Saturday, August 31, 2013

If You Want To Know Why Things Are Falling Apart, Look at Total Debt

We are in a long-term trend where additional debt undermines the system as the positive returns on that debt turn negative.


Want to know why things are falling apart? Just look at our soaring systemic debt and the diminishing returns on that debt. Our Chartist Friend from Pittsburgh has assembled a comprehensive series of charts on systemic debt (called total credit market debt in FedSpeak) that starkly illustrates the diminishing return on more debt:


Take a look at total credit market debt and gross domestic product (GDP), year-over-year: notice the correlation? Recall that defaults and writedowns of bad debt remove debt from the ledger, so in an era of deleveraging, new debt must exceed the writedowns of uncollectible debt to actually increase total debt.


Here is total credit market debt and velocity of money, year-over-year: the velocity of money is a measure of how fast money changes hands. In a robust economy, for example 1987 - 1999, the velocity of money is high. In recessions, it is low as fiscally prudent people and enterprises hesitate to borrow and spend.


It's easy to confuse trends and cycles. The Keynesian Cargo Cultists believe that we're in a cyclical downturn that can be "cured" with more debt-based spending, i.e. worshiping their false god of aggregate demand. They cannot comprehend that we're not in a business-cycle recession, we are in a long-term trend where additional debt undermines the system as the positive returns on that debt turn negative.

I recommend studying the entire series of charts for more insight into this trend: If Cash Is King Then Credit Is God



Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)

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