The Brave New World of Debt Deleveraging

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.

Greg Canavan
for Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

Leave a Reply

2 Comments on "The Brave New World of Debt Deleveraging"

Notify of
Sort by:   newest | oldest | most voted

Instead of trying to make more money than the jones’, I think the focus is now about losing less money than the jones’.

It has been this way since subprime. People trained to maximise profits instead of minimising losses and being efficient will become relics.

Never mind – its all relative anyway. If wveryone loses 50% overnight, we are all exactly where we were. Of course, he person who only lost 25% will be doing allright.


Will the debt deleveraging lead to deflation in the price of gold though? For your readers I would imagine that is the most important question.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to