Submitted by Charles Hugh-Smith of OfTwoMinds blog [4],
We are in a long-term trend where additional debt undermines the system as the positive returns on that debt turn negative.
Want to know why things are falling apart? Just look at our soaring systemic debt and the diminishing returns on that debt. Our Chartist Friend from Pittsburgh [5] has assembled a comprehensive series of charts on systemic debt (called total credit market debt in FedSpeak) that starkly illustrates the diminishing return on more debt:
Take a look at total credit market debt and gross domestic product (GDP), year-over-year: notice the correlation? Recall that defaults and writedowns of bad debt remove debt from the ledger, so in an era of deleveraging, new debt must exceed the writedowns of uncollectible debt to actually increase total debt.
Here is total credit market debt and velocity of money, year-over-year: the velocity of money is a measure of how fast money changes hands. In a robust economy, for example 1987 - 1999, the velocity of money is high. In recessions, it is low as fiscally prudent people and enterprises hesitate to borrow and spend.
It's easy to confuse trends and cycles. The Keynesian Cargo Cultists believe that we're in a cyclical downturn that can be "cured" with more debt-based spending, i.e. worshiping their false god of aggregate demand. They cannot comprehend that we're not in a business-cycle recession, we are in a long-term trend where additional debt undermines the system as the positive returns on that debt turn negative.
I recommend studying the entire series of charts for more insight into this trend: If Cash Is King Then Credit Is God [6].