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We’re Leveraging Into the Next Crisis

Aug 06, 2019 | Jesse Colombo |

We’re Leveraging Into the Next Crisis

Written by Jesse Colombo via Real Investment Advice

Since the end of the Great Recession, I have been warning that our economic recovery (both U.S. and global) isn’t a genuine recovery because it’s driven by debt and the inflation of new economic bubbles. I’ve been calling it a “Bubblecovery” or a bubble-driven economic recovery. We’re repeating the same mistakes that led to the 2008 financial crisis in the first place, basically. This week, Bloomberg published a piece called “The Decade of Deleveraging Didn’t Quite Turn Out That Way” that confirms my warnings:

“This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that.

“Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero.

“Consumers had grown overleveraged because the financial sector bombarded them with cheap credit, funded on absurdly generous terms by the markets. European banks, often the ultimate lenders (or “suckers” as Wall Streeters tended to call them), suffered terrible losses.

“Prolonged and painful deleveraging seemed inevitable. Debt would have to be paid down or written off. Disputes over who should retrieve what from the wreckage would have to be resolved. Economic growth would be difficult if not impossible. Central bankers, trying to minimize the pain, cut interest rates to zero or below.

“Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”

The Bloomberg piece included a chart that shows that total world debt increased by approximately $100 trillion from 2007 to 2018:

The Bloomberg piece also included an interactive graphic that shows how much debt each country owed in 2007 and 2018. The chart below shows total debt in 2007:

Read the full article at Real Investment Advice: What Deleveraging? Global Leverage Continues To Break Records | Real Investment Advice