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Charles Hugh Smith: Why The Debt-Dependent Status Quo Is Doomed In One Chart
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 This is the chart of debt addiction: the moment the expansion of debt is withdrawn, the economy implodes.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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Welcome to the endgame.
Again?
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!
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.
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.
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."
Just wait until our Lenders (China/World) figure out there is a better place to put their money, then GAME OVER.
China is already doing it silently. PM's. The more JPM supresses PM's the more China buys.
Good for them.
In the end, its the one with the Biggest Guns who owns the PMs.
Bu ha ha ha ha!
Ha ha ha ha. The idea that the USA could kill it's way out of its debt is hilarious.
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.
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
can i eat or drink gold?
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.
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?
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.
Mauldin also said Biotech/Pharma is the next bubble. Are you all in?
Is that you Mauldin, by any chance?
No. And No.
.
And Denninger says it never makes sense to own gold...
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.
Hooray!
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)...
+ 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.
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.
Inner Party Candidate MAX was trolling a thread yesterday the 1980s Silver Chart.... I think he truly believes.
+10 DoChen
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.
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.
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)
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.
"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. :>)
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.
James Rickards book, "Currency Wars" is a great must read.
http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495
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.
@CD
You mean to tell me it wasn't the 'Clinton Economic Miracle'?
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.
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...
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.
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...
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
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.
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...
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.
+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 :(
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.
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.
I'm particularly repulsed by #3
There have to be consequences for making bad decisions, otherwise they'll be made again.
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.
The End game is war and then system reset and there is no chart for that.
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.
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.
My masters have instructed me to inform you that I have been compartmentalized.
And so have you. :)
Ofcourse! I saw the sign this morning!
http://www.motifake.com/image/demotivational-poster/0903/segregation-engrish-segregation-demotivational-poster-1237152702.jpg
Lulz's and green for above dialog.
Back to work, bitchez!
Seems that is Plan B, but a distinct possibility nonetheless.
There is a chart for that. It's called casualties.
It's called casualties.
We call them "collateral damage" nowadays. Not to be confused with the dilemma banks are facing in search of money good assets.
Obviously the math, practical and theory all converge on this. However in real life, it's like the convergence will never happen.
What does that tell you about human nature and the propogandists that populate DC and the Media.
This isn't Math,this is Sums.
A seven year old could do it ,but a Nobel winning economist professor cannot.
Ha, ha....charade you are....
I guess the global economy can't read charts..............
So let me get this straight...We are GREECE...not Japan.
doing god's work means bring down the concept of nation state. it also means the NWO, which can only be accomplished via debt. Got it?
That's Plan A I think. Currently in motion - trying to get pesky little things like soveriegnty out of the way.
"...this rise in yield catapults the borrower into insolvency".
The borrowers are ALREADY insolvent, it's just being hidden by the shenanigans of the idiots at the central banks.
DavidC
That's why the Taylor Rule demands negative nominal rates.
read the Blodget presentation :
THE ECONOMY: Time For Companies To Pay Their Employees More - Business Insider
They've gotta blame the upcoming price inflation on something. It's obvious it isn't going to be their own monetary policy, so...
Western world is doing UnRealPlan, to get into hyperinflation.. Opposite of Real Plan to get out of it.
ECB/Fed would have been Jailed for QE/twist....
http://www.econ.puc-rio.br/gfranco/How%20Brazil%20Beat%20Hyperinflation.htm
How They Finally Did It
“Finally we started the Real Plan in 1993, and had to fight every element of the above doctrines.” The number-one reason Gustavo Franco gave for ultimate success was a unique period where none of the political forces of the country were able to intervene in the process to promote the special interests that the state had become committed to supporting in the preceding decades. President Fernando Collor de Mello was impeached in December 1992 and replaced by his vice president, Itamar Franco. “Franco was not interested in economics and signed anything the ministers would bring him. This was unbelievable, but it depoliticized the process.” Congress was also sidelined by a major scandal in December 1994 in which 26 members of congress and three state governors were implicated in diverting millions in federal funds into their own accounts. “This kept them out of the discussion. This gave us a window of opportunity where the politicians did not interfere.”
Gustavo Franco said frankly that “We empowered the treasury and the Central Bank to subvert democracy.” People and their political representatives had voted to give themselves things they could not afford. The finance ministry, treasury, and Central Bank, using a constitutional amendment passed in 1994, simply did not implement the budget. “We changed the composition of the CMN, the monetary authority, to be three members, the Central Bank minister, the finance minister, and the planning minister. This closed of the off-budget spending, while the treasury cut back on implementing the congressionial budget.” While congress had passed a budget that authorized, say, $800 million reals for a project, the treasury chose to actually expend only $200 million.
The flood of bad loans from banks to fund government projects the government itself was no longer underwriting was stopped by imposing criminal penalties! “We prohibited--made it a crime--for a bank to lend money to one of its own shareholders. Bank officials in the private sector did not even maintain checking accounts in their own banks, for fear of being prosecuted if their check guarantee cards lent them funds to cover an overdraft. But the state banks could lend to the government. Under the Real Plan we enforced the same rules on the state banks and threatened the bank officials with jail if they lent money to the government. We criminalized a major source of the inflation, especially where regional banks frequently bought government bonds. We made that illegal.”
In mid-1994, some 40 banks were actually bankrupt through their lending to government projects. “We began in December 1994 with the intervention in Banespa [Bank of the State of Sao Paulo] and other state banks. Banespa was the largest state bank in the country with claimed assets of $30 billion—but with real assets of a negative $25 billion.”
Board of Governors of the Federal Reserve System
Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
(Joint release)
Agencies Release List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies
http://www.fdic.gov/news/news/press/2012/2012distressedorunderservedtracts.pdf?source=govdelivery
That's a long list, Pete. Fascinating and informative. Thank you.
I'm surprised he didn't include this chart.
http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#symbol=^tnx;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
We must continue to buy thingamajigs, expect credit card bailouts for all before the election. Hope and change baby!
I think someone might notice that first chart:
http://market-ticker.org/akcs-www?get_gallerynr=3115
Thank you David, this article and charts are beautiful in their simplicity. Even a congressman could understand it. : )
Must read piece by a blogger today on Millenials and the Baby Boomer generation that destroyed our freedoms:
When will you realize that your (Baby Boomer) advice doesn’t work? Even McCullough, in the midst of stabbing our supposedly inflated egos, urged us not to do anything that we didn’t love or feel passionate about.
You know what? We don’t have that luxury. That idea is a relic of days gone by. We are not the generation that finds itself in creative abandon. We are not the generation that goes off in search of personal fulfillment and the satisfaction of a job well done, only to come back millionaires. We are the generation that takes whatever work we can get, that knows no matter how hard we try we might not succeed. We know our lot, and it’s not nearly as bright as yours. Woodstock? Ha. Like any of us could afford to take time off to lie around smoking and writing songs. Don’t accuse us of your ennui: we’re too busy trying to find a job.
Now, we have not only to worry about how to find our way through the dried-up maze without vacant jobs or relief from our debts of education. We have our ticket for the train to success, but it’s run off the rails. And we have to start worrying about you.
How are we going to support you?
Social Security won’t prop you up anymore. Your own retirement savings? As reliable as our degrees, which is not at all. Do we have houses to mortgage? Investments to collect on? Assets to sell? For most of us, the answer is a belly laugh and a no.
http://phoenixandolivebranch.wordpress.com/2012/06/25/open-letter-from-a-millennial-quit-telling-us-were-not-special/
Fantastic piece.
Thanks for the link!
"We're too busy whining and feeling sorry for ourselves to stand up on our own two feet, take responsibility for ourselves, and create our own jobs and opportunities, just like successful people in the past have done for thousands of years".
Didn't you forget to explicitly include yourself in the "successful people" group?
ah... if only "growing" the GDP were the purpose of life on earth itself...
It isn't? Damn, we are screwed for sure then.
Bernanke and the Fed's balance sheet keep will keep on expanding like a balloon.
There's no ability to have much higher rates anymore. The Fed's balancing spinning plates now.
This could go on for a very long time (ZIRP). If the Treasury is borrowing from the Fed at zero, it impediment to borrow as much as it want indefinitely. And in this environment, investors keep buying the debt, because for now, there's no safer place to put your money (except gold, as we all know). What is the catalyst we need to see that causes investors to shun the dollar when every other currency sucks even more?
##### NO #####
The problem with your argument (besides gold), is that EVERY real, physical, durable good is a safer place to put your wealth! AKA, the currency dies!
The catalyst is obvious. When europe finally stabilizes, it will replace the US as safe haven. That could take a very long time... look how long Greece has played out.
In a few decades China will be grown up enough to freely float it's currency, or perhaps back it in gold. That's another catalyst for safe haven money to leave flat broke USSA.
With the market going up as it has been it is certainly good to read some real information.
TPTB reckon that with over 2 billion poor Chinese and Indians in the debt game, the endgame can be pushed further back.
Even if they could convince chinese to drive themselves deep into debt, that would not work. Why? Because they will buy chinese products, not western ones. Duh!