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Why The Private Sector Borrowing Again Is Not Good

  • Written by Syndicated Publisher No Comments Comments
    December 19, 2013
    Since at least the 1980s, US policy has been to convince us to borrow as much as possible on pretty much anything we could think of. This worked brilliantly until 2008, when homeowners, consumers and businesses hit a wall and private sector defaults began to exceed new loans. Another Great Depression was imminent.

    But instead of allowing this natural cleansing process to run its course, governments around the world stepped into the breach themselves, borrowing tens of trillions of dollars to replace evaporating private sector debt. The idea, to the extent that there was one, was to buy time for traumatized consumers and businesses to relax a bit and start borrowing again.

    This appears to be happening. The latest Fed Z.1 report shows overall US debt growing again, with the private sector leading the way.

     

    US debt growth percent change 2013 v1

     

    It’s not surprising that near-zero interest rates and trillions of dollars of newly-created currency would get people borrowing again. What is surprising is that anyone thinks this is a good thing. In 2013 total US debt, equity prices, household net worth, large-bank assets and derivatives books, and a long list of other debt-related measures pierced the records they set in 2007. In other words we’ve recreated the conditions that prevailed just before the world nearly fell apart.

    Will the result be different this time? It’s hard to see how, especially since developed-world governments now have roughly twice as much debt as they did back then, so their ability to ride to the rescue will be limited.

    As this is written the Fed is announcing that it will scale back its debt monetization to only $75 billion a month, or $900 billion a year. Its balance sheet, which just hit $4 trillion, will grow by nearly 25% in 2014, to nearly $5 trillion, which is a measure of how much new currency it is creating and pumping into the banking system.

    The next stage of the plan is to get the banks to start lending this money, which would, through the magic of fractional reserves, produce loans in some large multiple of the original amount. So we might be on the verge of trading a nasty-but-comprehensible Kondratieff Winter for something a lot wilder.

    Images: Flickr (licence attribution)

    About The Author

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    DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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