Guest post by Azizonomics.
These figures are staggering; the advanced nations typically have between three and ten times as much total debt as they have economic activity. In the United Kingdom — the worst example — if one year’s economic activity was devoted entirely to paying down debt (impossible — people need to eat and drink and pay rent, and of course the United Kingdom continues to add debt) it would take ten years for the debt to be wiped clean.
But the real question is why? Why are both debtors and creditors willing to build a status quo of massive unprecedented debt?
From the side of the creditors, I think the answer is the misconception that debt is wealth. Debt can be used as collateral, or can be securitised and traded on exchanges (which itself can become a form of shadow intermediation, allowing for a form banking outside the accepted regulatory norms). To keep the value of debt high, and thus keep the debt illusion rolling along (treasury yields keep falling) central banks have been willing to swap out bad debt for good money. But debt is not wealth; it is just a promise, and in today’s world carries huge counter-party risk. Until you convert your debt-based promissory assets into real-world tangible assets they are not wealth.
With economic & political problems spreading rapidly around the world and – importantly –an accompanying negative price trend, the mood in the speculative markets has darkened rather suddenly (and – for us at least – rather amusingly). Just two short months ago, the S&P 500 had enjoyed a 37% gain over 10 months, and – with the consensus’ seeming tendency to extrapolate the recent past into the future - sentiment towards stocks, commodities, non-government debt & ‘risk’ currencies had become fiercely bullish. By that time, the contempt bestowed upon the steadfast bears was onerous; in short, being bearish was well and truly out-of-style.So, as ever, the market proceeded in the least appetising direction so that the greatest pain could be imparted upon the greatest number of speculators. After about a month’s worth of technical divergences, the major US equity indices and commodities topped out on May 2ndand have subsequently proceeded lower ever since (i.e. with lower short-term lows & lower short-term highs).