UNSUSTAINABLE EQUILIBRIUM

The Damage of Sustained Excess Credit

Published 02-19-15

Excess Credit Has Lead to a 70% Consumption Economy with:

1. Unsustainable Excess Consumption and
2. Excess Global Supply RUN RATES

When you run a business you quickly learn that everything is about run rates and the sustainablility of those run rates. Any deterioration in the rate and actions are quickly taken by business leaders.

An Economy is no different except there is no responsible CEO.

A SUSTAINABLE EQUILIBRIUM

• Sound Money
  • Money is a Store of Value Without Distortions (like Inflation),
• Capital Comes from Savings
  • Consumer Savings - Money in excess of expenses & obligations,
  • Corporate Savings - Profits and Free Cashflow
  • No Debt Financing Burdens
• Demand matches Productive Supply

A UNSUSTAINABLE EQUILIBRIUM

• UN-Sound Money
  • Money is NO LONGER a Store of Value by being DEBASED,
• Capital Comes from Credit Creation
  • Credit Credit and Debt is bringing future demand forward
  • A Consumption driven economy is a 'Buy Now, Pay Later" Equilibrium
  • Consumer - Cheap Money Elevates Consumption without correpsonding increases in cashflow to match,
  • Corporate Production - Increases with cheap money to match increased demand,
  • Debt burden grows from both consumers and producers,
  • If 'unchecked' it leads to economies Consuming more than they produce,

EXCESS SUPPLY

• Supply EVENTUALLY Overpowers Demand at elevated consumption levels leading to price competition,

DEMAND GROWTH SLOWS

• Money borrowed (principle) comes due which slows along with real disposable income,

EXCESS CREDIT CREATION

• Governments are forced to create larger levels of credit to sustain consumption by bringing even more demand forward,
• The required credit creation goes up parabolically as forward demand is brought forward from further out years,
• Excess credit leads to cheaper money, excess leverage, mispricing of risk, lack of price discovery,malinvestment , moral hazard and unintended consequences.

WE DEFINED THIS IN OUR 2014 THESIS

An excellent post from Danielle Park on  February 17, 2021 talks to some of these points:

One of the greatest costs of the credit bubble that has enveloped the world the past 15 years is that it has allowed the price of most assets and services to skyrocket. In a sustainable equilibrium, available capital to fund investment comes from savings. But when as now, the banking system is flooded with credit on credit from a recklessly levered financial sector, for a time it makes capital plentiful and therefore less valuable.  Since less valuable, capital is rewarded with lower and lower yields.

Using borrowed money, more people have the ability to buy, and hence the price of most services and assets rises with the demand. Until finally we reach the end point of borrowing capacity, the end of debt service ability (ie., no matter how low rates are, repayment ability is ultimately finite because it is tethered to one’s available cash flow collected through sales or wages). At the end point, credit slows and the inevitable payback period exacts its pound of flesh:  years of reduced consumption courtesy of servicing costs, defaults, write-downs, bankruptcies and of course, mean reverting prices for assets and services. All of a sudden, reality reveals that few people actually have liquid savings, and hence few can afford to be buyers. And if at all, only at much lower prices.

A present example of these forces at work, is in post-secondary education. Education costs have skyrocketed because students have been able to access seemingly endless credit and so schools have been able to dramatically jack up costs and still find customers. But the end point of this ‘virtuous cycle’ seems to upon us. Students are increasingly already in debt by the time they reach college (car loans and credit cards) and then even after graduating, many are not able to earn enough to payback their loans and start a household–for years–as the debt weight of past consumption stifles new.

Student loans continue to pile up, now totaling $1.16 trillion in outstanding balances, one of the main reasons researchers have cited for the low levels home ownership among young adults. Here is a direct video link.

But it’s not just students or Greeks who are now suffering the paralyzing effects of impossible debt levels. It’s worldwide:

Despite widespread talk of “deleveraging” after a global credit bubble burst in 2008, the world continues to pile on more debt. According to a new study by McKinsey, the world ended last year some $57 trillion deeper in debt than it was in 2007.

The total tab—owed by governments, companies and households—is now more than twice the value of the world’s total economic output.

The biggest chunk of new borrowing since 2007—some $25 trillion—has come from governments going deeper into hock. Of the nearly 50 countries included in the analysis, only five—Argentina, Egypt, Israel, Romania and Saudi Arabia—have paid down some of their debt.

Here is the McKinsey Study Parks refers to above : REPORT

READ OUR 2014- THESIS

THESIS 2014: The Globalization Trap

THESIS 2013: Statism

THESIS 2012: Financial Repression

THESIS 2011: Beggar-Thy Neighbor

THESIS 2010: Extend & Pretend

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Gordon T Long    
Publisher & Editor
general@GordonTLong.com     

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