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How Deep is the Global Economic Rabbit Hole?

Economics / Global Debt Crisis Aug 01, 2011 - 06:20 AM GMT

By: Greg_Tomlinson


Best Financial Markets Analysis ArticleQuite simply, the world’s debt hole is deeper than any reasonable person can comprehend. It is difficult to define, and it is not terribly easy to write about - really it’s more of a concept than something that you can actually sink your teeth into. You won’t see an abundance of stories or editorials on this topic; in fact the financial media avoids the global debt situation like the plague for good reason. Sure, they talk about chunks of it, but almost never in total. However, with your indulgence, it is the purpose of this piece to bring us all a bit closer to not just understanding how dangerous things have become to all of us personally, but more importantly to frame the problem in terms of history and scale.

Super Who?

Many scholars of finance and economics, people infinitely more qualified than me; believe that we are nearing the end of what some call a "Super Debt Cycle." One could go so far as to call it a super debt bubble, as in the final bubble. Consider the sequence: after the junk bond bubble, after the dot com bubble, after the housing market bubble, with the ongoing government spending bubble, the only thing left now is the debt on debt on top of debt bubble! Let’s say for the sake of discussion that a super debt cycle is basically a long period of time in which significant debt-fueled economic growth has taken place with no meaningful and offsetting downward cycle. We acknowledge that modern economies simply cannot grow without large scale borrowing, and that is not a bad thing in itself. However, leveraging and debt can build to a point at which credit begins to tighten, restricting further growth. After all, what is credit if not confidence in the borrower’s ability to repay? So as traditionalist as it may sound, confidence is the only underpinning to a functional financial system. It is the foundation and the rock on which all else is built. Confidence is the key part, but the lender must also have something to lend. Towards the end of this “super debt cycle” we are getting into strange territory. What the lender has been lending for the past many decades is often just a debt itself. Even “real” currency is simply a debt instrument unless it is backed by something tangible; otherwise currency like ours is simply issued by “fiat.” (Hence the term “fiat” currency.) But, if you were to say, “Economies can run along just fine, indefinitely in fact, on fiat currency, you dolt!” I would agree, they can, except for the indefinitely part. Still, as long as confidence exists, things can and do grind along or fly along or whatever. Pull the confidence out of the equation, and start counting sorrows.

Confidence is relative.

What destroys confidence? The list is endless, of course. Here’s the sticky part. Who cares whether it is a two week blackout of a major power grid, combined with a terrorist attack at a mall, or a tsunami melting down three American reactors? The cause does not matter. What does matter is that we have absolutely no control over that eventual and virtually guaranteed calamity. In any economy there are inevitable triggering events which cause instability—the sort of instability that can lead to loan call-ins, rapid liquidation of debt instruments, a run on the banks, crushing inflation and the resulting kind of uncertainty (lack of confidence) that ripples to the farthest reaches at light speed. “These be the dragons” that devastate currencies, markets and economies. This sort of thing has happened before, at slower speed, but happened nonetheless. Macro downturn cycles are not without historical precedent and have one thing in common—they don't end well.

Somebody crash us into the soft bushes, before we go over the cliff just up the road!

It is my contention that we are now at an economic place in which debt is so piled upon debt: the system is so distorted and broken that the markets MUST reset in order for there to be any significant economic growth or opportunity for our children. Think about this: confidence is waning, debt security instruments have reached a point of complexity as to be incomprehensible and ultimately untrustworthy. Central bankers inject “liquidity” into a system already so flooded with debt that it has the net effect of tears on a river. Unfortunately when I say reset, I do indeed mean what the alarmists call “a meltdown.” This natural resetting or "breathing out" should have been allowed to happen in ’08. Instead, the inevitable was delayed, and just might be far worse in time.

Organic Economies

Economies are like living things, and if growth is likened to inhaling, even the tiniest tyke discovers he can’t breathe in or hold his breath forever. Downturns are, of course, likened to exhaling in this analogy. No organism can continually breathe in without exhaling. Economies on their own try to “breathe in and breathe out” in order to stay healthy. Central bankers with questionable authority work hard to keep these economies from exhaling with any force. Therefore those in power actually get paid to kick the “normal cycle can” down the road. These visionless leaders speak of things like “soft landings” in the low part of a cycle, but that is never their actual goal. No, the true goal is eternal expansion, an almost comical modern arrogance which ignores the weight of human history. Although central bankers are on a smaller scale than the global debt situation, their collective blunting or ignoring macroeconomic cycles is something that has helped to exacerbate the issue of the planet’s debt as a whole. Global debt is now a completely new kind of beast and it presents a new kind of danger, given the immediate and interconnected nature all things financial. Yes, that ‘08 collapse would have been bad, but rest assured it remains very much unavoidable. Cycles are not economic theory, they are economic law. Cycles cannot be prevented, only delayed. The longer “our” cycle is delayed, the worse and worse the eventual financial reset will become.

What’s a quadrillion anyhow, and what difference does it make?

After some digging, my personal "number" for global indebtedness is around 1.150 quadrillion! While that total is very arguable and nearly meaningless, the core issue of a "Super Debt Cycle" stubbornly remains. The number I'm using includes the world’s government debt with a few years of unfunded liabilities tossed in, the world’s consumer debt, private debt and finally: many hundreds of trillions in toxic mortgage-backed securities. Whether the debt was created out of thin air or whether it is real makes little difference. Come up with your own global debt number, it’s fun! But seriously, a person could stop in the range of 1Q or 700T or some similar number and conclude that they now know the approximate depth of the rabbit hole. The problem is that the information has no context: so let’s go find some.

What if we all rowed this giant ship really, really hard, like in Waterworld?

So what’s the "income" of the world anyway? Surely this debt can be paid if we have some really great economic years? Glad you asked. The world’s aggregate GDP is paltry 60 trillion, give or take. This means that if ALL the planet’s goods and services were all directed at debt elimination only, it would take over 19 years to settle the books. I think we can all agree that this scenario of repayment will never happen. That 1Q total debt can’t really be absorbed either, any more than a five pound bag of cat litter can suck up a barrel of oil.

Looking over the edge

Ever wonder what the numbers Bush’s advisors showed him looked like? The numbers that caused him to sign off on TARP despite whatever philosophical objection he may or may not have had? Those same numbers that probably caused him to do an underwear check? I think they looked a lot like what you see above. He knew that if the dam ever cracked the slightest bit then the whole thing would come crashing down. So the US plopped down a few tiny billions and later trillions and other governments injected what they could to put a band-aid on a mortal wound—and things continued to stumble on. Enter Obama’s brilliance; Unprecedentedly large budgets, more deficit-backed stimulus and more TARP. (Reminder: TARP is a revolving credit card with a 700B line. It is fully rechargeable/reusable, and it has been used in this manner a number of times, not just once.) All of the stimulus and spending did next to nothing. QE1 and QE2 were grossly ineffective as well. About all the QE's did was to further debase our currency, a practice that has allowed governments to pay off their debt at face value with ever devaluated fiat money.

Those Lying Green Shoots

Yet why have all the kings’ horses and men been unable to restart the economy's heart, even with such dramatic life-saving measures? To me, it is the most compelling piece of evidence of all that we are at the end of the Super Cycle. The economy is acting like a beloved plant you neglected and are now trying to bring back. What you don’t know is that you killed 90% of the roots because you are deceived by a green shoot or two. You wake with the realization that your only real choice is to remove all the dead, repot it and prune it back to only what the remaining roots can support. Or you can be like the world’s governments and economic leaders – flood it with water, fertilizer and sunlight then curse your “stupid” plant for being such an unappreciative slacker.

We love debt… in the right measure

Yes, we need debt. In many ways debt has driven most of the modern world's expansion. In the past one hundred years, the tremendous growth of the global economy as well as our standard of living owe as much appreciation to debt as they do to innovations in efficiency such as economies of scale or the assembly line. Debt used correctly is quite simply a modern economic marvel. Hooray, let’s call the History Channel! But wait…..

The Jews vs. the Hail Mary approach

The Jews of old, even under their strict, legalistic system allowed debt. They (or God) had the wisdom to reset the debt periodically. No, I don’t think they were dumb enough to grant a huge loan two years before the Year of Jubilee (mandated debt forgiveness). In fact, because no-one would give long term loans for the period close to those mandated debt reset times, the effect was to slow down the economy to create the natural cycle that all economies will find on their own, no matter what we do. WOW! So there it is. As smart as we think we are, our current system is more like trying to win the game by throwing only “Hail Mary” passes. In other words, we are simply hoping that it all holds together. I’d challenge anyone to find a football team that employs that offense, yet it is exactly how we run our most important affairs.

Of dung beetles and men

To conclude what I have feebly tried to present here, I believe there really is a complete lack of sophistication in the current global financial system, despite so-called technological advances. Satellites, software, and traders execute transactions flawlessly, sort of like bacteria in a cave. They respond to stimuli but not much more. Investors, market makers, lawyers writing derivatives, and central bankers are more like dung beetles. They work the pile looking for a big meal just like most of us. Governments are the bats above, blind but with a minimal sense of where they are. But on the largest scale, there is no one watching the whole of it. Like that cave, the global debt markets just exist. Those markets and that cave in this tranquil environment just happen to reside right next door to an awakening volcano.

Hobbling in Misery

Sure, our system could possibly hobble along like this for a while, but eventually a triggering event will come along, shattering confidence and bringing it all crashing down. Rest assured that someone has a plan for about that same time to exchange the debt for our blood, sweat and tears. Stay tuned for my next installment where I’ll make an attempt to strip their planned process of wealth extraction down to the wires.

Thanks for reading. I would appreciate your feedback at

By Greg B. Tomlinson

Greg Tomlinson is a veteran Realtor in Colorado Springs, CO specializing in serving builder and developer clients with market consultation and sales services. He is a proud father of two teenagers, David 19, Business Major at The University of Colorado and Elizabeth 16, High School Junior and promising artist. Greg is also a husband of 27 years to his wife, Kendra.

© 2011 Copyright Greg B. Tomlinson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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