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The Crush of Debt

The only beneficiaries of debt are those who sell it...

FOLLOWING World War Two, Europe rose from its ashes while America went from strength to strength. The entire developed, non-communist world — including Japan — enjoyed its "30 glorious years" of growth, says Bill Bonner, founder of the Daily Reckoning.

Then, something went wrong. The zombies gained power...and gradually shifted more and more resources to unproductive sectors. At the same time, the payoff from increased use of fossil fuels (the real cause of above-trend growth since the advent of the Industrial Revolution) reached the point of declining marginal utility. Energy prices rose and it was more and more difficult to find applications that would pay off.

Together, these phenomena caused real growth rates to decline. Neither in France nor in America have real wages shown significant improvement since. That is, for the last 40 years, the earnings of the typical working stiff have barely improved.

How to react to this challenge?

In the US, households ran down their balance sheets. They made up for the lack of income growth with debt growth. This allowed them to continue improving their standards of living until the 21st century.

In Europe, it was governments who ran down their balance sheets. They made up for the lack of income growth with increased public services, financed by debt. This allowed people to improve their standards of living even though they weren't earning more money.

In terms of total debt, there is not much difference between the countries of Europe and the US. All have total debt-to-GDP ratios in the 250%-300% range. Some a bit more. Some a bit less. In Europe and Japan, the debt is concentrated in the public sector. In America, it is mostly in the private sector...with the public sector gaining ground fast.

Of course, the people who sell debt — namely, Wall Street, the City in London, and the rest of the financial industry — did wonderfully well. In America, for example, the percentage of total corporate profits coming from the financial industry rose 300% during the last three decades.

That is why people think the banks were the cause of the problem. Mostly, they were just in the right time at the right place to benefit from a trend that they didn't cause and couldn't possibly control.

Then, in 2007, the reckoning began. All of a sudden, the private sector in the US buckled under the weight of so much debt. People couldn't pay their mortgages...and then the geniuses at the finance companies realized that they were broke. Their sliced and diced mortgage debt was not nearly as solid as they had thought.

Governments rushed to bail out the banks, who just happened to be large campaign contributors. The feds swamped themselves in the process. Iceland and Ireland were the first to sink. Then, all the periphery of Europe was shipping water.

Back in America, whole towns were soon underwater...such as Las Vegas and Orlando. In Europe, whole countries were submerged, such as Greece.

And what did the authorities do? What was their solution?

Alas, they are all one-trick ponies. And the only trick they know — adding more debt — doesn't work. But they keep at it...lowering interest rates, offering more credit on EZ terms to everyone. Students are encouraged to shackle themselves to a lifetime of ball-and-chain education debt. Homeowners, who should swim away from their underwater houses, are encouraged to refinance. Everyone is encouraged to spend money he doesn't have on products he doesn't need so that the economy will go where it shouldn't go — further into debt!

Debt has become an impediment to growth, not a facilitator. Like energy, it reached the point of declining marginal utility years ago. The feds can still add debt — at least in America — but it won't make the economy grow. Instead, it crushes it.

And when investors finally figure this out they will sell their stocks...and the markets will be free to complete their rendezvous with the bottom.

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Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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