Payback Time - The Coming Decade Of Deleveraging

Tyler Durden's picture

Having gorged on the fat pipe of cheap credit for much of the previous few decades, the last few years have rapidly and aggressively slapped the US (and indeed much of the world) from its stupor. All that growth, was it real? The speed of economic leveraging began to gain momentum in the early 1970s and accelerated sharply in the 1980s as the cost of debt began its decades-long decline. That leverage enabled consumption and capex to rise quicker and with less capital but obviously with more risk. With the current balance-sheet recession stymieing monetary policy and fiscal policy hardly supportive, it seems the private deleveraging hole will be difficult to fill with public borrowing excess. It seems that credit markets (the ubiquitous source of all that leverage) have again and again sung from a different song-sheet with regard to the way we escape from the inevitable deleveraging we are currently undertaking. Matt King, of Citigroup, provides a thought-provoking (and all-encompassing) slide-deck on the coming decade of deleveraging and how now is time for payback.


Payback Time: The Coming Decade Of Deleveraging

Matt King - Citi Investment Research & Analysis

1. The Bubble In Credit

Post Crisis Recoveries... Temporary Blip, or permanently altered trajectory?

The current recovery in context...Fine in some respects, but something seems broken

A Crisis of Demand? Not just a matter of lowering rates (the balance sheet-recession)

More Borrowing = More Growth? previous growth was founded upon borrowing - was it real?

How Much Have We Borrowed? More debt in more sectors in more countries than ever before

Wealth Effects - spending only possible because of high net worth

Leading To The Growth Triangle - But Don't Look Down!!!

Love Triangle or Pyramid Scheme?


2. Ways Of Deleveraging

Balancing Government's Books - Austerity works if offset by private leveraging

Assessing The Broader Economy...but the private sector is in savings mode too!

Whole Economy Deleveraging - much harder - unless you debase the currrency

The Effect On GDP - without FX, adjustment is extremely painful!

Bring On The Central Banks - But don't expect them to work miracles


3. Investment Implications

Saved, or Doomed? It's all a question of confidence!

Growth - Lower, but above all, more volatile!!

Expectations Management - Optimism is becoming harder to sustain

Real Estate - Deleveraging + Older Populations = Downward Spiral

Equities - The end of the equity culture?

Banks and Bankruptcies - Be wary of multiples on leveraged instruments

Fixed Income - low yields should eventually make for tight spreads...

Credit -...but only once the bankruptcies are out of the way

Structured Credit - Better the devil you know (EFSF anyone?)

And In Conclusion...

Debt Needs To Fall...

Asset Prices Likely To Go With It...

and Fixed Returns Beat Uncertain Ones...

Deleveraging Is More Difficult Than You Think

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fonzanoon's picture

where is the last part about gold and inflation? What am I missing here?

jdelano's picture

So how is it not news that some guy fired s high-powered rifle at the upstairs windows of the white house in an attempt to kill Obama?

stopcpdotcom's picture

They don't want to give the sheeple ideas.

TruthInSunshine's picture

This article hits the nail squarely on the head.

The only thing The Bernank is doing is trying to reflate bubbles ( he has succeeded with sovereign bonds, corporate bonds, equities and some commodities - all trading extraordinarily higher than where anything remotely reflecting FMV based on valuation standards using anything remotely approaching honest math would put them - a unique accomplishment given the historically divergent pricing of bonds vs stocks - and symptomatic of extremely broken markets) in order to delay the panic that would dramatically accelerate the deleveraging that's already begun in earnest, as those still with jobs and income realize that the CAT 10 hurricane is coming, and begin to white knuckle their cash, in hopes of having enough liquidity to ride out the storm and aftermath.

In a debt/credit (same thing) based economy such as fractional reserve banking dependent ones, deleveraging is the mortal enemy and fatal assassin of the central banksters. It frustrates their game plan, runs interference with implementation of their policies, and thwarts their best efforts at keeping what is in all respects a true Ponzi Scheme alive and kicking.

Yet, deleveraging will prevail, no matter how desperate and to what order of magnitude of insanity the central banksters become or resort to.

In the end, The Bernank will be known as the boy who blew bubbles so that very important friends of the New York Branch of the Federal Reserve Bank could hitch their rides to the last opportunity to suckle the remaining lifeblood of taxpayers.

Greenspan & Bernanke formed quite the three decade bubble blowing machine.

For all those who would tout (sincerely or disingenuously) the magical abilities of Federal Reserve alchemy and ability to suspend gravity indefinitely, I'd suggest there really will be an end game whereby high inflation or debt forgiveness, both routes leading to extremely painful losses for huge numbers of people, investors, speculators, gamblers, taxpayers and the citizenry at large gets wounded very badly, some for the umpteenth time, and the system will have to reset (pick your poison based on your positions - one is definitively more just than the other, as it imposes more of the losses on investors, who should bear the risk of loss in anything approximating a 'market system,' rather than citizens and generations of citizens as a whole).

Basic Math says:

"Just like the mother in the movie 'Blow,' the inevitable process that has to occur, global deleveraging, on a scale at least equal to (actually far more so given mark-to-fantasy valuations  and leveraging gamesmanship) the circa-1981 through 2011 credit fed and central bankster sponsored debt bubble, is a complete and total bitch."

***In reality, the credit/debt based bloat that distorted all markets (which Bernank succeeded in completely breaking) began in 1913 in the U.S., but only really got underway, whereby credit extended and absorbed that exceeded the ability to repay said debt by a historically astronomical spread, from about 1972 onward, which just so coincidentally (or not) was the year after Nixon de jure took the United States off of the gold standard, freeing the Federal Reserve to print as many Federal Reserve Notes (a greener shade of toilet paper) as it wished, with no contraint other than episodic periods of inflationary bouts that hammered what once was a meaty middle class.

Fukushima Sam's picture

And then there are the people who purposefully take their wealth out of the system because they want no part of it. The "economic terrorists", if you will.  ;-)

sqz's picture

Impressive research from Matt King again.

He seems to miss some implications from his data though.

Context: We are trapped in a Zero Interest Rate Policy environment due to pressure on public debt. But,

1. Unlike Japan, the US is able to keep printing and creating inflation, even without disinflation or deflation present.

2. A degree of capital destruction is both legally already happening (foreclosures) and potentially possible on a large scale (mortgage restructuring) as well as further price falls.

3. Unlike Japan, the US loves to spend (rather than save) at the drop of a hat if you can give them any excuse to do so - like giving them a job and not making them feel like their net worth is zero due to unreasonably high personal/household debt.

4. The US has a strong need for housebuilding every year just to replace old stock and build new stock, something like 1 million homes.

This means the US Fed can keep printing money and allowing credit creation. Corporate borrowing will remain stable or increase as a result, while their single largest costs (wage cost) are pinned due to high unemployment. Non-wage inflation will continue to rise and personal income will be eroded at the expense of corporate profit margins and higher product prices. As usual, Anglo corporates will hold off fixed/long-term investment for as long as possible due to culture and uncertainty.

Unless there is stunningly bad *structural* news that will have a (very) strong deflationary impact on the global real economy, like the complete and utter break-up of the Eurozone or Germany leaving the Eurozone, corporate earnings can only remain around this level or rise. Credit crunches or other non-structural financial problems will be solved with more of the same: throwing money at it.

In short, without deflation, both the monetary supply and negative real interest rates will persist and increase. Making both gold attractive as a store of value (there is no yield, but neither can you have negative interest on it!) and equity as an inflation-tracking asset. Only the UK is/will be more aggressively inflationary than the US, therefore possibly even better bargains in these asset classes are available there.

Unfortunately, for all the middle classes caught in the pinch, this will hurt. But it will hurt a lot more if you don't invest what little you have left in gold and equity for a decade!

Talleyrand's picture

In the preamble, Mr. Durden wrote, "The speed of economic leveraging began to gain momentum in the early 1970s..."  I think we can narrow it down to 15 August 1971.

All this debt, all this leveraging - yeah, there may be a whole hell of a lot of it - but, what's the issue? It's just air-money. Get real money.

SWRichmond's picture

All that growth, was it real?

All that demand for oil, was it real?


Almost Solvent's picture

That's what future generations will hate us for most: the absolute waste of most "oil" for a few FRNs

Totentänzerlied's picture

If the historiography of history is any guide, future (sycophantic apologeticist) historians will proclaim, with hands wringing,

"How could we possibly have known!? What could we possibly have done!?"

And the masses and the politicians and the intellectuals and the businessmen will love it for sparing them, one-and-all, from any blame.

And such will be the official history of the end of American empire and dollar-and-oil hegemony, forever and ever, amen.

Talleyrand's picture

Maybe they will thank you for ridding then of the curse that is "oil".

oldman's picture

Thanks, Truth

You put this very nicely into perspective.

All's well that ends, as I read it. The thing that I find most interesting as an additional threat is the possibility of a global decliner in population that might just catch the tail end of de-leveraging and extend the lack of wealth and capital for another decade or so.

I am looking for the 'unknown' not because I want to create more 'human pain and suffering' but for the simple reason that there is always some odd wrinkle in these explanations that defies the human imagination-----any other ideas? This is becoming very interesting with so many that now have been cast out into the streets demanding change----maybe something like a new way of managing resources, etc,

THanks again for the effort above as it clarified a couple of things                   om

twotraps's picture

Truthinsunchine, really well said, what are some scenarios you envision for the CAT 10 storm?  I'm shocked we have not seen more re-pricing of everything by now but so much has happened, the news gets worse, time goes on, it gets laughable, yet nothing seems to happen.  Interested primarily in protecting what i have but I wonder about a seriously overlooked investment/opportunity where the cash will run that could make for a serious multiple return.  Again, great comment

Seer's picture

Like what, help usher in Dimon as POTUS? (like Berlusconi being ousted for Monti)

Seer's picture

Would have to be- doesn't everyone know that the WH windows are bullet-proof?

Perhaps a martyr (for the "throw the bums out and replace them with other bums" [Party Pussy] crowd)?

Clowns to the left of me, jokers to the right...

Caviar Emptor's picture

I reported that here on ZH days ago. Picked it up on a wire feed, never made the MSM. At that point the perpetrator was still at large. Obama was in CA that night

NotApplicable's picture

I just googled it and got 224,000 news results, from every outlet I can think of.

jdelano's picture

Published when? I never saw anything on bloomberg cnbc etc and I troll pretty much all day long.

DosZap's picture


TROLL all day?.........

You musta been asleep.

Seer's picture

There was a delay, as they were exploring ways in which to change this story to include that the person was "throwing box cutters" in the direction of the WH.  But, there was difficulty in making this sound in any way plausible.  Meanwhile, the "history" will be that this was an "anarchist," and we know that ALL "anarchists" are violent brick-throwers and that they are responsible for why everything is fucked up...

Winners: Homeland (in)Security

Losers: Real people

Popcorn time!

DosZap's picture


So how is it not news that some guy fired s high-powered rifle at the upstairs windows of the white house in an attempt to kill Obama?

Well, since he was using a pea shooter,(not a High powered rifle),on likely 6"'s of bullet proof glass, and Obama was thousands of miles away, it's not that big a deal.

He's been caught, and identified.  A nut job,or someone w/ an axe to grind over nothing.(maybe part of a PC stunt for votes).

And, you have not been listening, nor reading evidently, because it's been ALL over the news.

CompassionateFascist's picture

Just another OWSer. And by the way, WHAT DE-LEVERAGING? Consumers are out buying their ChiCrap with debt plastic same as usual and the gubmint just took out another $2.4 trillion on its credit card. WHAT DE-LEVERAGING?? If they do, the system collapses now. If they don't, it collapses later. Better later than now. The "Super Committee" farce says all. They're cutting nothing.

DosZap's picture


Cutting 1.5-2T over a 15yr span, is nothing but a photo op.(the interest aone on the 15T, eats all that up per yr and much more.)

IF you could get them to agree on either.

As a debt free individual most of my long life.I am starting to see the cycle repeat.Americans can only wean themselves from  debt, for about 2-3 yrs, and then it's I DESERVE it time.

Also, after watching our leaders waste,spend, and do nothing, they are going to help us all..........go out with a part of the pie.

Govt gets it free, so why don't we?.Seriously only an honorable, moral peoples could do what's necessary to get GAME ON straight.

After watching OUR illustrious leaders/sarc, and the way they continue to care for themselves, and their buddies, spend like drunks...........J6P is saying, what the hell?.No job,no hope of a decent one, no REAL future screw them!.

When the/our  LEADERSHIP,is willing to take the pain ALSO, then you will get most peoples attention, not until.

Harlequin001's picture

People don't deleverage anymore than businesses do. They default. That is reality.

The Fed is simply bailing out those it can't afford to let default for now...

TruthInSunshine's picture

Defaulting is just one of what are many forms of deleveraging.

Paying down debt and saving are others.

Refraining from taking on new debt/loans is another form.

These are all actions that frustrate fractional reserve banking dependent economies, where the fiat is conjured from thin air, and at $0 cost basis for the the Money Masters, who can then loan it out at interest, leverage the debt outstanding multitudes higher, and make a killing even if a huge % of that debt goes bad - the Money Masters still make money on the debt that doesn't go bad, and they end up with an even higher pile of hard & real & really valuable assets, taken from those who did borrow in the form of securitized loans.

In any event, the fractional reserve loving Money Masters have no skin in the game; they conjured fiat from thin air at no cost to them, and used that as the pillar of a massive Ponzi Scheme, where they claim to have the force of law behind them in administering the terms of loans and debt disbursement and collecting on loans gone bad.

Wholesale refusing to play their game (i.e. borrow money from them and pledge things of real value for their monopoly fiat) is the only way to thwart them. With the leverage where it is at, if they can't push out bigger issuances of debt/credit, the system turns on them.

Harlequin001's picture

Whilst we may be splitting hairs here I view deleveraging as paying down existing debt; default is not deleveraging though it leads to less debt, there is a creditor now that does not get his investment back. As for your other comments I agree, this is nothing more than I have been saying about China printing money to bail out Europe and everyone else...

an absolutely unbelievable state of affairs...


StychoKiller's picture

With all the fuss over cutting (the rate!) of Govt spending, supposedly to the tune of $30BIllion, it should be obvious to all that almost NO ONE in the US Govt is able to really cut spending at this point!  The eyewash is so dilluted that no one should be taken in re: this "super" committee!

dark pools of soros's picture

perhaps the tattoo he has??

"The heavily tattooed suspect - who has the word "Israel" - written on his neck "

Carlyle Groupie's picture

Team Tyler may not want to sensationalize the fact that an Israelite attempted to assassinate the President of the United States.

Those on Wall St. have been successful in doing so since Obama was elected with no bullets fired.


The guy is hispanic. Israel is a common name in hispanic culture.

Vlad Tepid's picture

So is Jesus, but you don't see Him shooting at windows (yet.)  

"Do you know how to use one of THESE?"

Socratic Dog's picture

"So how is it not news that some guy fired s high-powered rifle at the upstairs windows of the white house in an attempt to kill Obama?"

If it was an "assault rifle", from 600m he may as well have been using a slingshot.  If it was something useful at 600m, then it wasn't an "assault rifle".  And it needed a high level of skill and practice to be dangerous.

Even with that expertise, hitting Obama while he was in Australia might have been a bit tricky.

So it probably isn't news.  Not that that ever stopped the MSM.

Carlyle Groupie's picture

It wasn't Obama that I was concerned about it was the Ghost of Dick Cheney.

Hugh_Jorgan's picture

4th Turning Bitchez!

If history follows the usual cycles we have 20+ years before we see any meaninful recovery, and long way to fall during that time...

Seer's picture

Recovery to what, another unsustainable bubble environment?

Crap, people, oil's lingering around $100/bbl, and gold's bottom is firmly above $1,600/oz.  These two should tell you that there's a LONG way yet to go, and that when we've "arrived" we'll find that there are firm (impossible to ignore) realities that'll keep it there.

philipat's picture

Doesn't this just prove that Citi remains a bloated monstrosity? I mean, what is the point of all this? We know all of the contents already whereas the value added should have been in the "So what should I do", of which there is none. What a waste of time, effort and another overpaid time waster.

Talleyrand's picture

Fuk City Bank of New York.

Clint Liquor's picture

Deleveraging is for pussies.

prains's picture

another one who just sees vag

Don Birnam's picture

"...the fat pipe of cheap credit..."

Indeed, the ensuing, saturated high could only have come from the "crack pipe" of cheap credit.

TheSilverJournal's picture

There will be no deleveraging. If deleveraging commences, then asset prices fall, the banks fail, and depositors lose their money. The Fed won't allow depositors to lose their money so the Fed either prints now to keep the credit stream going, or they print later to bail out the banks so depositors don't lose their money.

paarsons's picture

I don't know.

There might be another Paul Volker in the future.

Raise interest rates.  Hike margins.  Get the speculators out.

It's 50-50.

TheSilverJournal's picture

In case you didn't know, rates have been promised to be kept at 0% until at least mid 2013. Fed President Evans is now publicly calling for more QE. If they Volker it now, depositors will lose their money. Real estate would crash. Interest on the debt would rocket and the US would be instantly insolvent.

DaveyJones's picture

the math has us cornered. On top of that, we are not the economy we were when Volker pulled the plug.   

TruthInSunshine's picture

Back in the early 80s, I was quite young, but some very sharp elders whom I respect tell me that the major structural difference between now and then was that the Fortune 500 hadn't packed up most of their factory, IT, customer service (My name is Peggy) jobs and moved them to Mexico, China, India, etc., so that when demand picked back up, those factories and other places of employment spun back up and reinstituted workers.

I think this is very true.

Now, the globalists have succeeded in making labor the cheapest commodity of all, and there's zero chance that any multinational that just built a billion or 3 billion USD factory (think Intel in China or Ford in Hermisillo, Mexico, as two of thousands of examples) did so with any intention other than nursing those large expenditures for dozens and dozens of years (30, 50?). Those jobs are not coming back, short of a major war, and even then, it's unlikely.

They tell me people with good jobs, not fearing the loss of their jobs, as NAFTA, China MFN trade status and a myriad of other 'free trade' pacts (pitting slave labor versus American middle class in the race for low bidder worker) hadn't been enacted yet, decimating middle class or even upper middle class notions of careers, let alone job security, even eagerly bought homes with 12% mortgages back in the circa 1981-1983 period.

This is just more proof that anyone claiming what we're experiencing in the U.S. is cyclical is delusional; it's as structural a change as structural gets.

Hayabusa's picture

Funny how the news never reports these sort of FACTS!  It's a structural change and the only way those jobs are coming back is if our labor force does it cheaper, period.  No margin, no mission.