Peak Debt

Saw this intereseting article.. source link

What Is Peak Debt?

I will limit the discussion to the US. If one looks at the long-term graph of Total Debt as a percent of the GDP (see graph in the above reference) one sees a Longwave Cycle type of behavior whereby the debt grows for a long period, decades, reaches a crescendo and then seems to fall down rapidly, in a crash-like fashion, and remains low for a long period. Since the process is cyclical in nature, it repeats. Thus, Peak Debt, unlike Peak Oil, is not a theory but an observed reality of our economic system.

What happens at the Peak Debt is that the Total Debt of the economy, as a percent of the GDP, or nominal debt in current dollars, or both, stop going up and start to go down. The last time that the Peak Debt occurred in the US was in early 1930s and I can confidently predict that the next Peak Debt will occur within this decade, because the forces pushing debt higher and higher are reaching a point of exhaustion. The rising Consumption Debt exerts a depressionary effect on future consumption and at some point the debt service reaches a high enough portion of the income that the current consumption must be cut down.

Debt plays an extremely important role in our economic system, especially, if one recognizes that stock market is a substitute debt market. In particular, Consumption Debt, taken on by the households for the express purposes of consumption expenditures (including mortgage debt), plays direct role in income and wealth inequality; high corporate profits, hence stock market booms; inflation rate; etc. All these – inequality, historically high corporate profits, and inflation – peak before the Peak Debt. Peak Debt occurs during the early part of the Deflationary Depression phase of the Longwave Cycle. What follows Peak Debt is a long period of depression, as the material and psychological effects of the prior consumption boom linger. All the above are based on cause and effect and not some theory and fully supported by history of earlier episodes. Since these cycles are rooted in human behavior, in this case the predictable behavior of various participants, especially, bankers and consumers, the cycle unfolds in a “clock-work” fashion.

The modern history of Consumption Debt, on a broad scale, especially, on non-essential purchases, is only a century old. Its messiah was none other than Henry Ford. Ford realized that it is not enough to offer great products at a reasonable price but the consumers must be induced to purchase in order for the producers to be able to sell more and more product and make more profits. This led to financing of the consumer goods that ultimately resulted in the 1920s boom in the US (very very similar to what has been going on in India over the past ten years). What is new in 2000s, compared with the 1920s, is not just pushing the consumer products, for which financing became a vehicle, but pushing of the debt itself, which now results in later afterthought purchases of big-ticket consumer items. I hope that you discern the difference between the two. PUSHING DEBT HAS BECOME THE EASIEST AND THE MOST PROFITABLE BUSINESS IN THE US OVER THE PAST FEW YEARS. Who wants to take the risks of a producer when financing has become so lucrative? Look at the largest “industrial” corporations in the US over the past decade, or two, and what you see is that they are lot more into financing business than in production business.

BTW, the boom-bust nature of the Longwave Cycle has most to do with debt, hence the “banker’s mischief” in creating them. Let me quote my favorite economist, Joseph Schumpeter, “One of the results of our historical sketch will, in fact, be that the failure of the banking community to function in the way required by the structure of the capitalistic machine account for most of the events which the majority of the observers would call “catastrophe.”” I am amazed by the fact that blind faithful of the American System don’t see the current “reckless mortgage lending” as an indictment of the whole econo-political system as being corrupt. These blind faithful will pay the price in not too distant a future. That is what happens with any blind faith. No system, or human institution, is immune from the control by the Crooks. We can proudly claim to be #1 when it comes to takeover of the econo-political system by Corporate Crooks, or as “the Money Bags” had done in England a hundred years ago.

The two largest bubbles of their kind in the US history – the Stock Market Bubble of late 1990s and the Housing Bubble of 2002-06 – over the past ten years are a result of the largest Debt Bubble (or Credit Bubble) in US history.