The word cycle implies a beginning, middle and an end. My interest in debt cycles along with my intuition about the current global debt crisis has l ed me to believe that I may not be off target about the future. I have been doing a lot of research on the subject (that I can make available on request) on debt supercycles and historical outcomes and although times are different, the situation remains the same.
The amount of debt that has built up globally post WWII is astronomical. Primarily in western nations, it started out with the individual or household using cheap and easy credit to buy consumer goods and services. The cycle then moved to the banks and other financial institutions, again fueled by low interest rates, liquidity provided by central banks and unregulated risk. Finally as households and banks deleverage or purge unaffordable debt loads, sovereign nations take on all this debt and levels spiral out of control. Debt is not actually retired or paid off, but transferred with national debt being the final destination. Historically, when nations take on more debt than can be repaid there are only 3 choices: 1. inflate your way out of debt, 2. default 3. devalue. The U.S. is not alone in this debt supercycle. We have seen forced austerity on bankrupt nations like Greece and Ireland by the EU already and there are many other European nations hanging on the edge. Countries holding debt in other currencies are especially vulnerable. The trouble with a global economy is that one nation does not go down alone, but rather creates an avalanche of failures in other nations. This was evident back in the 1930s as one nation after another pushed down exchange rates hoping to export themselves out of the depression, but this only aggravated the problem. I have looked at charts dating back to 1800 that show that sovereign defaults tend to cluster. They also tend to happen suddenly after quiet periods and like an avalanche, have no predictive pattern.
I think that I have made clear my belief that the USA has not only unsustainanable debt, but at current levels, it is impossible for us to ever repay. That leaves us with solutions that are between ugly and uglier and those who think otherwise may need to do their own research and come to a reasonable conclusion. Now that the line of monetizing debt has already been crossed, the only thing that allows us to continue to make a mockery out of monetary policy is global confidence. We are lucky that our debt is in dollars and are equally lucky that as the world's reserve currency, we can print money at will. Luck is a commodity that is not unlimited though and eventually, if we do not pursue a strategy of risk management and fiscal responsibility our luck will run out.
All the squabbling going on right now about who's programs get cut and what benefits we cannot afford to live without will all seem like petty bickering if we as individuals, localities, states and a nation do not get our fiscal house in order. With $14 trillion in debt currently owed and promised future liabilities of $80-120 trillion more as the baby boomers retire, the time for a "moment of clarity" is now. The latest bubble to burst from the creation of securitization and shadow banking in 2008 is the last one any nation can afford and nothing is changing. Interest rates still are low, liquidity still is high and politicians for the most part are unwilling to make any meaningful decisions to show our bondholders that we have any intention of mopping up the mess from the last bubble or regulating the risk of the next. In the global endgame, we will either default, devalue or suffer massive inflation. Pick your favorite fiscal disaster because the largest financial avalanche is ahead of us, not behind.
On a personal note, I was disappointed to see how little American's have donated to help Japan after the earthquake. Japan, a loyal ally deserves our help right now and the Red Cross has indicated that donations are less than one third that of Haiti. I went online with a credit card to the Red Cross, but there are many ways to donate and several valid charitable sites. Make sure you donate to a legitimate charity, but please donate if you can.
• Carol Perry has been a Northern Nevada resident since 1983. You can reach her at carol_perry@worldnet.att.net.