I’ve been arguing for some time now that the current economic mess we find ourselves in resulted from too much debt, a problem that cannot be solved long-term by creating more debt.
This week, in his “Thoughts from the Frontline” newsletter, John Mauldin had two guest writers ‘pinch hit’ for him. Both to some degree made this same case. Tony and Rob Boeckh (a father and son team) are both economists and had some very interesting comments to make regarding the current economy, how we got here, and where we’re going from here.
Tony was chairman, chief executive, and editor-in-chief of Montreal-based BCA Research, publisher of the highly regarded Bank Credit Analyst up until he retired in 2002. Tony still enjoys writing from time to time and is now joined by his son, Rob, in the ‘family business’.
Here are some of their thoughts.
The Boeckh’s argue the culprit of the credit crash has been the US debt super cycle which, according to the Boeckh’s, has operated for decades in a remarkably benign manner. The effects of current account and fiscal deficits which are inflationary in nature, combined with a steady increase in private debt, which is also inflationary, have been slowed by the addition of emerging markets like India and China. The industrial production of these countries has, according to the Broeckh’s, allowed this credit inflation to occur virtually without any consequences – until recently.The explosion of private sector credit has been significant since 1982, after holding steady as compared to US Gross Domestic Product from 1964 to 1982. See the charts below (Source: “Thoughts from the Frontline”):
As you can see from the charts, private debt compared to GDP has been rising and is currently peaking, a trend I believe will have to be reversed through contracting credit or increasing GDP. Since the US economy is heavily dependent on consumer spending, the latter seems unlikely given the recent significant decline of consumer spending. The reality is GDP will likely continue to contract as will consumer credit.
The current level of debt as compared to GDP is 180% of where it was in the early 1980’s. This expansion of consumer credit and debt has been occurring for over 25 years and, as I’ve stated in previous posts, is the primary cause of the current recession in my opinion. Unlike prior recessions, this one is credit driven. The last credit driven recession began in 1929. Unlike 1929 though, this credit expansion has occurred over 25+ years rather than the 5 or 6 years prior to the Great Depression.
It’s definitely different this time.
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