Those of you who are regular readers know that one of the basic principles of Barataria is that over the long haul there are very few surprises. Great empires come and go, economies hum along and then break, and new technologies add sparkle to our lives – but people are still people. When we take a strong half-step back, far enough for some perspective but not so far back we can’t keep our hands dirty, just about anything starts to make sense.
Today’s piece is a small summary of one small part of a breathtaking interview with Dr. Lacy Hunt of Hoisington Investment Management, conducted by Kate Welling and published by John Mauldin. The original article is a must read, but it takes hours to read, digest, and re-read. But there is one part that demands more discussion – and has a killer graph.
Below is the total debt of the US since 1870 as a share of Gross Domestic Product (GDP), compiled by Dr. Hunt.
Hunt argues that in order to understand where we are in the great cycles of the economy, you have to go back very far in the past. This analysis is based on the “Debt Supercycle” theory that credit bubbles are what cause Depressions – and that there have been roughly five in US history. You can see the Panic of 1873 as a small blip on the far end, with the Great Depression of 1929 as the big spike to the middle. The mountain of debt, 382% of GDP, is where we are today.
This long view clearly shows the cycles of debt. Total debt creeps up as investments are made in a strong economy. When things have been humming along for a while there’s no reason to believe they won’t keep on keepin’ on. Businesses borrow more, states build infrastructure, consumers use their credit cards, and banks don’t really worry about the risk because hardly anyone defaults. Then, when it reaches a certain level, the economy falls back to a point where it simply can’t service that debt any longer.
The Depressions are clearly marked as spikes of debt taken on to keep the good times rollin’ when, in fact, it was all about to stop.
There are many features worth commenting on, but several stand out. Federal (and State) debt is less significant than the overall debt taken on by the economy. We also have a much more serious problem with debt than ever before.
Note that recently there is a definite inflection point about 1980, the year we keep going back to as the start of the recent trouble. That’s when consumer credit takes off as a driving force. Note also the final ascent to the top of the mountain that kicks in about 2000, when today’s Managed Depression began. That is when total debt as a share of GDP roughly equaled the 1929 Great Depression peak.
The policies that got us here assumed the official “Recession” of 2001 was a typical Postwar event. Low interest rates and a large Federal deficit were expected to “prime the pump” and get us all moving again. While the worst effects of a depression were managed well, the main effect was to prolong the pain and make it harder for our political system to focus on the real issue that got us to this point – the large cycles of debt through our history.
This is the main “Fisherian” argument that long economic cycles can be described as “Debt Supercycles”. Our political spectrum, or what we argue over, is usually defined by very different economic beliefs. The left tends to look to “demand management”put forth by Keynes, stating that depressions come from a lack of demand. The right usually argues for “supply side” expansions of investment capital to get through downturns, as argued by Friedman. The Bush administration did a lot of both getting us through the first phase of the Managed Depression.
How will this all end? There is little doubt that there will be default. This is why economists like Hyman Minsky argued that banks have to be kept small – so that no one is ever “Too Big to Fail” and default can occur naturally before a big credit bubble developed. It’s a bit late for that, but it will have to come.
The long view shows not only the Debt Supercycles, but our place in history. It is not unique, but it is unusual. We have some idea what will happen next because it has happened before – but it is not pretty. Then again, once we get out of this phase of the cycle there will be good times ahead – and the sooner we learn to deal with this crushing debt the sooner they will come.
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Simply brilliant. The debt problem is so obvious and yet no one in the MSM is willing to talk about it in the right context. This lays it all out plain and simple. Thank you.
Thanks! The Mainstream Media doesn’t really have the talent in place to understand this kind of thing, much less spend the amount of time it takes to lay it out in a form that people can digest. It is a complex subject. Without Hunt I would have never seen this, either, so time spent reading people like Mauldin (who is, sadly, far off the beaten path) is essential.
I would like to have work in this area (hint!) but I have yet to find anyone who will pay me to interpret complex subjects in a form that can be read by many people. But it is what I enjoy and think I do best.
This is simply breathtaking. I had no idea the problem was this bad. We talk about the government debt all the time but total debt is nearly 4 times as much? No wonder we are paralyzed.
I have to thank Dr. Hunt for putting this together over such a long period of time. It does show how everything fits in historically – which makes the point much more strongly than it would otherwise. The rise of debt around 1980 does explain what happened around that time.
It would be interesting to see how this compares with concentration of wealth on the same time line.
Have to rib you for ending so optimistic however – how will we get through this to good times? Seems nearly impossible.
It is amazing, isn’t it? History explains much of what is going on. Taking a straight line between our past and today and projecting it out into the future is not a perfect predictor – but it is all we have. This explains the dynamics we are dealing with very well.
1980 is indeed a major inflection in many ways. It’s not all Reagan – there is the rise of consumer credit, globalism, and many other forces that converge at that time. I do think that Reagan did some things well and some things poorly in the economy – but there was an attitude change that sunk in which generally got us to where we are today (in deep doo-doo economics, to paraphrase George HW Bush!).
Optimistic? I try. 🙂 One thing about cycle analysis is that there are good times and bad. To everything there is a season, and a time for every purpose under Heaven! 🙂
if the 1% can keep everyone in debt they win – thats what the consumer economy is all about. it all came about with reagan that was no accident. now they want budget cuts w/ tax breaks for the 1% only, what a crock!
I don’t think it was deliberate, but yes, the effect is one of slavery to debt. It makes “recovery” very difficult, if not impossible.
If you are trying to convince us that everything that is happening has happened before, I am already sold on it. Let the kids chase the shiny objects, they have more energy. Some day they will realize they saw it all before.
Good blog but it is frightening.
Ha! I have been on a bit of a tear lately. But it’s true.
As for the kids chasing the shiny and new, well, a lot of adults do it, too. Though I wonder about them a bit more. 🙂
Was no one paying attention to this when we were running up all this debt?
No one was really paying attention that had any influence or ability to get the word out in the mass media, no. This is news to me, too. As you know I’ve been looking for articles on debt cycles for a while so it’s taken me time to find this. I had to look.
One thing to remember is that U.S. asset prices help drive up the level of private sector debt. Obviously we are out of control. I think Americans might save more by investing abroad, but we are never quite sure what is really the nature of other political economies, except maybe Canada and the U.K. Another is that in the private sector during the 1990s the U.S. was building something called the Internet. The world never really appreciates what we do for them.
Also a lot of US debt can be attributed to the Cold War. Western Europe became demilitarized after nearly committing suicide during the world wars.
Yes, the asset price bubble and the credit bubble are very much one in the same. It all really started in the 1990s and moved on to spec housing. But it was all closely tied together.
Our military spending is crippling us, and there has to be a way to cut back without leaving the whole planet rudderless. But we spend such a large share of GDP on military (4.8% compared to the world average 2.6%) that we are at a distinct disadvantage:
http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures
I think it was about the same during the Cold War, but something tells me it’s been creeping up lately.
US defense spending in the 1950s and 1960s was a larger bite out of the US budget compared to now. It’s interesting the chart above doesn’t show an increase in federal debt during the Bush II years. Interestingly US defense spending used to be the way private sector R&D was stimulated. DARPA, etc. I have good friend whose computer science Ph.D. was fully funded by the US army. He’s been working for Intel since 1995. Most of military spending is on salaries, benefits and pensions. It is true that weapons systems cost a caboodle but most of the spending is for white collar people to do design and project management.
However, I would support some ratcheting down of military spending. We could substitute industrial policy or subsides to private industry instead of it going to the miliatary. We would at least be more competitve with China’s state capitalism. China cheats a lot on their approach to industry. They are like one big company.
China and Russia could theoretically could be partners in war and peace issues but they periodically delight in taking the wrong position on foreign policy issues. Like Syria and Iran.
Just stumbled upon your site – love it! Within the last year I discovered: http://www.zerohedge.com/
http://www.chrismartenson.com/
http://www.psychopathiceconomics.com/DavosEconomicForum/
and I think I’ve come to conclude that the issues I our presidential candidates talk about are pretty irrelevant compared to what we need to address. I’m both curious and scared to see what the future holds for possible student loan, derivatives, and treasuries bubbles. Only time will tell.
Good list, thanks! I like sharing links in the comments, especially to articles / blog entries that are useful.
We are in a prolonged “bubble” economy, and unwinding all the garbage we’ve integrated is going to take forever. A whole lot of regulation is probably needed just to move things forward, IMHO. At least one Hell of a lot more disclosure is necessary, if nothing else.
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