This week’s piece is probably his best in a long time. It is entitled The Debt Supercycle and deals with how the U.S. and the rest of the world recovers from the burden of all this debt.
It is a timely one for those of us debating whether this ends in a massive deflation or a massive inflation. I welcome it in particular because I am regularly asked: “What can I do to protect myself and my investments?” Those who have inquired in this or a similar fashion must read Mauldin’s article. He does a reasonable job of describing the interactions of policies and “path-dependencies” of a range of policies that make forecasting so difficult. He describes better than I have the difficulties of forecasting.
I have always stated that the way to forecast how this ended was to forecast what politicians would do in the future. That, in my opinion, is what is in their best interests and not necessarily yours. Voters obviously influence how politicians behave and voter unrest runs very high. Finally, even knowing what politicians are trying to achieve is not enough. Often their methods are mischosen for the tasks they pursue. On top of all of these numerous uncertainties, interaction with global actors must be factored in.
Given the above and other issues raised in the Mauldin piece, forecasting is a fool’s errand. The economics profession is not short of fools, hence there is no shortage of forecasts and opinions, mine included.
To encourage you to read Mauldin’s piece, the following quotes are supplied:
What I think is ending for a significant number of countries in the “developed” world is the Debt Supercycle. The concept of the Debt Supercycle was originally developed by the Bank Credit Analyst. It was Hamilton Bolton, the BCA founder, who used the word supercycle, and he was referring generally to a lot of things, including money velocity, bank liquidity, and interest rates. Tony Boeckh changed the concept to the more simple “Debt Supercycle” back in the early 1970s, as he believed the problem was spiraling private-sector debt. The current editor of the BCA (and Maine fishing buddy) Martin Barnes has greatly expanded on the concept.
Essentially, the Debt Supercycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where bond markets rebel and the debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions.
While the Debt Supercycle may not yet have ended, I think we can begin to see a clear case that, like the sandwich-board-wearing cartoon prophet warning, “The End is Nigh!” Greece is the harbinger of fundamental change. Spain and Portugal are pointing to the same outcome, as their cost of debt keeps rising. And Ireland? The Baltics?
There is a limit to how much debt you can pile on. But as the work of Reinhart and Rogoff points out (This Time Is Different), there is not a fixed limit or some certain percentage of GNP. Rather, the limit is all about confidence, a theme I have written on many times. Everything goes along well, and then “Boom!” it doesn’t. That “Boom” has happened to Greece. Without massive assistance, Greek debt would be unmarketable. Default would be inevitable. (I still think it is!)
Mauldin wisely does not provide a prediction of how things will end. He does provide the alternatives and a wealth of data and interpretation as well. He is not a pessimist by nature, but I would have to say that he is clearly not an optimist regarding this economic mess:
The end of the Debt Supercycle does not have to mean calamity for each country, depending on how far down the road they are. Yes, if you are Greece your choices are between very, very bad and disastrous. Japan is a bug in search of a windshield. Each country has its own dynamics.
Take the US. We are some ways off from the end. We have time to adjust. But let’s be under no illusions, we cannot run deficits of 10% of GDP forever. At some point the Fed will either have to monetize the debt or the bond market will simply demand an ever-higher interest rate.
I highly recommend that you read the entire post by Mauldin.