In the mid 90s a few regular and very knowledgeable participants on Silicon Investor bulletin board (some call it discussion board) got me interested in studying the history of manias, panics and depressions. I dug deeper into the world of dismal science purely mainly out of interest and secondarily out of self interest. One thing got clear to me – the economic ‘boom’ we have witnessed in the 90s and 00s came on the back of unprecedented credit expansion. If one were to look at it purely from the return on investment metric, the economy is seeing only a fraction of what is spent. In other words, for every dollar of debt, only a fraction has gone into the economic activity – 25 cents on the dollar, to be exact.

This week I read a fascinating article by Lance Roberts of Street Talk Live. He contends that the great American economy is nothing but a big lie. Excerpts:

The idea that the economy has grown at roughly 5% since 1980 is a lie.   In reality the economic growth of the U.S. has been declining rapidly over the past 30 years supported only by a massive push into deficit spending.

From 1950-1980 the economy grew at an annualized rate of 7.70%.   This was accomplished with a total credit market debt to GDP ratio of less 150%.  The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%.  There were a couple of reasons for this.  First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy.  Secondly, the economy was focused primarily in production and manufacturing which has a high multiplier effect on the economy.  This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

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This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living.  As their wages declined they were forced to turn to credit to fill the gap in maintaining their current standard of living.   This demand for credit became the new breeding ground for the financed based economy.  Easier credit terms, lower interest rates, easier lending standards and less regulation fueled the continued consumption boom.  By the end of 2007 the household debt outstanding had surged to 140% of GDP.   It was only a function of time until the collapse in house built of credit cards occurred.

This is why the economic prosperity of the last 30 years has been a fantasy.  While America on the surface was the envy of the world for its apparent success and prosperity; the underlying cancer of debt expansion and lower personal savings was eating away at core.

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The clearing process is going to be very substantial.  The economy is currently requiring roughly $4 of total credit market debt to create $1 of economic growth.  A reversion to a structurally manageable level of debt would involve a nearly $30 Trillion reduction of total credit market debt.  The economic drag from such a reduction will be dramatic while the clearing process occurs.

Economically speaking, what were the Seminole event 30 years ago?

• Reagan Presidency and his supply side economic nonsense taking root. Don’t let these facts come in the way of Reagan worshipers –
• Deficit spending and  tax cuts that only helped the top income brackets to transfer more of that debt into their coffers as wealth. In other words, the great wealth transfer!

Here are some great charts that explain his thesis in simple detail – without any heavy reading:

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