Ann Pettifor: 2nd February, 2009
I am grateful to Dr. Krassimir Petrov of the Center for Research on Globalisation for this daunting chart. It shows how much debt sludge has to be cleared out of the US financial system. Much, much more than in the 1930s. Contrary to orthodox economic forecasting, this portends a Greater and Longer Depression – deeper and more prolonged than that of the 1930s.
Purging or detoxing debt from an economy is a strained, long-winded and ugly process. Private creditors exacerbate the crisis by imposing a tough diet on the heavily borrowed: they restrict credit; compound interest on defaulted debt; and impose higher real market interest rates. Today, while Fed rates are low, private market rates for non-investment-grade corporates are in the region of 16%.
This is as life-threatening a cure as the medieval concoction of gall from a castrated boar, briony, opium, henbane and hemlock juice
Yet regulators and politicians turn a blind eye to this financial sector quackery, cause of high mortality and unemployment rates amongst otherwise healthy companies – preferring instead to bail out the quacks.
So the US faces a larger challenge. How will it cleanse itself of the money-changers that since the 1970s have acted as parasites on the healthy US economy? Those that burdened thriving companies with debt, and then siphoned off a large share of the profits in the form of interest payments? Or used direct debits to drain excessive interest payments from the bank accounts of hard-working Americans? Will they be purged from the system? Or will American politicians and regulators continue to treat them as delicate “intestinal flora” – vital to the health of the economy?
In the run-up to the stock market bust of 1929, as in the run-up to the ‘debtonation’ of 2007 – the unregulated private finance sector created and sold credit as if there was no tomorrow. Regulators – official and political – turned a blind eye. It was a lucrative business as credit-creation – unlike software, digital or clean technology development – was, and is, largely effortless. For long periods money-lenders basked in the delusion that it was risk-less too.
Their ‘easy but dear money’ financed and fuelled the stock market boom of the 1920s. At its peak, credit (or debt) rose to 250% of GDP. In other words, Americans borrowed two and half times their annual income – and used a great deal of it to gamble on the stock exchange.
“Using the same metric today” writes Professor Petrov, “the debt level in the U.S. financial system surpassed 350% in 2008. ”
The implications are clear. It took years – from 1929 until the 1940s – and a World War, before the US cleansed itself of the 1930s debt sludge. Japan is still trying to purge itself of debts built up in the 1980s. 18 years after the Japanese ‘debtonation’ of 1990, the economy is still the weakest of all the OECD countries. Eighteen years after the property bubble burst, Japanese house prices are still falling!
Will it take 12-18 years for the US economy to recover, after purging debts equivalent to 350% of GDP? On this reckoning: more than likely.