The Crash Course - Chris Martenson [39]
Because the conventional GDP measure neglects to factor out the use of credit/debt when measuring “growth,” it isn’t telling us everything we need to know. This oversight goes a long way toward explaining why the United States, along with every other debt-saturated country, is now in for a very painful adjustment process: Past growth was partially (and unsustainably) bolstered by debt, and future growth will be sapped by it.
Good Debt and Bad Debt
It’s time to distinguish between two major types of debt. Not all debt is bad or unproductive. Debt that can best be described as “investment debt” provides the means to pay itself back. An example would be a college loan securing the opportunity to earn a higher wage in the future. Another would be a loan to expand the seating at a successful restaurant. In the parlance of bankers, these are examples of “self-liquidating debt.” Because these kinds of loans will boost future revenues by enhancing productivity or increasing output, they self-generate the cash flows that will be used to pay them off in the future.
The other type of loan, however, is purely consumptive in nature, such as debt incurred for a fancier car, a vacation, new granite countertops, or perhaps a war that results in a large quantity of destroyed equipment. These loans don’t come with the means to pay themselves back. They are called “non–self-liquidating debts” (a mouthful of a term) because they don’t lead to additional future revenue, productivity, or profits. In our island nation example above, if we postulated that Family B had instead borrowed $50,000 for productive (and not consumptive) purposes, perhaps to build a factory which would then triple its income for the next twenty years, the entire story of which nation is in better financial shape? would shift. So not all debts are potentially harmful; only excess “non–self-liquidating” debt becomes a corrosive burden. Between 2000 and 2010, U.S. total credit market debt grew by more than $26 trillion, an unfortunately large proportion of which was of the non–self-liquidating variety. The implication is clear: Just like the island nation that borrowed and spent $50,000 on purely consumptive purchases, much of this debt load will translate into diminished standards of living in the future as it gets paid back out of a finite pool of income.
The key here is not to just look at the total pile of debt relative to income, but to look at how much of the debt has been spent on non–self-liquidating consumption, as opposed to investments boosting productivity and income.
The Crisis Explained in One Chart
Long before the economic crises of 2008 onward, I knew that such events were coming. While I admit to wallowing around in massive quantities of base data—I’m a scientist at heart, so data is a kind of like catnip for me—I found certainty about the trouble ahead in a single piece of evidence. The chart below, all on its own, led me to conclude that the next 20 years are going to be completely unlike the last 20 years.
The dotted line in Figure 10.2, covering the period from the 1950s to the early 1980s (“Stage One” in the chart), was very nearly flat over those three decades but then adopted an entirely new and steeper trajectory beginning in the early 1980s (“Stage Two”). It is in Stage Two where we can detect the underlying cause of the economic predicament that first revealed itself in 2008. Whether you are talking about an individual, a municipality, a state, or a nation, there must be some reasonable proportionality between one’s debts and one’s income. Stage Two illuminates when, for how long, and to what extent the United States lost its footing.
Figure 10.2 Credit Market Debt to GDP
Compares total credit market debt in the United States to GDP (Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 360