The future is pretty muddy now, which leaves some hope yet fears of invisible demons. One of the key features of the market economy that is important to keep in mind is that it is constantly healing itself, sometimes by few pills, sometimes by amputation. And the lack of pain and medication may hide a growing problem. The most painful recession is seeding the future growth while the prolonged good times are adding to the body fat that will lead to a stroke.
This article will cover the basics of the Great Debt Cycle, which I believe to be the cornerstone of the extra-long economic cycle named Kodratieff Wave.
On top of the regular short- and medium-term cycles every economy is experiencing a very long cycle, 50-60 years or even more. It is easy to observe that the longest cycle is very visible when charted in term of debt. Money is the blood of economy and debt is the heart (i.e. pump) that circulates that blood. When debt level is too low the entrepreneurship has hard time to obtain resources and often needs government intervention, which is very unhealthy. When debt level is too high the system collapses. Thus, the debt cycle is the transition of the economy from periods to low debt into periods with high debt.
This chart shows the private debt to GDP for several countries:
(chart from Oz Debtwatch). The longest chart pictured is for Australia. You can see the debt/GDP ratio peaking in 1890’s, 1930’s, 1990’s and still peaking now. In 1990 United States experienced a medium-sized real estate crash and it would be a good point for another global collapse, but apparently the crash of communism and unprecedented expansion of capitalism into new territories prevented the crash. Now the debt ratio finally expanded to the level well above the Great Depression peak.
We can zoom in and see the mortgage debt in US for 60 years:
It is emphasising that the latest portion of the debt expansion happened in the mortgage sector, so when the pendulum swings the other way we should expect the mortgage debt unwinding to be especially severe.
If we slice through the country borders we can see how the debt level was growing elsewhere:
This chart is outdated, but when we deal when 50-year cycle it’s not important. As you can see the only country that is busy fixing the debt problem is Japan.
This chart (from Sudden Debt) compares the growth of debt and GDP:
As you can see at the later stages of debt expansion it leads to only marginal improvements in GDP, i.e. the cost/benefit ratio is getting worse and at some point becomes counter-productive. That is the moment when economy heals itself by amputation, i.e. by unwinding the debt. By my understanding the most effective way to unwind the debt is to default and scratch it off, this is what the mortgage sector in the US is very busy doing.
The debt ratio is somewhat inverse to the savings rate:
Who needs to save when debt is so cheap?
In this article we just visualized the basics and established that:
- The economy (world and native) is experiencing the debt cycles
- Every debt/GDP peak is eventually unwound completely. There is no long-long term trend, every historic low is revisited again
- At some point debt is hardly beneficial
- Economy will fix itself, don’t worry
The next article will cover the Autumn period of the Kodratieff wave
5 Comments
The purpose of this (and maybe 2 more) article is to repeat the basics I will use later to argue about possible directions in the future. I think we are at the bifurcation point where the nature of future pain will be determined. But there will be a pain no matter what.
Andy, another great article. Amazingly, the youngest baby boomers ages 48 to 64 are among the highest percentage of Americans declaring bankruptcy. It appears that the cost of health care is at the heart of this problem. Its part of the coming debt bomb. They are the least prepared. Their parents ages 82 and over are much better prepared for any such difficulties.
This supports the idea that many of the early baby boomers either did not save for retirement or possibly they are feeling the impact of our declining standard of living. Specifically, this group age 48 to 64 probably took the brunt of corporate America’s outsourcing binge. The age group between 48 and 64 may no longer be able to earn an income needed to support their age related expenses.
Whereas their parents were already out of the job market before good paying jobs were sent abroad. Furthermore, as inflation quickens, those individuals who do not have upward mobility in the job market are falling behind on their obligations. The cost of health care and the numerous un-funded obligations to our elderly is another disaster that awaits the American tax payer.
Of course the Democrats will be demonized as bad people for raising taxes on the wealthy. Unfortunately the Democrats, just as during the Great Depression, will be forced to raise taxes on the only remaining Americans with any income. Otherwise they will have to make unprecedented cuts in Social Security, Medicare, and Defense spending. This is the big question; do they have the guts to do the right thing? If not, our dollar will continue to decline in value and we will become a Banana Republic.
Papa Bear I believe you mare making an erroneus assumption. Increasing the tax rate does not equate with increased tax revenues. In fact most of the time the opposite occurs. Witness what happened when G Bush reduced tax rates, tax revenues increased and the economy grew. Yes unfortunately because of the mess we are in, social programs will have to be cut. But, I don’t feel sorry or people who did not prepare for the future. I did and I feel comfortble regardless what happens to the economy.
>>> Papa Bear I believe you mare making an erroneus assumption. Increasing the tax rate does not equate with increased tax revenues. In fact most of the
>>> time the opposite occurs. Witness what happened when G Bush reduced tax rates, tax revenues increased and the economy grew
I’m sorry, but this is an extremely erroneous statement. The Bush tax cuts produced not just huge, but unprecedented budget deficit. The treasury debt is quickly approaching $10 TRILLION. It was under $6 T when he took office:
http://www.brillig.com/debt_clock/faq.html
Bush burned over $4 TRILLION and I still wonder where they all went?
Andy, you are correct. And I suspect, that the numerous promises that our governments, (Federal, State and local) have made over many, many decades will require them to raise taxes on the wealthy and cut spending. And then we have the problem of defining who is wealthy in this country because of the special interests and resulting class warfare which is conducted to intentionally stir up the sheep. That’s another discussion. But we may be forced to raise taxes and drastically cut spending.
And yes I too am amazed at how much money our numerous and overlapping governments have consumed over the past several decades. It started long before Bush, but has definitely accelerated at a rapid pace over the past seven (7) years. In my feeble opinion we have been spending the people’s money at a blistering pace since the last depression which ushered in large social programs. Then came WWII and our spending really never reverted to the mean after those two events.
The data on this is staggering. Yet, no one has really ever addressed this spending spree because it has become the norm since the 1930’s. But we have a huge adjustment that will come to pass and it has been building for nearly 80 years.
We went from depression stimulus and the resulting social spending to WWII to the Korean War to the Vietnam War to the Cold War and to the War on Terror, not to mention numerous, numerous little “wars” in between.
No nation has ever spent the kind of money we have spent on both guns and butter (butter represents social and consumer oriented programs) and survived for very long.
Our involvement in WWII was absolutely necessary, but the other wars were questionable relative to our true national security.
Now we face a far greater threat to our national security than any real foe since WWII.
And this threat is from within.
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[…] In the previous article we’ve established the existence of the extra-long debt cycle, which consists of the accumulation and unwinding phases. The next step is to evaluate the trends in monetary aggregates and interest rates. […]
[…] previous two posts on Kondratiev wave discussed the debt cycle and monetary base as the basis of the K-wave cycle. The goal of those article is too show that […]
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