Debt Has Exploded Instead of Deleveraging in This Economic Winter Season

Today I want to point out the biggest difference I can see between this Economic Winter Season and the one 80 years ago…

That is: Central banks!

Thanks to their interference, our massive debt bubble didn’t deleverage as it should have!

Total debt peaked at $58.4 trillion, or four times GDP, in the first quarter of 2009 and just barely deleveraged in the financial and consumer sectors during the Great Recession.

But massive money printing and cowardly suspension of mark-to-market policies for loans let the banks off the hook.

U.S Total Debt Outstanding Nearly $77 Trillion! 14-03-19

Source: Federal Reserve Flow of Funds Report

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The Economic Winter Season’s primary purpose is to flush out unproductive debt and deleverage financial asset bubbles that are weighing down the economy and stoking income inequality.

It forces businesses to cut excessive costs and get more efficient.

All of this makes the economy much more productive and ignites a strong recovery, like the one we saw from 1933 to 1937…and for decades to follow.

Well…no detox means no strong recovery!

Japan is the poster child for a comatose economy three decades after their great crash.

Our poor GDP numbers over the last 11 years is evidence closer to home.

Still, our debt continues to grow. Government debt leads the way, with corporate debt close on its heels.

GOvernment and corporate Debt Exploed Post 2008 (trillions) 14-03-19

Source: Federal Reserve Flow of Funds Report

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Federal government debt has exploded from $7.8 trillion to $17.9 trillion. That’s a 129% increase.

The government debt has been doubling about every two administrations or every eight years. Counting the trust funds like Social Security (sitting around) $5.9 trillion, we’re up to $23.8 trillion.

Overall government debt, including state and local, is now at $26.8 trillion; up 77%.

Foreign debt is up the most: 152%, to $4 trillion…but it is the smallest sector.

The other big sector is corporate debt. It has grown from $10.6 trillion to $15.2 trillion. That’s an increase of 44%. And the majority of that debt is BBB rated or lower…just one step above junk.

The whole world went on a corporate debt spree. What with low interest rates it was a no-brainer.

In the US, much of that cheap money went to buying back stock to leverage earnings; a move that will look stupid when companies most need cash to survive the greatest shake-out of our lifetimes during the next several years.

Consumer debt is only marginally higher than it was at the 2009 peak, with mortgage debt down 2%. But consumer credit — cards and car loans — are up 53%. And a subprime auto credit crisis is rearing its ugly head, with defaults a major — and growing – concern.

Financial debt is down 9%…but this was the most toxic and out-of-whack sector in the 2008 meltdown. The fact that it’s still this high 11 years later is actually terrifying.

Let’s talk about Australia as well for a second.

While Australia’s debt-to-GDP ratio is relatively healthy compared to other advanced economies, this is largely due to the fact that Aussies are able to dig things out of the ground and ship it to China.

An ugly end to the commodity rally could hurt Australia a lot.

What’s more, there are three particularly worrying aspects to Australian debt and I’ll show you the data that has me most worried.

  1. Government debt-to-GDP ratio has risen sharply as successive governments have gone on a spending binge (and remember, the GDP numbers are effectively juiced because of immigration, we are now in a per-capita recession).

Australian Gov. Debt to GDP Ratio 14-03-19


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  1. Australia’s household debt-to-GDP ratio is at high levels. Aussies can’t help themselves and keep pulling out the proverbial credit card at every turn. A lot of this is tied up in real estate as well!

Australian Gov. Debt to GDP Ratio 14-03-19

Source: BIS

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  1. Australia has a quickly growing, high level of overall net foreign debt (public and private):

Australias Net Foreign Debt in $ Millions 14-03-19

Source: ABS

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The implications are clear: We’ll have to finally see debt deleverage from higher levels in the next crisis, which I believe is due between 2020 and 2023, based on my most important cycles.

It won’t be pretty. In fact, I foresee it to look like 1930 to 1933. Only this time, rather than having the crash at the beginning of the Economic Winter Season, like we saw at the start of the Great Depression, we’ll have the crisis at the end.

I believe 2008 to 2023 will go down in history as the Economic Winter Season central banks couldn’t stop.


Harry Dent
For The Rum Rebellion

Harry Dent is an economic realist. His market predictions and strategies, as well as his general views of the economic and political state of the world, are based solely on his own knowledge.

And, as a Harvard University MBA graduate and Fortune 100 consultant, it’s not as though he’s lacking in this resource. But if experience isn’t enough to convince you, perhaps his accuracy is. In 2017, Harry Dent was making calls about the Australian property market that are coming into play as we speak.
And yet, the media portrayed him as ‘crazy’.

At The Rum Rebellion, this sort of biased, inaccurate media that isn’t accepted. Dent and his fellow editors aim to give you the information you should know, rather than what the media wants you to know. Dent believes in facts and facts alone when forming an opinion, and such is The Rum Rebellion mission.

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