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Debt Supercycle

The challenge came in a moment of weakness born of a position of power.  I was up giving a quick talk on the essence of storytelling to a group of students learning about marketing techniques, particularly focused on blog writing.  It’s a hot topic lately, but my approach is, as always, that there is really nothing new about it at all.  Just as the thought-out schtick was winding down, my friend and very capable professor Sara slipped the story sidewise.

“You say that storytelling can be used for anything.  You write about economics.  How does storytelling work in economics?”

The short answer is that there are many amazing stories to tell, but how can it be boiled down to a simple explanation?  The short version escaped me at that moment, but eventually it came back – it’s essentially the same as storytelling itself.  Things go along wonderfully until we somehow forget the lessons our grandparents learned the hard way and then have to call on another round of “experts” to tell us what should be obvious.  And that brings us to the concept of a “Debt Supercycle” – how Depressions have come and gone since ancient times because we lost the big story about the economy.

This is a topic that begs for graphs and charts, but there aren’t any yet.  It’s a theory that needs a lot more expounding before it can make it into the popular storyline.  But a quick introduction can help.  John Mauldin has been talking up this concept heavily for the last few years, so I’ll let him introduce it:

A Debt Supercycle is not some new thing. Rogoff and Reinhart write about 266 such events in the past few centuries in their epic work This Time Is Different. It seems to be part of the human condition. We increase the amount of debt in a system until there is too much debt. Each and every time, the people and leaders in a country convince themselves that “this time is different” and the debt is not a problem to worry about. And that is true until some moment in time when the markets lose confidence in the ability of governments or businesses to service the debt.

Note that the issue at hand is not governments, but the entire economy – businesses large and small included.  It’s not a policy decision but an attitude.  Once there is a general belief that money can solve all of our problems there is more of it and everyone becomes happy for a while.  Then, all Hell breaks loose.

The phrase was first coined by investment analyst Tony Boeckh in the 1970s to describe what he saw as a spiraling problem.  The timing is important because it highlights the famous statement by Vice President Dick Cheney that “Reagan proved that deficits don’t matter.”  Actually, if you take the very long view of things, we’ve proved pretty conclusively that they do matter – it just takes a while.

Irving Fisher wrote about this during the last Depression as well, so the concept is far from new.  It is simply convenient to ignore it as long as everything seems to be working well.

This comes back to haunt us when we look at the terrible decline of manufacturing in the US, the real source of our joblessness right now.  More debt means more money in the system, and for a generation more stuff is produced.  Yet right about the time Boeckh was making his observations it became clear that people were making a lot more money shoveling money around than actually making stuff.  It kept overheating for a full generation until the foundation of the economy was hollowed out, around the year 2001 or so, launching us into a Depression.  Managing the worst effects of this kept the party running for some time – until we get where we are now.  What really happened?

The short answer is that it took a full generation or two to sink in as more and more money took over.  And here we are wondering what to do about it.

The way out is not going to be easy, but what matters here is attitude.  I’d like to know what you think about this concept because a good story, especially on a topic like this, has to ring out as true from the very start.

Someday I’ll have the Big Story down so tightly that I can pull it out on a moment’s notice.  That’s the story we have to start telling about the economy – the epic tale that includes generations.  And it’s by telling that story that we change the attitudes that got us into this mess in the first place.

Despite the lack of graphs and details here, there are many included in the links provided to related topics.  If you’d like to read more, please  follow the links.

18 thoughts on “Debt Supercycle

  1. If you are asking for help writing the story that needs to be told I think you have it as well as anyone does. I do not know what to add but maybe you need to start more with the attitudes that “this time it is different” that you talk about. That was what really dominated the 1990’s right before the collapse. Other than that you did mention once how this goes back to the Bible and that sounds right so maybe you can start with that?
    I agree though that this has to get out there in a way people can understand and if that takes the form of a story then it needs to be written.

    • Yes, that’s what I mean. I’m looking for ideas and chewing this up a bit to try to think about how the Really Big Picture can get into people’s heads for once. There are implications that are vast, but it’s probably best to not be distracted by them. I’m working on it. May need to write a book of some kind.

  2. That word supercycle keeps reminding me of a cleaning appliance. Good post, so I have 2 questions. If Perot is credited with talking about deficits and manufacturing, does it follow that his warning on industry was more important? On a more concrete level (pun intended) I think about the size of automobiles. The 70’s saw the introduction of Japan to the US auto market. In the 80’s and 90’s they pushed quality (partly as a result of some backlash in imports) and yet the US still seemed to push for BIGGER. I could be entirely wrong but not until the minivan and probably the Ford Focus world car did the US auto manufacturs nationalized, rationalized their models.

    • Dan, Perot had a lot to say on a number of topics. I’m thinking about what he said on NAFTA, for example, which I think had to happen all the same but did appear to go down much more like he said than I’d like.

      Your example of the automobile is important – some level of competition internationally is absolutely critical – but when does it go over the line and threaten our own ability to survive? We’ve been through a GM bankruptcy now that looks somewhat inevitable given how bad things were back in the 80s – but it took 25 years to happen.

  3. This is onto something but it does have to be fleshed out. I don’t know if it should be made into some kind of story but there is a story here if that is the best way to tell it. It is like we forget the old lessons and keep saying that everything is different. It never really is.

    • That’s where I start – it’s never different this time, no matter how much people insist that it is. I don’t know how to get that story into the guts of the young people who will have to deal with this and make their own way.

  4. it is obvious that something has been wrong for a long time, since at least ronald ray-guns. but people dont want to listen to what is really going on because they are fed happy talk. we dont need any more stories we need truth.

    • Reagan was a big part of what went wrong, yes, but it started before him. Stories are essential moving the truth from our heads to our guts – I think most people can understand intellectually what this is about, but being able to react to what it means is another problem entirely.

  5. I suspect, ‘though it may just be me, that most people don’t have a grasp of economics and certainly don’t understand the language of economics, so any story must be easy to digest & understand. I’m not trying to be flip or funny when I say to begin with: “Once upon a time…
    My genealogy research into my own family got me thinking about the economic times my paternal grandfather, great-grandfather and great-great-grandfather lived through and how the vagaries of economy drove them from New York State to LaCrosse, Wisconsin, to Stillwater, & Saint Paul, Minnesota and finally to East Texas in search of opportunity (read “employment”). The only reason I’m here and not Texas is my dad and his siblings remained in St. Paul with Grandma, when Grandpa went to Texas.

    • Thanks, that’s just what I need. But you know what I mean about how cyclical these things are better than most – especially since we both have houses that date from the Depression of 1857 (what, like 3 Depressions ago, depending on how you count). I don’t think that many people really “get” this – and I hope the explanation as to why we have these ancient “supercycles” makes sense. So how do we package it up in a way that doesn’t sound crazy (like some History Channel Ancient Alien show or something)?
      As for not being a Texan, I’m happy for that. 🙂 But this illustrates my point about the heritage of North Americans – when the going gets tough, the tough get up and leave. Seriously, we have a long history of moving on to find opportunity. I don’t understand why would expect anything different from our North American brothers and sisters who speak Spanish, French, Navajo, or whatever.

  6. Just ask someone about their credit score and you will get some idea how big this problem is. Some people can go on and on about just what they have done to borrow here and pay back there just to boost their credit score. They will go on and on about it for hours if you let them talking about how much money they supposed save. I work with a lot of people like this and they just don’t understand when I tell them the best way to save money is to not borrow at all but to save up for things that you want. This attitude is what got our government and so many companies deep into debt and you are right that it is absolutely everywhere. If you can take this on by all means do it but you have to start at square one. Good luck.

    • Excellent point! This is totally embedded in our credit culture at this point. People will go to great lengths just to make sure they have access to a lot of debt – which, I would say, is access to a lot of problems (or even slavery). And that is how we run businesses and the nation and just about everything. The adults who had to content with the Great Depression of 1929 would be appalled that we learned so little from them.

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