A picture of the post-WWII debt supercycle

Summary:  a brief description of the post-WWII debt supercycle, now ending.  This describes the problem (posts listed at the end give more detail and links to authoritative studies).  What should we do about this?  For my recommendation see A solution to our financial crisis (you will probably find it shocking, unfortunately).


For many months we were told this was a subprime crisis.  Then the realization slowly dawned that Alt-A loans were also defaulting.  OK, they were really just another form of subprime loans. Then prime mortgages started defaulting, so it became a mortgage crisis.  Now auto loans are going, followed by credit card loans and real estate construction loans.

As we slide into a recession, more and more loans will go bad. Eventually we the horrible truth will become clear. It was not evil loan salesmen, or devils in the form of GSE executives, or whatever other excuses we invent. We — American households — have taken on more debt than we can support.  This is the post-WWII debt supercycle (term coined by Bank Credit Analyst).  The time has come for that debt to be reduced, one way or another.  Painful or easy, the half-century increase in debt will be followed by a probably much faster decline.

The supercycle is easy to see.  There are three components to the economy.

  1. People
  2. Businesses
  3. Government

Let’s look at the debt of each over time, compared to the overall US economy (to compensate for the growth of the economy over time, and inflation).  Graphs courtesy of Contrary Investor, a valuable source of information and insights about the economy (a subscription only source; here is their free monthly report).

I.  People

II.  Businesses

III.  Government

This does not include State and local debt, or future liabilities (e.g., pension, social security).  Watch these numbers grow, as debt from households and businesses gets moved onto the National VISA card.  The $700 billion of the Paulson Plan is just another step, between the hundreds of billions already spent and the hundreds of billions for the subsequent plans.  As Contrary Investor notes, the inital estimates for the cost of bailing out the S&L’s were aprox $20 billion.  Final cost:  $160 billion.  Par for the course as government programs go.

Why is the financial sector causing so much trouble?

To learn more about the Debt Supercycle

U.S. Household Deficit Spending – A Rendezvous with Reality“, Robert W. Parenteau, Levy Institute, November 2006 — Abstract:

Over the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. This reversion will jeopardize U.S. profit and economic growth, as well as the growth of countries dependent on export-led development strategies. His research supports the position of other Levy Institute scholars who have urged policymakers to recognize the consequences of current imbalances in the U.S. economy.

Some FM posts about the current crisis

  1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  2. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
  3. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
  4. Another voice warning about the nationalization of AIG, 18 September 2008
  5. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
  6. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  7. Another step away from our Constitutional system, with applause, 19 September 2008
  8. What do we know about the financial crisis? What are the key questions?, 20 September 2008
  9. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  10. America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
  11. Legal experts discuss if the Paulson Plan is legal, 21 September 2008
  12. Essential steps to surviving the current crisis, 23 September 2008
  13. How should we respond to the crisis?, 24 September 2008
  14. A solution to our financial crisis, 25 September 2008

For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.

A few of the most important posts warning about this crisis

This crisis has long been forecast by many, including in articles on this site.  Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results.  To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime.  Here are some of those posts.

  1. A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter I, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, Chapter III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?, 18 March 208  — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
  9. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.

14 thoughts on “A picture of the post-WWII debt supercycle”

  1. I have a question: The note on the total US Federal Debt chart says “Current level assumes $5.3 T in Federal Debt.” What are they referring to? The National Debt clock shows about $9.8 T in debts. Can you explain the discrepancy?
    Fabius Maximus replies: The actual outstanding debt is $5,613,893. The government has issued also $4 trillion of IOU’s to itself, social security payments which the government has spent. See the Treasury website for details.

    These are often included in the total debt – by folks seeking to exaggerate the debt — or as an asset to pay social security benefits — by folks seeking to show that social security is in fine shape. You an easily prove both viewes absurd. Write yourself an IOU for a billion dollars. Has anything changed?

    The actual debt is $5.6 trillion. The actual liability includes both the debt (resulting from past expenditures) and the discounted value of promises to make future payments). It is stated on page 32 of the Fiscal Year 2007 Financial Report of the United States Government.

    “Considering this projected gap in social insurance, in addition to reported liabilities (e.g., debt held by the public and federal employee and veterans benefits payable) and other implicit commitments and contingencies that the federal government has pledged to support, the federal government’s fiscal exposures totaled approximately $53 trillion as of September 30, 2007, up more than $2 trillion from September 30, 2006, and an increase of more than $32 trillion from about $20 trillion as of September 30, 2000.7 This translates into a current burden of about $175,000 per American or approximately $455,000 per American household.”

  2. Excellent post as usual FM. Can I add a link to someone, an Aussie who has been going on about this for years and the dangers faced, unfortunately ignored. Steve Keen, goto his site (http://www.debtdeflation.com/blogs/), a lot is about Australia but he has a lot about the US as well in easy to understand formats. He also said that the current bailout plan “is like using thimbles on the Titanic”.

    FM, I’m scared mate, I actually had to pick a bank in the UK least likely to collpase for my 80 year old mother recently. I hope I picked the right one.

  3. The Europeans are now moving to end Bretton Woods:

    Sarkozy, who also holds the European Union’s rotating presidency, said he would propose swift action by the 27-nation bloc at its next meeting to tighten controls over European banks. But beyond Europe, he said, the leaders of all the world’s major industrial powers should gather at a special summit before the end of the year and start to construct from scratch a new financial and monetary framework to replace the U.S.-dominated system set up at Bretton Woods, N.H., in 1944.

  4. I’m now definitely against the bailout — the US financial sector, like the world’s financial sector, is TOO BIG. A bailout fails to reduce the size, and in fact tries to keep it too big.

    *Small banks are mostly OK*

    Let THEM get the ‘big business’ loans that previously went to the ‘big banks’ (now proven incompetent).

    Loans to businesses are crucial — but a low interest rate means small banks can provide such loans.

    House prices MUST DROP, and then stabilize. The US Fed should be deciding how to stabilize house prices. Supporting buyers of foreclosures, as well as pushing Fannie Mae to restructure (reduce) overpriced loans, will put a floor on house prices.

    Let the small, S&Ls, do more home-buyer loans, too — with 10-20% down. Most big financial institutions are NOT NEEDED by a globalized, inter-networked economy. Let them die by their own incompetent choices. It wasn’t the devil that made them make those lousy loans.
    Fabius Maximus replies: To be against the bailout is easy. But what measures do you support? The US financial system is burning. A modern nation can surrive the destruction of its financial system no more than a person can the death of his neural system. The small financials can no more substitute for the large ones than the nerves in your foot replace your spinal cord.

  5. Re: Duncan’s comment above.
    Sarkozy, the conservative French PM, also called this the end of pure free market ideology –the idea that the only guarantee of rational outcomes is the unregulated market. Mirabile dictu!

  6. I love all the information here. It really added to my knowledge on the subject. The additional graphs or charts make it easier to understand the data. I was looking for a graphic to illustrate the US debt clock but didn’t find one but perhaps someday it will be added to this great resource. Thank you.

    Evelyn Guzman
    Debt Challenger

  7. Here is a good article about what should be done with the bailout.

    The Public Deserves a Better Deal“, JOHN PAULSON, op-ed in the Wall Street Journal, 26 September 2008. I’ve heard many say that this is a failure of capitalism or the free market. The reality is alot of this falls on the shoulders of the Federal government and the Federal reserve.

    As Jerry Pournell states in his blog today:

    “Note that WaMu died from a lack of confidence. They had overinvested in toxic paper — deliberately, it seems, and they were out there pushing bad loans. Of course the Community Reinvestment Act (CRA) pretty well required banks to make bad loans — also called sub-prime — but it also required Fannie Mae and Freddie Mac to guarantee them. The loans were guaranteed, and made with the expectation of a guarantee.”

    Another well intended government program going up in flames. This was then compounded by easy money from the Fed and you get a vicious cycle effect.

    Confidence and stability is the lifes blood of large economic and financial systems and that needs to be restored. We are still in a world of hurt for next 5 years plus if our government takes the right action now if they don’t take action we may be looking at this 20 years from now. We the people have allowed this to happen by not paying attention, I think we almost have their attention now.
    Fabius Maximus replies: One inevitable aspect of a crisis is the flood of quack analysis and solutions. Such as attributing this to the CRA, passed in 1977. Even by quack standards, this is absurd. Matthew Yglesias gives the nickel summary on this:

    “The technical term for this argument is ‘bullshit.’ For one thing, the timeline is ludicrous. The Community Reinvestment Act was passed in 1977. Are we supposed to believe that CRA was working smoothly throughout the Carter, Reagan, Bush I, and Clinton years and then only under Bush II did overzealous anti-”redlining” enforcement come into play, perhaps a result of Dubya’s legendarily close relationship with ACORN? Or maybe overzealous enforcement back in the late 1970s is somehow responsible for a real estate blowout that only materialized 30 years later? It doesn’t even come close to making sense.”

    For a more detailed rebuttal see “Did Liberals Cause the Sub-Prime Crisis?“, Robert Gordon, American Prospect online, 7 April 2008 — “Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It’s a useful story for them, but it isn’t true.” (Gordon is a senior fellow at the Center for American Progress)

    As I note in this post (which it seems few of those posting comments have read) 22 months into this crisis, Americans refused to open their eyes to its extent. Years of warnings by major experts and important institutions were and are ignored. Ditto for the data, shown on these graphs — and dozens more easily showing the extent of this problem.

    As for Project Hope Mark V, or whatever iteration we are on, neither it (the Hank Paulson Plan) or the Mark Vb (the John Paulson Plan) will work, as they are of grossly inadequate size to mitigate or even slow a process of this magnitude. See “A solution to our financial crisis” for a plan that is at least of the aprox right size.

  8. FxConde – I have been griping about this bailout, but could stomach the solution proposed by John Paulson…thanks for the link. It appears we have the wrong Paulson guarding the Treasury.

  9. BlacquesJacquesShellacqes

    Expectation of stability explains and justifies it all. You can support big debts if you have a reasonable expectation that you will have the stability required to service and pay them.
    Fabius Maximus replies: As debt grows it inevitably reaches the maximum carrying capacity for that debtor. Both the Minsky Cycle (here and here) and the Austrian school of economics are based on that insight.

  10. Suggest you update this post. Rescale the plots so thay are all scaled from 0%-200% GDP rather than each plot having different y-axis scaling than the others. This will make comparisons easier. Also suggest an “All-Debt as % GDP”
    Fabius Maximus replies: These are taken from another site. You are getting this for free.

  11. Fab says:The US financial system is burning.

    And your evidence? 1) overpriced homes have a higher foreclosure rate, after 2) no-money down poor speculators (liar loan users) stopped paying, causing 3) rocket science ‘financial instruments’ used by ‘top banks’ to meltdown?

    Sorry, I don’t think so. Conservative local banks have lots of cash for good local loans. Depositors, and borrowers, DO have lots of options on where to go. “Smaller Banks Thrive Out of the Fray of Crisis“, Washington Post, 26 September 2008 — “People Shift Money From Wall Street. to Main Street”

    The primary ‘Main Street’ purposes don’t need the Wall Street overpriced bankers. The gov’t maybe made a mistake with AIG, and certainly did with Bear Stearns — should have allowed failure.

    I was wrongly in favor at the time, thinking it would be enough for stability. Your great Financial Debt graph above shows the huge need to rapidly reduce that debt. Best long term would be debt to equity swaps, between different financial institutions that were imprudent, but even more chapter 11 bankruptcies would be OK.

    There are FAR TOO many ‘top bankers’. The bailout keeps too many of them. The non-financial economy doesn’t need so many of them in financial institutions — and as Lehman Bros. look for work, big companies wanting to put out bonds directly will be an increasing possibility.

    Investment bankers were always just intermediaries — with special contacts more than special knowledge. Now both are easier and cheaper to come by for those with real products.

    We should accept far more banking failures than we’re likely to see. With low Fed interest rates, banking failures today will NOT spill over nearly as much to the production economy. Depositors are insured, somebody will try to enforce the borrower’s promise to repay.

    Where is the ‘rush’? What loans haven’t been made? The rush is to save the multi-millionaire top bankers, not the real economy.
    Fabius Maximus replies: This is a powerful and important perspective in the debate. No short answer is possible, so I have lifted it into its own post.

    Is the US economy in good shape, or in terrible shape?

  12. external debt-the amount owed to foreign countries is the number that always shocks me. as a % of gdp, it’s over 90%. UK is over 400%! Netherlands is 360%! for a relative number, one could look at many of the eu countries and their foreign/external debt per capita (source Wikipedia)

    and the lowly US, 42.3 k per capita.

    am I being naive in believing that owing money to other countries is a bad and growing thing, but that we are not even close to being as far down that road?
    Fabius Maximus replies: This means nothing. Zip. Europe is an economically integrated entity (and has been for centuries), moving slowly towards political unification. “Foreign debt” of european nations (e.g., UK owned to France) is like mortgage debt owned by citizens of New York to Florida.

  13. Quack analysis? Interesting. It’s not the original bill that helped cause alot of this but the revisions later. I believe the last revision, which was in the middle 90’s is what really shoved it over the cliff. Of course this is only one leg of the whole problem. But not taking it into consideration is also short sighted. Either way I really don’t think that government can come up with an effective plan that is either correct or large enough. The citizens have really no way of knowing what needs to be done and our leaders have basically abandoned any real solution but they want to look like they care.

  14. Can someone offer me some direction?

    Where could I find comparable data for other individual countries (not the global debts)? To what extent do you think that US deleveraging will coincide with similar debt crises in other (European, etc.) countries? Where could I find forecasts for creditor loan reductions as Japanese and other creditor nations demographic changes (aging into retirement) take hold?

    Thank you on advance.

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