Positioning For The Coming Rout
Thursday, May 12, 2011
Executive Summary
- What private and public debt levels are telling us
- Housing’s prospects for worsening the situation
- Why endless compound growth is impossible
- The crushing pain of a deflationary downdraft
- Predictions and conclusions for the future
Part I – Why Growth Is Dead
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II – Positioning For The Coming Rout
Looking Deeper
Okay, that’s the big picture. It is why I am convinced that the next twenty years are going to be completely unlike the last twenty years. For starters, we’re not going to be able to double credit this next decade, and that alone is a big shift with huge implications. But we’re also going to be facing higher energy costs, which will further impair the smooth operation of the economic machine, because energy is an input cost to literally everything else.
But to have an idea of what is going to happen next (say, over the next year) so that we can make better personal and investment decisions, it’s important to dig a little deeper into the data. Here we want to lift the covers on total credit market debt and housing because these are the key elements of this story.
Total credit market debt is first broken into two main buckets: financial and non-financial sector debt. Financial sector debt belongs to commercial banks, savings institutions, credit unions, life insurance companies, brokers, dealers, and government-sponsored agencies. Non-financial sector debt belongs to households, businesses, and governments.
At this level we already see where some of the trouble lurks.
Debt in the financial sector, after rising exponentially for decades, stumbled hugely and has not yet recovered (all data is current through year-end 2010; the 1Q 2011 report is not yet out).
Non-financial sector debt, on the other hand, continues to rise relatively smoothly. How can this be? It turns out that the story is mainly one of households pulling back and the government filling the gap, although corporate borrowing has helped, too (as indicated in the opening Bloomberg piece):
As with the financial sector, household debt soundly broke a multi-decade exponential increase, looking at accumulation which has not yet recovered. Here is a major story of retrenchment that is largely driven by a lack of mortgage borrowing, with minor wiggles going in both directions and involving auto loans, student loans, and credit card borrowing. But the summary is one of a decline in borrowing.
by eye 
