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Back in the 1930's, Irving Fisher introduced a concept called the 'debt supercycle.' Simply put, it posits that when there is a buildup of too much debt within an economy, there reaches a point where there simply is no other available solution but to let it rewind.
We are at that point in our economy, as are most other major economies around the world, claims John Maudlin, author of the popular Thoughts from the Frontline newsletter and the recent bestselling book Endgame: The End of the Debt Supercycle and How It Changes Everything.
For the past several decades, excessive and increasing amounts of credit in the system have allowed us to live above our means as both individuals and nations. We've been able to have our cake and eat it, too. Now that the supercycle has ended and the inevitable de-leveraging cycle is staring us in the face, we will be forced to set priorities in a way that has been foreign to our society for over a generation.
On The Debt Supercycle
You can’t look to monetary policy for help (which will try to stimulate businesses to get more debt) because debt is the problem. If you are drunk and you need to cure yourself; another fifth of the whiskey is not the answer. So when debt becomes the problem, when it gets to be too much, more debt is not the issue. You've just simply got to work it off. There’s no easy way out of it. And, it takes years to work through it. It takes a long time, generally -- 60 to 70 years, in the US's case -- for these debt cycles to build up. It’s when you can no longer adequately service your debt and the market loses confidence in your ability to service the debt at a price that it finds adequate.
On the Slow-to-No-Growth Future
The problem is, there are only really two ways that you can deal with the debt. You can grow your way out of it, which is what you can do in normal business cycles. For most times in most places, we can grow our way out of debt problems, which is what the central bank is coming in and trying to do. The problem is, when you’re at the end of the debt supercycle, when you’re running up against your ability to borrow money, that liquidity no longer works.
As Fisher pointed out, the time to solve the debt bubble is before it becomes a bubble. He was wanting separation of commercial banks and lending. He wanted a much less fractional-reserve-based banking because he wanted the debt to keep from building up past levels that we saw in the 1920’s. He saw that as something that was so bad that it created the Depression.
So you can either repudiate the debt, you can default on it, you can monetize it, you can try to grow your way out of it; but you’re going have to deal with it. And there’s no easy way, when you’re at the end of the debt supercycle, when debt has become too much. Printing money doesn’t work.
Now, upon reflection and thinking about it, we’ve gone too far. And, this is where they are in Europe. Japan is getting very, very close to that moment. I keep saying, I think Japan is a bug in search of a windshield. I think they’re going to collapse. Quite frankly, the credit crisis that Japan is going to have is going to be far more serious than Greece. Japan makes a difference. They’re a big country. Greece is an ant hill.
We in the US can solve our problems, but not without paying a large price. We’re going to be locking in a slow-growth economy. It’s going to be very frustrating for politicians, because they are going to want to come in and sprinkle pixie dust on the economy and make something happen. And the reality is, we can’t. And, that’s a frustrating position. It’s five or six years of slow-growth economy.
On Confidence (or Lack Thereof) in Our Leadership
There's a great line that people do not accept change until they see the necessity, and they only see the necessity in moments of crisis.
Now, sadly, simultaneously we’re seeing that much of the developed world is going to have this crisis all at the same time, you know within three to four years of each other. That’s not good for world growth. It’s not good for globalization. We’re at a place where we have to make hard decisions.
And when you get politicians with a crisis, it’s hard to say what they’re going to do. When you read the stories of how decisions are made by politicians in the middle of a crisis, it’s not comforting. I mean, they’re picking up the phone to each other and saying, "What do you think we should do?" They are working it out as they go along. There’s no master plan here. There’s nobody with a playbook.
Click the play button below to listen to Chris' interview with John Mauldin (runtime 38m:34s):
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John Mauldin is a financial commentator and a New York Times best-selling author. Each week, over 1 million readers turn to Mauldin for his views on Wall Street, global markets, and economic history.
Mauldin’s weekly e-newsletter, Thoughts from the Frontline, was one of the first publications to provide investors with free, unbiased information and guidance. Today it claims to be the most widely distributed investment newsletter in the world.
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Comments
Thank you for your thoughts Chris and John.
I have not read John Maudlin's book therefore I am open to correction.
It seems to me that inadequate attention is paid to the physical world and the constraints that these impose apon us.
How about Peak Phosphorus which is irreplaceable as the energy carrier of life in ATP.? What is the cycle of that? Are we implying that this too is just a supply and demand problem? If the price is right the phosphorus will appear? Well, the price might be too high. People might just not have enough of this "money" stuff to competitivly bid for the remaining stocks of oil so that the miners can make a profit digging it out of the ground in far away Africa. Too many real problems are glossed over.
I am not "to the Left" of anything. The fact that our civilization is collapsing does not fill my heart with boundless joy. I love root canal work just like James Howard Kunstler. But I do not think that we are going to be in a position to make choices.
I get from conversation that this is all very normal and that we will see it play out according to script, just like it did before. We have just had a wild party with free energy. People have been breeding like there is no tomorrow.
Gail Tyverberg (Gail the Actuary) has this interesting graph for you.
"Common sense is the collection of prejudices acquired by age eighteen." Einstein. ""Absolute certainty is a privilege of uneducated minds-and fanatics. It is, for scientific folk, an unattainable ideal." Cassius J. Keyser ."
Ah yes, the Club of Rome charts....... Sobering stuff.
I get Mauldin's newsletters, and he is certaily interesting and mainly on the ball, but you are right Arthur, he has no idea of Peak Everything..... or at least he never ever mentions it in his newsletters. Has anyone read the book? Does he mention Resource Limitations in it?
Mike.
Peace on Terra http://damnthematrix.wordpress.com/ http://groups.yahoo.com/group/roeoz/
Morning guys. I have listened to the podcast three times now, and of course he gets the debt part. But I think he is completely naive about politics. There is NO way the Dems. and Repubs. could work on this. We have seen it too many times. It will take a total collapse of the dollar to fix it. Why do you think the National Defense Authorization Act repealed the 1878 the Posse Comitatus Act and suspended Habious Corpus? The government is preparing for the wost. Things are speeding up so quickly we may not have the time.
Ernest
who has the 'grade a' butter?
write a book? who reads books anymore. let's just yell and scream.
You make a good point Kugs. The butter I had in New Zealand was about the best I have had. If anyone wants to listen to Jim Rickards new take on things here is the link.
www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/1/28_Jim_Rickards_files/Jim%20Rickards%201%3A28%3A2012.mp3
Interesting piece but as with virtually 100% of economists I've heard from, whether Austrian or Keynesian or anything in between, there seems to be this attitude that growth is good, and that's what we should be striving for. This debt problem is going to kill growth for a while until we solve it through whatever means we end up doing, then we can revert to growth and a return to some degree of prosperity..
This attitude has got to change. Growth IS the problem! Economists are the problem! They need a fundamental shift in their attitude to how economies function, because growth will not return! His disbelief in the reality Peak Oil is an all too typical symptom of this denial, and misunderstanding of how the real physical world interacts with the financial world which doles out that natural wealth amongst 7 billion of us.
Actually, money does grow on trees. To be more accurate, wealth grows on plants. http://markbc.wordpress.com/thermodynami...
This Mr. Mauldin is in total denial and completely oblivious to the planet beneath his feat.
Arthur seems to have summed this podcast up best.
Good point Mark.
He does not understand that we may be on our last bout of growth. There may be a few more on the plateau, but even if we start balancing the budget in two years, which is a big leap, there is no way we can even sustain the interest. By then I believe we could be the victums of the Bond Vigilantes or something else make us collapse like a collapse of Europe.. I just think there are too many things at play as you guys have pointed out that this can be anything but disorderly financially and socially.
Ernest
Just think if we attack Iran, as I believe we will, there goes any recovery with $200 oil. He has a simple formula about bringing down the debt with no understanding of the other complexities and unknowns.
I agree ewilkerson, there is no way the monetary system could survive. One could argue that one of the main purposes of all the CB manipulation has been to prop up the current system well beyond when it should have died, decades ago. So now, if it was forced to face fundamentals, it would all vaporize in a heartbeat. There is no way the budget could be balanced now, not a chance. The deflation would be so severe it would quickly revert to hyperinflation and the end. Hyperinflation is the only end result now, barring a new gold standard but that would entail a violent currency devaluation of 10 X or more.
I remember debating with Peter Schiff about his recent book about economic growth in which he states that fish are "produced" by fishing nets. All's we have to do is get the government red tape out of the way to let the fishermen "produce" more fish with their nets. I had to explain many times over that fish (shrimp) are actually produced by the ocean (even George Costanza from Seinfeld knows this). Then the escape argument was presented that when we run out of fish in the ocean we'll just "culture" them instead, not understanding that in order to "culture" fish we have to feed them first, and this food ultimately has to come from the environment somewhere, whether the fish are in tanks on the land, pens in the sea, or swimming around free in the ocean. Economists just don't get it.
Actually, money does grow on trees. To be more accurate, wealth grows on plants. http://markbc.wordpress.com/thermodynami...
Chris,John, Matt Simmons, Hirsch, Janszen, Skrobowski, The Oil Drum, Zero Hedge, etc... were the first of just the beginning of people, and places who I started off reading when I committed myself to all things OIl and Economies (committing 4000 hours a year for about 4 years now, admittedly still way behind the curve). Chris and John are my can't misses each and every week. In saying this, John Mauldin has expressed today that he feels we are 5 or 6 years away from energy independence, and far be it for me to disagree but I wholeheartedly do. What he is saying to me is that 70% of all energy (Oil) used by cars, and the internal combustion engine, with a depletion rate world wide of 5 to 6% during a time when our President cannot even muster the will or guts to lay down an oil pipeline from Canada to the Gulf Coast, when Congress cannot pass a bill to use natural gas, the next highest BTU fuel that is portable and cheap, that can move heavy equipment, I would have to question whether he is smoking data that is wacky if not dangerous to your health. Other than that discrepancy it was a great interview. I just happen to think and believe that OIL makes the world go round, and we are in trouble because we are already 20 years behind the curve from a sustainable energy (new) source. Respectfully given...BOB
Robert Essian