The Crash Course - Chris Martenson [49]
What then should we think of this mountain of debt, or credit, which has been consistently expanding faster than GDP (or income)? Given that this matches the very definition of a bubble, it might be prudent to dedicate some thought to what will happen if—or when—that bubble bursts. When viewed this way, housing becomes a sideshow, instead of being the epicenter of the bubble. It is an eddy in a much larger ocean of debt that has been 40 years in the making.
Figure 11.5 Credit Market Debt Outstanding
With exponential ‘fit’ yielding an “R-squared” of 0.99.
Source: Federal Reserve.
Exponential Debt
There are two ways to go about understanding things: One is to build your knowledge from the ground up, piece by piece, and the other is to stand back, look at the big picture, and then work backward to deepen your understanding of the system. If we look at growth in the credit markets over the past several decades, we might note that not only has credit been growing, but it has been growing in a nearly perfect exponential fashion.1
What does it mean that debt has been accumulating in a nearly perfect exponential fashion? What will happen when it someday can’t continue to increase exponentially? What will change in terms of how the economy works and how stocks and bonds function as vehicles for storing and accumulating wealth?
We can begin to answer these questions by simply noting that debt has been growing faster than national income, and that such a system is unsustainable. Like any bubble, it will someday pop.
If we accept the premise that this credit expansion does, in fact, fit the definition of a bubble, then we can make the following predictions:
Credit growth will peak, stall, and then decline, a process that I conclude began in 2008.
The bubble will take somewhat less time to deflate than it took to inflate. If we date this to the start of the housing bubble in 1998, then we might expect it to bottom out somewhere around 2015, give or take. If instead we date the bubble to the early 1980s, then we might expect it to truly bottom out somewhere around 2025, +/− 4 years.
Depending on where we date the start of the bubble (1998 or 1980 or even 1970), somewhere between $20 trillion and $30 trillion of debt in excess of income (GDP) has been piled up and will need to be eliminated in one fashion or another (i.e., by inflation or deflation). This will simply return debt back to the place from which it started, just the same as any other bubble.
Those predictions imply an immense amount of painful adjustment. If they come to pass, then the United States will be a vastly diminished nation in the twenty-teens and twenty-twenties as compared to 2008, with far fewer economic opportunities and less capacity to muscle through any other challenges that might arise.
By itself, exponentially growing credit isn’t necessarily a problem, but if it is growing faster than the economy, then it does become a problem.
We have a problem.
Withering Heights
How was it possible to keep such a bubble going for so long? One essential factor was that interest rates constantly fell even as the total amount of credit market debt rose.
Here’s why this matters. Imagine that you had a credit card with a most unusual feature, whereby the rate of interest declined as the balance grew. The more you charged, the lower the interest rate became, which had the effect of stabilizing or even reducing the minimum payment due. Clearly such an arrangement would allow more borrowing than if the interest rates had not fallen (let alone risen). It is highly doubtful that the credit bubble would have developed without U.S. interest rates steadily falling over the 30 years between 1980 and 2010