CENTRAL BANKS LOSING CONTROL: Are The Seeds Of A Global Depression Sprouting?

(By Chris Hamilton)

If the “markets” are rigged and economies divorced from true market valuations, then what (if anything) could trigger a recoupling of reality to the record setting flashing numbers presently offered by the “market” facade?  My best guess is decelerating global credit and debt creation (and a rotation from private to government debt creation) is the harbinger progressively pushing the financial rigging to its ludicrous conclusion.  The rigging isn’t likely to stop, but the loss of belief and confidence in these numbers (along with economic mismanagement based on these faulty signals) is soon to force market resets and revaluations of everything.  This will culminate in a global depression of unknown duration and depths until balance is restored.

McKinsey & Company did us quite a solid with their recent report titled “Debt and (Not Much) Deleveraging” (yes, I’m attempting to be hip…and prove to my high school age son and daughter I’m not as big a nerd as they think).  Anyway, I’d encourage economic junkies to at least read the executive summary. http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

The report showed global debt, in total dollar terms, and global debt to GDP as a percentage continues to ramp. Globally, debt continues growing faster than the economic activity it spurs.

But, McKenzie left an awful lot of meat on the bone (sorry, bad pun given this blogs title) and that’s what I’m serving up today…and I think it goes an awful long way in detailing the sources of the current global macro slowdown.

To put things in perspective, let’s start with global debt vs. global GDP (gross domestic product). As shown in the below chart, debt continues growing faster than economic underlying growth (and the capability to repay or service said debt).


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

A quick look at the four sources of the global debt in the chart below; Household, Government, Corporate, and Financial.  All are growing…some just much faster than others.


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

But let’s compare and contrast the rate of the growth in debt, both in dollar terms and percentage terms. The chart below shows that global debt grew 63% from ’00-’07 but the rate of growth slowed to 40% over most recent 7 year period…in dollar terms the debt growth was almost identical over the two periods.


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

The charts below are a break down from which of the four sources the growth in credit and debt came from.

  • Government debt (below) grew in both periods but, not surprisingly, ramped up after 2008 (both in total and as a percentage).


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

  • Corporate debt grew evenly in percentage terms over both periods (below).


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

  • But household and financial sources pace of debt growth slowed dramatically both as a percentage and in dollar terms from the earlier to the latter periods (charts below).


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis


SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis

The ’00-’07 period of global growth in credit / debt was driven by near doubling of household and financial debt. Think mortgage debt, HELOC’s, credit cards, and securitization of every sort imaginable on a foundation of growing government and corporate debt.

However, the ’07 – ’14 period debt creation came from significantly different and concerning sources:

  • $25 trillion in global government debt was driven by a hike of $19 trillion in advanced economy government debt.
  • $18 trillion in global corporate debt was taken on in massive bond sales and loans taking advantage of record low yields and rolling (refinancing) existing debt to ever lower rates.
  • $7 trillion in global household debt may have (net-net) been entirely due to China’s housing bubble creation of over $21 trillion in new Chinese debt…roughly half of which was attributable housing. The US, UK / Ireland, Spain and select other recent real estate boom / bust patients saw declining mortgage debt creation and consumer deleveraging.
  • $8 trillion in global finance

Ominous warning lights and alarms should be going off about now considering 2015 and forward.  The ’07-’14 debt drivers are running out of steam and the sources of ’00-’07 debt appear to be slowing rather than revolving back to previous debt glory. Of note:

  • China’s housing driven bubble and mortgage debt binge looks to be rapidly losing steam.
  • Advanced economy consumers do not appear interested or capable of increasing their household debt further.
  • Advanced economy governments are in deep debt and running into declining rates of debt creation (US down to mere half trillion annual deficits rather than nearly $2 trillion in ’09, ’10…likewise slowing debt creation in most EU nations).
  • And what if corporations sense rates can go no ZIRP’ier or NIRP’ier and cut down new bond issuance or debt creation (hasn’t happened yet…but watch out if this last source of debt rolls over).
  • The rest of the world’s governments sensing softening of demand may stimulate and/or may pull in their horns…but either way it won’t be enough.

Net / net, with slowing global credit and debt creation…well, things like consumer demand and commodity prices would collapse, shipping indexes tank, global economic activity start spiraling, and QE / shadow QE become commonplace but insufficient.  With slowing global credit and debt, demand would significantly fall from credit driven excess back to what can be supported by wages and savings (aka, a lot less…or in the vernacular, a depression).

If any of this sounds familiar, perhaps the long feared deflation and depression are finally overwhelming central banker and government attempts to avoid the inevitable.  Maybe, maybe not…but it sure looks like the global flow of credit and debt is decelerating…and maybe precipitously, baring all the credit induced excess capacity of nearly everything.

Or perhaps more simply put in a world where economic growth depends on ever greater credit and debt, the inevitable reality is excess capacity without the credits continued escalation…in the absence of the continued growth or flow of the credit and debt…falling demand and excess capacity creates a recession. If the recession is repeatedly avoided by even more credit and debt…eventually the imbalance of organic demand and synthetically created supply is so great a depression is the inevitable outcome.  And the greatest fear of all is that governments, with their lapdog central banks, will attempt to fill the void and keep the game going…even if only for one more day and at an unthinkable cost.


This article was written by Chris Hamilton from Econimica.blogspot.com.

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11 Comments on "CENTRAL BANKS LOSING CONTROL: Are The Seeds Of A Global Depression Sprouting?"

  1. Pfft, I thought we were in a global depression since 2008. No one had the guts to call it what it is. Instead they coined the phrase great recession. I guess using the term depression is, well too depressing. Anyone want to see the 21st century soup lines? Look no further than EBT cards.

    • Right On Nick!

      We are in a serious depression that started in 2008 and EBT cards, Obama phones, massively extended unemployment, etc have taken the place of the old soup lines. No one sees it or reports on it. Add that to the government manipulation of reported data such as CPI without food & energy, seasonally adjusted unemployment and new jobs, etc along with the lamestream media with their heads in the sand, we are rapidly approaching very deep shit and no one knows. Everyone will be suprised. You will hear “I had no idea things were so bad” or “How can we have reached critical EROI when oil is only $30 per barrel – it is not possible”

      So everybody stops spending what money the have. You can see by the consumer debt chart that individual households arealready feeling the pain and reducing expenditures (so are the smart finance guys). Major deflation is just around the corner. Everyone stops spending, prices start dropping and people keep not spending waiting for even lower prices. After all the suppliers are bankrupt or gone and they are ALL defaulting on their debts, then all of a sudden there isn’t anything to buy and hypeinflation takes hold. Look at the history of the reichsmark, it took RM1,000,000.00 to buy a loaf of bread.

      The governments (Our Government) will devaule our sacred greenback, probably try and confiscate our gold and silver and, if this is happening everywhere, will adopt IMF drawing rights as the new world currency.

      We are in for one hell of a rollercoaster ride. The only way to survive is to be prepared.

      Buy for CASH and STASH.


      • People don’t really much stop spending waiting for prices to decline. That’s a keynesian myth that they put out to justify constant inflation. “My god! If we had a natural mild deflation from technological improvements people would all just stay at home with their money and the system would crash!”

        We shouldn’t confuse the fall of prices of assets that were in outrageous bubbles for a general deflation.

  2. China/Russia/BRICS/additions will soon be holding all the cards.The ‘West’ will suffer for sure,but how many years have they been stealing the world’s resources now? 50/70/100/longer?what goes around,as they say.

    • Actually, the game started with the second discovery of America and cut-throat competition to get as much colonies as possible all over the world.

    • That isn’t such a lock anymore my friend. The world is now too volitale.

  3. Good article, Steve – you always offer great insight to many topics. If I can just say that for 25 years we have lived beyond our means. While good paying middle class manufacturing jobs left for overseas slave labor the pain was hidden by credit expansions. The residual of these expansions was debt. I would assume we have reached end the line of this economic Ponzi scheme. The key driver was the boomer generation and its massive consumption as it moved through its phases. The boomers are now planning for retirement, their hunger to consume waning – I look at them as the ‘pig in the python’. And as the boomers prepare to exit, just as the pig from the python, they will be worth nothing to the elite but as excrement. At some point soon the whole Ponzi will be revealed, Social benefits will have to be cut as well as private retirements will be confiscated in some part or as a whole.
    Many people forewarned about NAFTA but their arguments were eventually drowned out by those who only saw the economic numbers and not the economic drivers (credit expansions).
    As the ‘phase change’ takes place from a credit fueled economy back to an income fueled economy, the standard of living for the masses will drop like a rock. Prices will increase exponentially as I am very much anticipating a massive attempt by the FED to fight this change. The FED will have no choice as politicians look to them as a savior through money printing. If the FED refuses their pleas then its own sovereignty could be threatened as the politicians will look to take control of the printing press. Thus hyperinflation is almost assured to be in our futures as those who caused this mess will err again it attempting to fix it. At this point I can only see precious metals being my investments.

  4. At some point the piper must be paid. The sad thing is, those enjoying the music the most are arranging for the deaf to pay the bill. When folks become aware, then they will prepare to survive the onslaught.

  5. Care to explain how is it that past several years the german bunds have had a lower interest rate than Fed/Treas bonds same duration, implying less risk of default, currency etc.
    mentioned in article chapman at safehaven.com


    now we see despite “collapsing euro”, which these bunds are in for Germany, the interest rate has DROPPED even farther, into negative, instead of rising in yield/price dropping as would be normal risk/reward for someone holding a bond in a weaker currency.
    Means there’s hundreds & hundreds of billions of euros of either very smart or very dumm money in this.

  6. silverfreaky | March 30, 2015 at 2:00 am |


    Metallmainstream: “Negativzinsen sind verzweifelte Mittel von Zentralbanken, um Anleihen völlig überschuldeter Staaten zu stützen”. Meine Indikatoren: Das stimmt zwar, nur verzweifelt ist das nicht, es ist gezielte dreifache Enteignung: Zuerst führt sich damit der Staat für das Schuldenmachen positive Erträge zu, dann raubt er dem Sparer Zinsen und lässt ihn Strafzins zahlen und dann lässt er die im öffentlichen Eigentum stehende Zentralbank den Verlust durch QE bei Negativrenditen einbuchen und prellt dann den Steuerzahler durch die Verluste der Zentralbank: So kassiert er 3 Mal ab. Planmäßig, nicht verzweifelt. SYSTEMATISCHE VERSTAATLICHUNG LÄUFT SEIT 4 JAHREN AB!

    I try to translate ist.

    What I wrote in the last time is written here.With a deflationary shock Szenario the central banks will
    make Money.Ok now the Translation.

    Metall Mainstream writes:”negative interest rates are a desperate Instrument of the central Banks to Support countries with a lot of debts”.
    My indication:That’s true but it’s not desperate, it’s the goal of them and their plan.This leads to an
    triple confiscation.First the state gets Money for making debts because of the negative interest rate,second he robs the Money from the savers because oft the low interest rate and he have to pay
    Penalty interest.At the end he let the loss(negativ interest rate of QE) of the in public property staying central Banks booking and robs the tax Players Moneys tbecause of the the loss of the central Banks.

    So he makes Money 3 times.But it’s not desperate as the mainstream suggests it’s sheduled.This means sytematic socilisation since 4 years.Sorry for my bad english.I hope you understand it.

    This is the reason while there is no need to hold PM at the Moment.No risk, no Inflation.Maybe this will change.But not yet or the next years.We are the loosers.

    • No need to hold PM at this time? Then hold what? Cash? Stocks? Bonds? What? Negative rates at banks tells me to look elsewhere. Why not hold PM? It seems a disingenuous statement to not hold what is real money for thousands of years. And why overtly say that? Don’t hold PM. It makes no sense.

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