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business newsThe Debt Supercycle and the Path to Profligacy
How did the US get here? We simply kept borrowing ever greater amounts of money at an increasingly rapid pace.
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The Debt Supercycle
When I mention The End Game, you'll immediately want to know what’s ending. What I think is ending for a significant number of countries in the "developed" world is the Debt Supercycle. The concept of the Debt Supercycle was originally developed by the Bank Credit Analyst. It was Hamilton Bolton, the BCA founder, who used the word “supercycle,” and he was referring generally to a lot of things, including money velocity, bank liquidity, and interest rates. Tony Boeckh changed the concept to the simpler "Debt Supercycle" back in the early 1970s, as he believed the problem was spiraling private-sector debt. The current editor of the BCA Martin Barnes has greatly expanded on the concept.
Essentially, the Debt Supercycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where bond markets rebel and the debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions. As Bank Credit Analyst wrote back in 2007:
The history of the US is characterized by a long-run increase in indebtedness, punctuated by occasional financial crises and subsequent policy reflation. The subprime blow-up is the latest installment in this ongoing Debt Supercycle story. During each crisis, there are always fears that conventional reflation will no longer work, implying the economy and markets face a catastrophic debt unwinding. Such fears have always proved unfounded, and the current episode is no exception.I was talking with Martin Barnes a few months ago, and the topic turned to the ending of the Debt Supercycle. Martin said we’re nowhere near the end, as the government is stepping in where private debtors are cutting back. We’ve just shifted the focus of where the debt is coming from. And he’s right, in that the Debt Supercycle in the US, Great Britain, Japan, and other developed countries (yes, even Greece!) is still very much in play as governments explode their balance sheets. Total debt continues to grow.
A combination of Fed rate cuts, fiscal easing (aimed at relieving subprime distress), and a lower dollar will eventually trigger another upleg in the Debt Supercycle, and a new round of leverage and financial excesses. The objects of speculation are likely to be global, particularly emerging markets and resource related assets. The Supercycle will end if foreign investors ever turn their back on US assets, triggering capital flight out of the dollar and robbing US authorities of any room for maneuver. This will not happen any time soon.
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