The Crash Course - Chris Martenson [40]
Sources: Federal Reserve & Bureau of Economic Analysis.
But that’s the past; what about the future? In order for the four decades that will come after 2010 to economically resemble the four decades that came before, the slope of line in Stage Two must not change. If it flattens out a bit, or, more ominously, returns to the anemic slope seen in Stage One, then the next four decades will have weaker growth, fewer opportunities, and be marked by less wanton indulgence and more cautious purchasing habits. In short, they will not resemble the prior four decades, at all.
A key question you might ask yourself here would be, How likely is another doubling of debt over the next decade? My current prediction is not very, but that is my own personal assessment. If I were to summarize my view here, I would say that anyone who is counting on, requiring, or otherwise hinging their future sense of prosperity on an uninterrupted continuation of the Stage Two line is making a very low-probability bet. Your assessment may well be different, or perhaps not, but no matter where you fall on the spectrum of possibilities, remember to trust yourself.
Back to the main topic. A simple way to interpret Figure 10.2 is to simply note that when the solid line is rising, it means that debt is growing faster than GDP (i.e., income). This is analogous to a credit card balance that steadily grows larger even as the income of the cardholder remains the same. It doesn’t take a PhD in economics to understand that sooner or later such a trend will come to a screeching halt. Someday payments on the interest will become too difficult and debt accumulation will cease. The strict math limit to that process occurs when 100 percent of income is required to service the interest payments alone, but thankfully things rarely get that far.
When viewed historically and compared to GDP, the current levels of U.S. debt are unprecedented. There are no maps to guide us in these unknown waters. There’s no history, no institutional memory to draw upon, and no experienced leadership prepared to confidently guide us through such a crisis. That’s my major point here: Anybody who is counting on the past extending seamlessly into the future is headed for almost certain disappointment, both because there’s a very low chance of doubling debts yet again and because there are no experienced leaders with their hands on the wheel.
Of course, with more than a single chart, I can make a far better case that the future will be quite different from the past.
The History of Debt
The first part of this story, historically speaking, always begins with the accumulation of debt. Perhaps there are important wars to fund or an exciting new technology in which to invest (e.g., railroads, Internet, and so on) Or perhaps there’s nothing more to show for the debt accumulation than a period of reckless consumption.
The second part of this story involves the psychology of the players who are fully invested in perpetuating the status quo. There are careers to consider, and small matters of legacy here and there, but mostly there’s an overwhelming desire by the leaders of each generation to conform and not rock the boat.
The circumstance of “too much debt” has been revisited dozens of times throughout history, and the same exact, perfectly understandable, imperfectly human response has been applied nearly every time: printing money.
This Time Is Different
In their landmark work titled This Time Is Different, Kenneth Rogoff and Carmen Reinhart2 assembled a comprehensive database spanning 800 years of economic data including international debt and banking crises, inflation, currency crashes, and debasements. The one constant throughout history is that many governments, for myriad reasons, have gotten themselves wedged into a situation best described as “too much debt.” Throughout history, nearly all governments