The massive indulgence in debt, or a “credit induced boom”, has now begun to reach its inevitable conclusion. The debt driven expansion, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread malinvestments. Not surprisingly, we clearly saw it play out in “real-time” in 2005-2007 in everything from sub-prime mortgages to derivative instruments. Today, we see it again in mortgages, subprime auto loans, student loan debt and debt driven stock buybacks and acquisitions. When credit creation can no longer be sustained the markets will begin to “clear” the excesses. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses.
This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process.
That clearing process is going to be very substantial. With the economy currently requiring roughly $3 of debt to create $1 of real, inflation-adjusted, economic growth, a reversion to a structurally manageable level of debt would involve a nearly $35 Trillion reduction of total credit market debt from current levels...
A $35 Trillion deleveraging process is impossible. Such an event could never happen?
The last time such a reversion occurred the period was known as the “Great Depression”...
This is one of the primary reasons why economic growth (along with lower interest rates) will continue to run at lower levels going into the future. There is ultimately a limit to which indebtedness can supplant actual organic economic growth. The question is whether we have already reached that limit, which brings us to a final question.
“If the economy is doing as well as Central Banks suggest, then why, after 9-years, are the ’emergency measures’ being applied to global economies still in place?”
More importantly, what happens when they are forced to stop.
Of course, this is why Central Banks globally are terrified of such an outcome....