August 04, 2008

Re-inflating the Debt Balloon



Once again, America owes far more than it produces. With the debt balloon re-inflated to new extremes, how much greater will the next depression need to be to fulfill this business supercycle?

This chart is not an all-encompassing measure of U.S. debt. It ignores the big government debt that ballooned in World War II and grew in Vietnam and now. Many of the leveraged items of derivatives – not described as debt today – would qualify under a broader definition of debt, and don’t forget the $6 trillion of international debt built up through the trade deficit, none of which existed at the previous peak.  

This chart illustrates how a long-lasting depression was required to deflate the private debt built up in the 1920s and early 1930s, and that we should fear the consequences of the return to more sustainable levels of debt across our financial system.

 

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