Rubin, Summers, Greenspam and Clinton to create the derivative wealth machine. What we see is that any "wealth" generated since the repeal of Glas-Steagall is in reality derivative wealth, not real wealth at all. We are just beginning to realize the big con, it's all derivative wealth that ultimately will be worthless.

Fri, 06/29/2012 - 12:46 | 2573674 poor fella
poor fella's picture

Very Bluntly Put! The silver lining in the destruction to come will be the 'vaporization' of derivative wealth. The LOWEST tide ever experienced - it will not matter too much though, CIOs still parachuting goldenly with perfect 10 scores.

All aboard Ellison's Island...

Fri, 06/29/2012 - 12:06 | 2573503 Dr. Engali
Dr. Engali's picture

My thoughts have always been that we have to wipe out the debt build and go back to 1987 levels when this nonsense really started taking off.

Fri, 06/29/2012 - 11:51 | 2573441 brodix
brodix's picture

 There have been discussions and proposals as to how to structure a better monetary system and one popular proposal is to combine the Treasury and the Federal Reserve system and have the government spend money into the economy directly, by paying for public works with new money, rather than this roundabout way of having the Fed buy government debt as the basis of the currency. The fact is that as an obligation, money is inherently a debt, a promise of value to be returned. Even a gold based currency is just debt denominated in gold, as in; IOU one once of gold. So unless those commitments are made as viable investments with potential long term return to society, the result will be another form of bad debt and it will also collapse. Governments have an inherent tendency to make more promises than can be kept, so giving politicians the ability to create money by spending it into existence is an idea that should only be considered with the strongest of reservations. The current system seems designed to create excess debt anyway, since it budgets by putting together enormous spending bills, adding enough extras to get sufficient votes and then the president can only pass, or veto it in whole. Budgeting is to list priorities and spend according to ability. If the government actually wanted to budget, these bills could be broken into their various line items and have every legislator assign a percentage value to each one. Then reassemble them in order of preference and have the president draw the line at what is to be funded. This would create a system of actual budgeting, as well as distributing more power over the entire legislature, rather than having most of it accumulate at the top. This makes prioritizing a legislative function, with the president as the one responsible for the level of spending. As Truman might have put it, "The buck stops here."

http://www.exterminatingangel.com/index.php?option=com_content&task=view...

Fri, 06/29/2012 - 12:00 | 2573474 DavidC
DavidC's picture

Even if Governments released money into the sytem directly rather than by the curent method, it would not stop them spending more than they have. That's what they're doing right now, and that's what they would continue to do.

DavidC

Fri, 06/29/2012 - 12:10 | 2573508 LULZBank
LULZBank's picture

 it would not stop them spending more than they have.

What they have now, and will also have (as per the proposal above) is infinite sum of money via the "authority" to create money. So they will always spend more than they have. Thats, actually, the idea.

So your thesis is flawed, not even good enough for teh LULZ.

The only thing the direct spending by Govts will change is, the debt ceiling debates and no ad revenues from the "debt clock" kinda websites.

Both paths end in the same shithole.

Fri, 06/29/2012 - 12:52 | 2573703 gofigure
gofigure's picture

Kings use gold, Gentlemen use silver, Peasants use barter, Salves use debt..

Let us at least be gentlemen about this.

Any monetary system that continues to use debt instruments as money will continue to keep us in debt-servitude to the controller of the printing press, period. No matter how well intended at the beginning.

There has to be some way of retaining value for our efforts over time without the disease of debt eating away at it. Any new monetary system that does not address this will fail over time.

Only when governments have to confiscate real-value from real-people in real-time to pay their “bills” will there be a real-accounting for what they are doing. Until then, it's just another zero, and the salves stay inline automatically chasing the down the next payment, year after year, generation after generation

What you are purposing is just another trap...

Fri, 06/29/2012 - 12:58 | 2573713 BigJim
BigJim's picture

 Even a gold based currency is just debt denominated in gold, as in; IOU one once of gold.

Not really, any more than a warehouse receipt is a form of debt. Whereas, the current system is entirely debt based; if all the debt were paid back, there'd literally be no money left in the economy. In a gold-standard based system, even if all the debt were paid, there'd still be the base money left, which, unlike our current system, would be accessable to depositors for use as money.

Fri, 06/29/2012 - 17:28 | 2574746 Rogue Trooper
Rogue Trooper's picture

+1000 Jimbo :)

No matter how you try to explain this... even so called smart folks just don't get it. They refuse to take the time to read, Mises, De Soto, even Minskey for that matter.  They want a single page executive summary or a 10 page power point.

Back in 2008 many people told me they now understood that debt was the problem, asset prices (Houses) had got out of control etc.  Now they are back buying properties at 6 to 7 times earnings and saying 'this time it's different'.  This is the reality in New Zealand presently. Same applies to Aussie and Canada the so-called commodity backed currencies/economies.  At least in the USA house prices have reduced significantly.

World of hurt coming.... don't ask me when.

 Bullshit bingo on a global scale :(

Fri, 06/29/2012 - 12:58 | 2573715 ussa
ussa's picture

Yes, take your proposal one step further as a start to monetary reform: 

1. Roll Fed into UST;

2. Require 100% reserve banking;

3. Enables $11+ trillion ($12.8t assets minus $1.5t equity) in non-inflationary purchasing power see FDIC stats (http://www2.fdic.gov/SDI/SOB/);

3.a. Buy household sector debt (approx $12t) and forgive leaving a tax liability which can be refinanced via the social security trust fund; http://research.stlouisfed.org/fred2/series/CMDEBT

3.b. Invest in NPV>0 infrastructure projects that lower total factor costs in the economy;

4. End debt financed deficits so interest payments are eliminated (the debt is probably comparable to the cumulative some of past interest pmts);

 

This is a just a start to reform the massive institutional rot in the US.

 

 

Fri, 06/29/2012 - 12:58 | 2573716 ussa
ussa's picture

Yes, take your proposal one step further as a start to monetary reform: 

1. Roll Fed into UST;

2. Require 100% reserve banking;

3. Enables $11+ trillion ($12.8t assets minus $1.5t equity) in non-inflationary purchasing power see FDIC stats (http://www2.fdic.gov/SDI/SOB/);

3.a. Buy household sector debt (approx $12t) and forgive leaving a tax liability which can be refinanced via the social security trust fund; http://research.stlouisfed.org/fred2/series/CMDEBT

3.b. Invest in NPV>0 infrastructure projects that lower total factor costs in the economy;

4. End debt financed deficits so interest payments are eliminated (the debt is probably comparable to the cumulative some of past interest pmts);

 

This is a just a start to reform the massive institutional rot in the US.

 

 

Fri, 06/29/2012 - 13:30 | 2573823 glenlloyd
glenlloyd's picture

I'm particularly repulsed by #3

There have to be consequences for making bad decisions, otherwise they'll be made again.

Fri, 06/29/2012 - 15:19 | 2574252 brodix
brodix's picture

The reality is that money, whatever it's based on, is a contract, not a commodity. When we start to think of it as a commodity that can be manufactured by creating demand, ie, debt/an obligation of return value, then there is a tendency to create endless amounts of illusionary value, ie. "liquidity.". When we understand it is only a contract, an agreement among individuals, there is no room for illusionary value.

Fri, 06/29/2012 - 11:52 | 2573444 LULZBank
LULZBank's picture

The End game is war and then system reset and there is no chart for that.

Fri, 06/29/2012 - 11:56 | 2573459 Cognitive Dissonance
Cognitive Dissonance's picture

Working on it as we speak. Hold please.

My masters have instructed me to inform you that the particular chart you're requesting will be ready in 5-10 years. Please return then.

Ya'll have a wonderful trading day.

Fri, 06/29/2012 - 12:03 | 2573485 LULZBank
LULZBank's picture

My masters have instructed me to inform you that the particular chart..

You also work for the Master's???

How come I've never seen you in the office then? I mean our luxury villa where we do stuff, but its like office, you know. We work from here.

Do NOT follow this link or you will be banned from the site!