Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage while relatively low compared to Europe (13 vs. 25) is still high enough that an 8% drop in asset prices wipes out ALL capital.
The situation is even worse for the US consumer. During the housing boom, consumer leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and bankruptcies, US household debt is equal to nearly 100% of US total GDP.
To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).
Going into this recession, total US credit market debt was at its highest level of all time: over 350% of GDP. In comparison, during Roosevelt’s New Deal during the Great Depression we hit only 300% of total GDP.
This is why what’s happening in the US today is not a cyclical recession, but a h. And it’s why 99% of commentators and pundits are unable to grasp the significance of this: it doesn’t fit in their economic models which only go back to the post_WWII era.
Here’s duration of unemployment. Official recessions are marked with gray columns. While the chart only goes back to 1967 I want to note that we are in fact at an all-time high with your average unemployed person needing more than 20 weeks to find work (or simply falling off the statistics).
Here’s the labor participation rate with recessions again market by gray columns:
Another way to look at this chart is to say that since the Tech Crash, a smaller and smaller percentage of the US population has been working. Today, the same percentage of the US population are working as in 1980.
Here’s industrial production. I want to point out that during EVERY recovery since 1919 industrial production has quickly topped its former peak. Not this time. Despite spending TRILLIONS in stimulus industrial production is well below the pre-Crisis highs.
Again, what’s happening in the US is NOT a garden-variety cyclical recession. It is a STRUCTURAL SECULAR DEPRESSION. And the reason is that we are currently witnessing the collapse of the greatest debt bubble of all time.
Indeed, 2008 was the first round of this. We’re now heading into the second round in which entire countries will go bust. Remember, stocks were the last to “get it” in 2008. They’re the last to “get it” today too. And when they finally DO “get it,” we’re going to see some REAL fireworks.
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Good Investing!
Graham Summers
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