We’ve Reached the Zero Point of Debt Creation

Harry_headshot-150x150Forty-five years and counting.

We’ve been on a debt spree since the early 1970s when we went off the gold standard, covering every possible angle. Trade deficits, government deficits, unfunded entitlements, private debt – you name it! Our total debt has grown 2.5-times GDP since 1971.

How could economists not see this as a problem? How is this the least bit sustainable?

It isn’t. We’re hurdling toward a massive financial crisis, and all we have to show for it are financial asset bubbles destined to burst. And when they do, they’ll wipe out the artificial wealth they’ve created for many decades… in just a few years, as they did from late 1929 into late 1932!

The chart below shows the common-sense truth.

As with any drug – and debt is a financially enhancing drug – it takes more and more to create less and less of an effect. Eventually, you reach the “zero point” where there is no effect and the drug kills you from its very strain and toxicity.

We’re rapidly approaching that zero point, after every dollar of debt has produced less and less GDP steadily since 1966:

Getting Less and Less in Return

Note that the anomaly in the chart after 2008 was due to the impact of unprecedented QE. Ever since that disruption, the trends have pointed back down – making a beeline toward that zero point again.

Back in 2002, Swiss investor and market prognosticator Marc Faber published a similar chart. His findings showed the zero point for debt creation would occur around 2015. With updated data, we now see that the zero point will hit around the beginning of 2017.

In other words – right about NOW!

This is why central banks around the world have failed to spurn inflation despite endless money-printing. The more money they print, the less effect it has.

Just ask Japan. They’ve been doing this since 1997 with zero GDP growth and zero inflation, on average. Lately it seems like any time they get out of a recession they’re thrown right back into one!

But there is another ramification to all this money-printing…

When central banks create money out of thin air – through the fractional reserve banking system and through QE – it has to go somewhere.

When the economy is so indebted that consumers and companies can’t take on any new debts, the money can’t go there. So, it winds up going into financial speculation, especially as investment firms can lever up at little cost due to zero or negative interest rates. Stock prices bubble instead of inflation as the economy keeps sucking wind!

Sure enough, this next chart shows that debt and equity prices go hand-in-hand:

Stocks Have Bubbled Along with Debt Since 1995

In the 20 years between 1995 and 2015, debt grew at a rate of 4.2-times GDP, and stock prices followed at 4.3-times. Total U.S. sector debt now stands at 348% of GDP, with stocks at 214%.

All told, these two combined are 588% of GDP, far more than any time in history.

Is this a bubble burst waiting to happen or what?

Count on 2017 marking the beginning of the greatest crash we’ve seen since 1929-1932. And I have a new book coming out to commemorate this occasion.

This new book, The Sale of a Lifetime, will hit shelves on September 15. I couldn’t have picked a better time to release it. It’s coming out at the height of the greatest bubble in modern history… and I wrote it to examine financial bubbles more than any book that came before it.

In this book, I’ll show why we shouldn’t expect to see a bottom in stocks until at least late 2019 or possibly early 2020, when all four of my key cycles continue to point down together – a rare event. The markets are likely to be rocky into late 2022 when three of these four cycles finally turn back up together again. Around that time, the next global boom will arise from predictable demographic trends and continued urbanization in emerging countries. And surprisingly – China will not be one of them.

We’re simply running out of time.

Be in cash or get trashed. If you’re not sitting on the sidelines, make sure you’re using an investment system like the ones we publish at Dent Research. Adam created his Cycle 9 Alert, for one, to be profitable in both bull and bear markets, and its track record speaks for itself. Adam has the details for you right here.

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Harry

Follow me on Twitter @harrydentjr

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Categories: Debt

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.