The 40-year expansion of credit – the debt supercycle – is over. Its passing means you must re-think how economics and markets ‘work’. Of course economics and the market will still work in the same way they always have. They simply reflect billions of individual decisions made on a daily basis.
But easy credit has for many years influenced those decisions. Now, the global economy’s appetite for more debt, which is already well over and above its ability to produce real assets, is sated. That means there is more debt in the world than there are real assets to back that debt. That in itself is a scary thought.
That’s why the old cycle of recession, followed by lower interest rates, an increase in new debt and recovery, is over. Debt indigestion means we can no longer rely on more debt to pull us out of a slump.
That hasn’t stopped the politicians and central banks from trying though. On a global basis, the only new debt creation now is government debt. It is entirely unproductive and eats into what’s left of the wealth created by the private sector. That’s hardly conducive to good old ‘wealth creation’.
You may look forward to 2012 as a new year and all that sort of stuff. But we’re not just entering a new year. We’re in a new world too. It will be a world defined by just how we go about deleveraging from a 40-year credit bubble. It should be interesting viewing.
for Markets and Money