The Debt Super Cycle: Part I

This will be one of 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, its origins, development, the ultimate end game, and how investors may both protect themselves and profit from it. You can find Eric at

 The financial crisis that continues to undermine the foundations of the world’s economies since 2008 has predictably resulted in bitter societal divides as to both its causes and solutions.

Whether it supporters of Occupy Wall Street or the Tea Party movement, many of the assertions as to the root causes of the crises limit mistakenly their focus almost entirely on cyclical developments over the last ten or twenty years.

To properly understand the underlying secular rather than the merely topical causes of our current dilemma, one must understand the Debt Super Cycle theory.

A. What is the Debt Super Cycle?

Originally developed by Bank Credit Analyst, an institutional research firm founded in 1949 and first popularized by author John Maudlin in his recent book, Endgame: The End of the Debt Supercycle and How It Changes Everything, the theory essentially postulates that the development of Keynesian economics and monetarist policy in response to the Great Depression, albeit well intentioned, had lead to first, unsustainable levels of first private, and now public debt. The symptoms of excessive debt are exhibiting themselves in the form of continued low economic growth and excessive volatility.

Unless structural changes are made, market forces will potentially eventually overcome the efforts of policy markers and cleanse balance sheets in a cathartic and potentially cataclysmic fashion along the lines of what the peripheral countries of Greece, Ireland, and Iceland are currently experiencing.

B. Roots
Although the financial excesses that developed, particularly over the last ten years, are certainly exacerbating factors, the roots of our current problems actually run back to the responses of policy makers to the Great Depression.

Prior to the Great Depression, in order to deal with periodic economic downturns policy makers embraced laissez faire economics. Laissez faire economics is an economic doctrine that opposes government regulation beyond minimal guidelines necessary for free-market systems to operate.
The theory, espoused by economists, such as Friedrick August Hayek, founder of the Austrian school was that the free markets needed to find their own nature equilibrium and that excesses must be periodically purged from the system.

A classic example of the Austrian school of economics is encapsulated in the advice Treasury Secretary Andrew Mellon provided to President Herbert Hoover during the Great Depression: “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder and live a more moral life. Values will be re-adjusted, and enterprising people will pick up from less competent people.” 

This policy of allowing markets to fluctuate freely without government interference resulted in a series of booms and busts, as well as widespread bankruptcies of debtors and banks.

Although there is a certain seductive economic logic, the severe downturns such as the Great Depression can result in massive human misery, social instability, political extremism, and in some cases even lead to wars.

The roots of the current crises has it roots in the unintended consequences of well intentioned policy makers attempting to mitigate the human misery and suffering resulting from the Great Depression.

In the next article in this series, Eric will discuss how policy makers’ attempts to smooth out economic fluctuations have ironically significantly contributed to our current predicament.

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