Guest Post: The One Chart That Says It All

Tyler Durden's picture

Submitted by Charles Hugh Smith of OfTwoMinds,


Depending on debt to fuel nominal growth leads to an economic death spiral.


Sometimes one chart says it all. Here is a chart of the S&P 500 (a broadly based measure of the U.S. stock market) in a ratio with total consumer credit, courtesy of frequent contributor Chartist Friend from Pittsburgh.

Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then.

Chartist Friend explains:


A funny thing happens when you price the stock market in something other than itself, say gold or the PPI or in this case Total Consumer Credit outstanding. You wind up with a depiction of the market that is sometimes very different from the headline-nominal performance number. The following chart shows that in the 80's and 90's we had a real bull market, one based on production and innovation that was able to outperform the growth of credit in the economy. Excessive borrowing wasn't needed during that time. Now we're borrowing like a drunken shopper, and all we can come up with are centrally planned consumer-oriented bubbles.

What we see very clearly in this chart is the dramatic spikes created by credit bubbles--the housing bubble in 2001-2007--and massive Central Planning intervention:
The Federal Reserve's expansion of money supply and constant injections of liquidity into markets and the Federal government's $6 trillion bailout/stimulus debt binge since 2008.

The critical feature of each credit bubble is that the SPX responds with less vigor to each dose of credit. This is the classic downtrend--lower highs, lower lows.

This is the chart of a death spiral. Here is one way to understand the dynamics revealed in this chart: when depreciation of productive assets (factory tools, software, refineries, etc.) outstrips new investment in productive assets, then output, income and profit decline. (Note that building McMansions in the middle of fields and pumping hundreds of billions of dollars into overseas adventures are not productive investments, they are mal-investments.)

Once the cost of servicing all that new debt outstrips increases in income, then there is less money available for productive investment. Debt service and mal-investment thus set up a positive feedback loop, a.k.a. a death spiral.

The housing bubble created over $5 trillion in new debt to service while it produced effectively zero new productive investment (housing is ultimately a form of consumption).

The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many.

So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite. Now that the latest credit bubble is popping, the market will roll over and continue tracing out the down-channel until it hits zero: the next credit bubble won't spark a rally at all, it will simply spark implosion.

For more on the dynamics of financial fraud and credit bubbles, please check out:

Money from Nothing: A Primer on Fake Wealth Creation and its Implications (Part 1)

(March 12, 2012)

Money from Nothing: A Primer on Fake Wealth Creation and its Implications (Part 2)

(March 14, 2012)

Our "Let's Pretend" Economy: Let's Pretend "Job Growth Is Best Since 2006"

(March 9, 2012)

Our "Let's Pretend" Economy: Let's Pretend Financialization Hasn't Killed the Economy

(March 8, 2012)

Our "Let's Pretend" Economy: Let's Pretend Student Loans Are About Education

(March 7, 2012)

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Fastback's picture

maintaining the Status Quo, A big ugly nasty mess

VulpisVulpis's picture

Time for this Again:

"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community. 

The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. 

It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government."

Andrew Jackson, Farewell Address, 1837  

Fukushima Sam's picture

This Andrew Jackson guy sounds like a terrorist.

battle axe's picture

Death Spiral. And now for some more happy news, "War with Iran probably in Q2 or early Q3."

Roger O. Thornhill's picture

Jackson's speech could have been written today - the great myth is that we are evolving as a society, whereas I think we are devolving. The intelligence of the founders, like Jefferson, etc. are quite impressive.

That they attempted to address the people as equals was also impressive.

Today there is a celebration of stupidity - and I don't blame the people. Anyone exposed to the mainstream media or public schooling will lose what natural IQ points they were born with. Even with college I think it took a few years to shake off the moronic philosophies of my college professors. And now, with age, I see those "professors" for the barely credible fools they are. Pontificators in the echo chamber that is higher education.

The Big Ching-aso's picture



Obviously a failure to communicate.  Smith needs to take an upcoming Fed-Ed class to get his 2 minds right.



Badabing's picture

Appl  iphone, ipod, ipad, irobot?

irobot  was on the other night, a story about a detective in the year 2035 named Spooner played by Will Smith who has a lack of trust for the robot population. The story was originally written in 1950 by Isaac Asimov and the movie screen play was written by Jeff Vintar and Akiva Goldsman. In the movie detective Spooner is sitting at a bar, when the police captain walks in and Spooner orders him a beer. After a short dialog Spooner pays for the beers, two for him and one for the captain. The bill for the three beers is $46.50. today in a small pub in NYC it’s about $5.00 a beer so the bill today would be around $15 for the three beers. We are lead to believe that it will be normal to see over 200% inflation in 23 years. Subliminally planting the expectation and acceptance of ripping us off.WHAT THE FUCK GIVES THEM THE RIGHT TO INFLATE THE MONEY WE WORKED FOR AND SAVE!                 


withnmeans's picture

Everybody should tune in to Bloomberg, Michael Pinto is right on. Taking the wood to ole Pimm Foxx..... Love it

TruthInSunshine's picture



"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."


-- Andrew Jackson

(1767-1845) 7th US President *In 1836, Jackson forced the closing of the Second Bank [Fractional Reserve Charlatan Printshop] of the U.S. by revoking its charter.

john39's picture

could have, if most elected officials were not functionally illiterate banker puppets elected by a drugged up and dumbed down electorate which can't differentiate between TV and reality...

Clay Hill's picture

If you think ol' Hickory's farewell address was still relevant, wait until you see his veto message concerning the charter extension for the Bank of the United States.

It is a bit long, but covers everything from Government dependance on debt money creation by private parties, to conflicting powers of taxation between Federal and State Governments, to the dangers of being beholden to foriegn investors during a time of war.

DoChenRollingBearing's picture

@ battle axe

+ 1

¨Death Spiral¨, Whhhhheeeeeeee!

Gold, bitchez!

SheepDog-One's picture

I'll believe 'war with Iran' when I see it, not sooner. Now Russia has installed special forces troops in Syria, so any action we take we'll be going against Russian military not guy in old bedsheets. I say its a stalemate.

V in PA's picture

What makes you think Russia and the USA have a different agenda in Syria? The media!?! Last time I checked, the US is becoming more like them (USSR/Russia) than most would care to admit.

viahj's picture

Russia is sending troops into Syria just like they did before we invaded Iraq, to secure their military bases and weapon systems that they sold to Assad (that shit is resalable to the new regime or someone else so no sense in letting it get destroyed needlessly).

LowProfile's picture

What the FUCK does that have to do with what he did about the banks!?

Congratulations, you're on the list.

downrodeo's picture

ol hickory, that dude is a personal hero of mine

 sure he wasn't perfect but

we can't say he didn't warn us

JPM Hater001's picture

Get the pipe... We're heading for 13000 as we speak

11b40's picture

Just like clockwork:

12:03 PM Bullish sentiment rises to the highest level in 4 years, according to the Charles Schwab Active Trader Survey, with 51% of frequent traders in the bull camp vs. just 25% last October. Most bullish sectors: Tech and energy. Least: Financials, healthcare, minerals, consumer discretionary.

Everybody's happy.  Must be time to put it in reverse.

vast-dom's picture

1837 they knew the game and were warning a la military industrial complex... If Jackson today was privy to just The Feds toxic shadow books of derivatives to the Nth and caustic bank garbage debt he would organize a revolt!

tempo's picture

There is no alternative to trillion dollar deficits in the West with the worldwide labor glut forcing "good wages" in the East to $1.25/hour, working at Foxconn (AAPL)12 hours/day, 6 days/wk, living 20 per dorm room, facing dangerous working conditions w/o legal/environmental protection. Our only growth business is subprime trillion dollar lending to unqualified students w/o assets so they can have a "college experience" knowing there are no jobs for 85% of the graduates who have now become slaves to the banks. IMO the warm weather accounts for most of the growth in jobs, housing and retail sales which pulled demand forward and goosed SPX. AAPL...represents the worse type of Corporate greed hiding in the 60's love logo. You users and employees should be ashamed.

blunderdog's picture

    AAPL...represents the worse type of Corporate greed hiding in the 60's love logo. You users and employees should be ashamed.

It's not just "AAPL," though.  If you really believe that the consumer is responsible for the crimes of the producer, then it should be properly broadened: If you use a piece of electronics, you should be ashamed.

Buy a pad of paper and move to a cottage in the woods.

Vince Clortho's picture

in a fiat monetary system, everyone is a debt slave outside of the CBs.

ClevelandJanelle6's picture

my neighbor's aunt makes $67 hourly on the laptop. She has been fired from work for ten months but last month her check was $20142 just working on the laptop for a few hours. Here's the site to read more ....

viahj's picture

you guys keep forgetting your decimal points....



Ruffcut's picture

his neighbors aunt has very nice tits and shows them for cash. My tits don't look so good.

-1Delta's picture




ipads are all bot with cash not credit! Things are fine- this is a bull market! or a central bank's artifical prop up...

wandstrasse's picture

EVERYTHING is 'bot' with debt... all cash is born as debt issued by the mega elite out of thin air... their wet dream came true...

Eternalko's picture


Well, here is a screenshot from my bachelors paper. US total debt (households, business, financial sector, local/states, federal, external) change and DJI growth.

Even funnier :)



kridkrid's picture

Could you translate that? What does (fed) mean on your blue line?

Eternalko's picture

As I said, US total debt VS DJI.

FED is the data source. Z.1 Debt outstanding report.

wandstrasse's picture

This means that the debt fiat monetary system is - gasp - NOT sustainable???

Jason T's picture

perhaps better to see total stock market value Vs. total consumer debt.. 

SheepDog-One's picture

'Stock market value' is a real tricky thing, todays 'reflected value' on the ticker is fake, because no way it could be cashed out at that level, probably not even half these levels. Could every share, or even half the shares of Apple actually be sold for $600? Good luck with that, I dont believe it for a second, all just fake. 

CrimsonAvenger's picture

Yes - HUGE point. People forget the demographic element to this, namely that this 'bull market' period corresponds with the huge Boomer cohort existing at their peak earning power and pumping up the cost of investments. It's supply and demand. When they all go to sell their bought-up assets the values will drop significantly.

Dr. Engali's picture

Bingo we have a winner. You will never see anybody on CNBS talk about that.

rqb1's picture

not to disagree with you, but cortez said that yeaterday on fast money midday, and was ganged up on right after by all the other traders, talking heads.  not a cnbc fan, but was suprised to hear some truth, even if they did try to discredit him after

kridkrid's picture

I recognize, as I write this, that words like this can make me sound crazy, but... truth is allowed to be spoken, as long as it is marginalized quickly.  I think this is by design, partly.  That way, when people with the truth talk in their circles, it doesn't sound unique enough to pay any attention to it.  You can be "lumped" in with whatever "fringe" person said something similar on program ______________. 

LowProfile's picture

Gettng harder and harder to do that, what with this Internet thing.

tabasco71's picture

Yes, back to what they are actually worth.

I guess if you whack all the goodwill and retained earnings off the balance sheet and then discount the debtors and assets values then you arrive at what the company is actually worth.

tabasco71's picture

Hadn't considered that before... but very true, if every share of Apple started to sell, the erosion in share price would mean that the overall return stock would be say 20-30% of what the current market cap is.

According to the way I modelled it, the first 20% out the door would be the ones who grabbed 80% of the value too.

Willzyx's picture

Tyler has posted this a few times.  Game theory and AAPL hedge fund holders.  In this broken market, the algos can't be counted on to provide liquidity.  Flash crash bitches!

rosiescenario's picture

My guess is that after 5% were sold, the trend following algos would grab on and you would see about an 80% drop as the algos and the actual sellers competed....kind of a flash crash on crack.



urbanelf's picture

Sure, but the mistake you are making is assuming that debt is bad.

Try SPX + Consumer Credit or maybe SPX ^ Consumer Credit

hedgeless_horseman's picture



...the mistake you are making is assuming that debt is bad.

Remember that, according to Congressman Pete Stark, "the more we owe the wealthier we are."


kridkrid's picture

My thoughts on that video have shifted a tiny bit over the years.  We have chosen an absurd system in which we facilitate our collective economic interactions (fiat money loaned into existence through our banking system with interest attached to the "money" upon its creation).  Within that context, there is a certain absurd logic to what the congressman says, unfortunately.