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The Debt Super Cycle: Part II

This is the second in a series of guest blog posts from Eric Greschner. Eric is a portfolio manager, author, financial educator, and speaker. This post will discuss the Debt Super Cycle development.  You can find Eric at

Article II: Close to an inflection point?

The development of these monetarist and Keynesian techniques by policy makers often lead to the Federal Reserve lowering interest rates below market rates during periods of economic weakness. The goal was to encourage consumers and businesses to borrow money that could be used for either consumption or for businesses to grow again(business expansion?).

As a result of the artificially lower interest rates, consumers exhibited a strong tendency to borrow more money than they would have otherwise, often for the purposes of consumption.

Businesses also borrowed money. Lower interest rates were successful in strengthening businesses, primarily via(by) making marginal businesses or projects, which otherwise would have gone bankrupt, viable as a result of artificially lower funding rates.

Successive periods of artificially lower interest rates over the decades have lead consumers to accumulate significant periods(levels, amounts?) of debt. For example, in the US, private sector debt alone has risen from 50% of GDP in 1950 to 160% today.

It is interesting to consider that U.S. private household debt may have reached maximum levels. The delayed and subdued response to extraordinary levels of the traditional remedies, high debt and low interest rates, has many economists worried that we may be “pushing on a string.” This is the case even with interest rates currently hovering near generational lows.  There is a very palpable sense of unease and a sense that this time “feels” different.

Many commentators are concerned that there will be a point in the future when the policies of lowering interest rates and additional government spending quit working because the debt burden has become too high and taxes can no longer be raised. Once the cycle comes to an end, assuming no drastic changes or unforeseen variables intervene, the result may be a painful balance sheet cleansing in the U.S. that is similar to the situation that Greece may soon be forced to confront.

However, we are not at the end of the Debt Super Cycle yet. Businesses, instead of levering up, are exhibiting borrowing behavior that mirrors households’ diminishing consumption.

For example, NFIB business survey shows less than 30% are borrowing, the lowest percentage in the twenty-five year history of the data set. Moreover, businesses in the US remain highly profitable and tax rates are, on a historical basis, fairly low. The fact that businesses are, in aggregate, in a fairly strong position is a positive.

Thus, only the public sector is left to help the economy stabilize and to prevent what may be an ultimately inevitable and painful balance sheet cleansing.  The US Government has responded rather “enthusiastically” to this problem with the greatest ever-Keynesian fiscal reflation in US history. According to the Congressional Budget Office (CBO), the US will create more federal debt than during the entire previous history of the nation. Debt levels will reach 69% of GDP in 2011 and, assuming no changes, there are grim long-term projections showing levels of up to 350% of GDP by 2050.

Moreover, many of the monies were disproportionately spent on relatively unproductive programs rather than on ones, such as infrastructure, that tends to generate both profitable and long lasting results.

Once consumers have reached their limit, businesses are unwilling to borrow money and the government has lost the ability to borrow at reasonable rates, the end of the Debt Super Cycle may finally be near. In time, as we are seeing with Greece, the debt levels reached by the U.S. could become so excessive that a “tipping point” may be reached.

In the next article of the series, Eric will provide an assessment of the current situation and discuss a checklist of signposts to watch for indicating that we are close to the end of the Debt Super Cycle.

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Comments ( 1 )
  • Siervo says:

    This article doesn’t describe what the future of economics will be post the/a “debt super-cycle.” It describes the water, while dissipating into a theory of balance sheet cleansing.

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