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A picture of the post-WWII debt supercycle

Larry Kummer, Editor

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. Prof Nouriel Roubini describes “The Decline of the American Empire” ,18 August 2008
  10. The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
  11. “The changing balance of global financial power”, by Brad Setser, 22 August 2008
  12. “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
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