When you watch the mainstream media, business news, or any national politicians, they inevitably use certain keywords over and over in an attempt to try to ‘frame’ the economy to their desired outcome. For years we heard the word ‘recovery’ used by the Fed, President Obama, and CNBC to justify the central bank’s instituting of zero interest rates and quantitative easing, while at the same time Washington used this narrative to continue massive deficits to feed their insatiable spending.
But along with the term recovery, another over-used financial term is that of growth. And since our entire economy is now based on debt and the interventions of central bank money infusions, an interesting dichotomy is occurring that finally shows exactly where this growth is taking us.
Right back to the Great Depression.
Long before McKinsey released its 2015 report which showed that, contrary to repeated, erroneous analysis and propaganda media reports, not only has the world not deleveraged at all but has added some $60 trillion in debt since the crisis (a number which mostly thanks to China is about $5 trillion higher over the past year) we warned that the primary reason why the world is unable to grow is because of an unprecedented mountain of debt that keeps growing. In fact, since the growth – and monetization – of debt by central banks is the critical precondition to keeping asset prices artificially inflated, it was also the case that global debt would keep rising indefinitely, at least until such time as the world finally hits its credit limit, a critical topic discussed extensively by Citigroup’s Matt King in October of 2015.
Which leads to the question: based on historical analysis just where is the debt capacity for the world’s biggest creditor, the United States, and what happens when said capacity is hit.
The following chart from Citi shows the last century of US non-financial leverage in context. As of this moment, consolidated US non-fin debt/GDP is about 275%, or roughly where it was US when the great depression stuck.
For those curious about the “tipping point” threshold levels, keep an eye on 300% – that’s when the system collapsed last time leading to a devastated economy.
The second question: what happened next to unleash the greatest deleveraging in the history of the US? Why World War II of course. – Zerohedge
Since 2008 when the Fed began its massive programs of monetary stimulus, the debt to gdp ratio has risen by over 40% from a ratio below 1:1 eight years ago (76) to its continuing climb over 100% of gdp here in 2016 (104.17). And most of this is because of debt since the actual GDP between 2008 and 2015 rose a total of only 12.5% (14.54 trillion to 16.47 trillion).
Fed Chairmen like Ben Bernanke and Janet Yellen swear that if the central bank had embarked on a massive debt and spending crusade during the Great Depression, America would have gotten out of the malaise much earlier than it did 24 years later. But since each of these academics were able to put their theories to the test following the 2008 Credit Crisis, the truth of the matter is that debt does not create real recovery or economic growth, but instead does what it did in the U.S. during the 1920’s when it was done on a much smaller scale… it leads to a Depression, not recovery from one.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com,Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.