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Many people have their retirement savings invested mostly in stocks. This popular strategy could be on a collision course with the debt supercycle.

The term “debt supercycle” refers to a persistent increase in debt relative to gross domestic product (GDP). “Until the early 1980s, debt rose modestly and pretty much in line with GDP,” writes Tony Boeckh in The Great Reflation. “After that, it began to rise much faster.”

The chart below from Ned Davis Research shows a steep rise in total credit market debt as a percentage of GDP since the 1980s (chart sourced from Greenfaucet.com; goes back to the 1920s and shows the creation and destruction of credit during the 1920s and 1930s).

Click to enlarge:

Before the 1980s, debt outpaced GDP during the booms but was brought back more or less in line during the economic downturns. Since the 1980s, the “maestros” at the central banks have been quick to pump up the economy during the downturns, before the correction phase of debt was complete. So, each economic upturn started from a higher level of debt, resulting in an upward trend over time in the debt-to-GDP ratio.

The problem with increasing debt relative to the ability to service it, of course, is the rising risk of default and bankruptcy. The U.S. came close to that point in 2008 but averted it with another burst of stimulus. However, this is the same old response that ends up adding more to the debt mountain before it has had much of a chance to correct.

How sustainable is the ongoing increase in debt relative to GDP?

There could be another few more years of “feel-good” growth in the economy and stock markets as they float upward on the latest wave of printed money. But watch the trend in the debt supercycle underneath the surface for signs that this will prove to be a period of artifical growth: if the debt load continues to ratchet up, the next downturn could be when the U.S economy really goes off the rails.

Disclosure: None

Source: Are Your Retirement Savings on a Collision Course With the Debt Supercycle?