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There is a BIG LIE circulating throughout the world's political centers, media centers, and through the minds of citizens of the world. This lie is that Big Government, and the debt of Big Government -- too much government spending for social programs, employment, pensions, social security -- is what caused our current Great Depression. The Great Austerity Movement of 2013 carries this implication: government needs to be cut down to nothing so that the Private Economy can grow again.

I am not hostile to the Austerity Movement. I agree that debt has destroyed our economy, the global economy, and the prospects of our citizens for at least one generation, maybe more.

Until recently, however, I did not understand that it was not government debt that was the main culprit involved in the sinking of our Great Global Titanic. I knew Wall Street was the catalyst. But I did not know, until viewing several charts, that Private Debt sank our global economy -- and Private Debt sank and is sinking the European Union also, not their lavish social program spending, early retirement, generous pensions for their elderly....

Let us look at these two charts and then discuss them. The first chart shows American Private Debt (corporate and consumer) and Public Debt (government). The second, using a different format, looks at European Union debt: 1) bank liabilities, Private Debt; 2) corporate debt, Private Debt; 3) consumer debt, Private Debt; (4) government debt, Public Debt.

The first chart shows American Private Debt at 310% of Gross Domestic Product in 2008, the highest since 1929, the last Great Depression, when Private Debt was 240% of GDP. We remember that there was a nasty Housing Bubble in America from 1920-1926, which helped to cause the crash of Wall Street in 1929 and the 18-year Great Depression that followed.

Government debt in 1929 was a paltry 40% of GDP. In 1945, when America was financing its participation in World War II, government debt exploded to 120% of GDP. That is the highest government debt has been in America, making the 85% of GDP in 2011 seem almost insignificant.

The arguments that the American Government caused this crisis of 2008 through overspending on entitlements -- serving the so-called losers of society, those who can't stand on their own two feet -- this is the standard line of the conservatives -- doesn't show up in this chart.

Government debt vis-a-vis Gross Domestic Product is not astronomical, according to this chart. It was not high in 1929 either, the last time the global economy had a heart attack and died. Public Debt is, in fact, at the time of this chart at least, lower than in 1945, when the public financed American involvement in World War II.

The Far Right illusion is that if government just 'gets out of the way' of private enterprise, the world will fix itself. But this chart gives a different picture of reality.

This chart says it is PRIVATE DEBT that is at astronomical levels vis-a-vis GDP. As I have written, Private Debt in America was at 240% of GDP in 1929, before the global economy crashed then; and Private Debt in America was at 300% of GDP in 2008 -- and is still at 260% of GDP now, higher still than in 1929, before the global economy crashed again.

Yes, there WAS a Real Estate/Housing Bubble and subsequent banking crisis in the 1920's. In fact, the asset bubble that began in 1921 helped to cause the massive PRIVATE DEBT BUBBLE that destroyed the global economy then also. The web site below examines the housing bubble of 1921-1926.

The famous stock market bubble of 1925-1929 has been closely analyzed. Less well known, and far less well documented, is the nationwide real estate bubble that began around 1921 and deflated around 1926. In the midst of our current subprime mortgage collapse, economists and historians interested in the role of real estate markets in past financial crises are reexamining the relationship of the first asset-price bubble of the 1920s with the later stock market bubble and the Great Depression that followed. Limited data on 1920s home prices and foreclosures means that many questions remain unanswered.22 Historical trade publications like the weekly New York Real Estate Record and Builder's Guide, of which Baker Library holds a sixty-year run, allow researchers to fill in the blanks. The implications of early findings may challenge conventional wisdom about the factors that caused and prolonged the Great Depression.

What this all suggests is that American Big Business (Wall Street and Wall Street's political lackeys in Washington) is refusing to take the blame for the Global Collapse it helped to create through the same mechanism it used in the 1920s, Private Greed, pursuing recklessly their own economic empires -- asset price inflation fueled by lower and lower interest rates - and has attempted to shift the blame on to the governments of the world (Big Government being the boogeyman of the Far Right).

The debt that must be destroyed before the global economy can reach a state of organic growth again is, primarily, Private Debt -- private enterprise debt and private consumer debt. In fact, the very force that the Far Right says will save us from our current disaster is what caused and is still causing the current disaster.

Of course, Big Business has now found a convenient method for unloading toxic debt: by selling it at face value or even at future inflated value to the governments of the world. The governments are willing to buy worthless private debt in the hope of keeping themselves in power, of keeping their societies from unraveling into civil war and revolution. Why would Big Business ever concern itself with risk if there will always be a buyer of last resort willing to absorb the crimes and failures of the Free Market in pursuing the demon of Unlimited Wealth?

Then, of course, this forced ingestion of toxic (criminal?) debt by the governments in question -- in hopes of avoiding civil war -- has been followed by the political gambit of Big Business and the political supporters of Big Business screaming and shaking of fists at the government for taking on too much debt. Well, the 'too much debt' the public was taking on was the Disaster Debt of unregulated Big Business which made careless business decisions without considering risk or even to crimes in many cases (organized crime almost certainly, organized crimes in white shirts on Wall Street).

The Democrats watch the Republicans engineer bailouts of Private Corporations and cry out of a similar bailout of Private Consumers. We all need to understand, first, that the Debt Bubble was and is the primary problem; and, secondly, that the bailouts of Private Debt by the Public, corporate and/or consumer -- shifting the debt from one hand to the other hand -- does nothing to solve the problem. We have bad debts that need to be destroyed; like a hidden wound, these debts need to be exposed to the air, cleaned and treated. Some limbs have to be removed. There is no easy, painless way to do all this; but it must be done.

Destruction of our debts through bankruptcy and default -- using the mechanism that was designed for this action, higher interest rates, and more expensive money -- is the ONLY answer to our current problems.

We enjoyed the party; now we have to pay for the party.

Comstock Partners issued a report this year in which they found almost exactly the same evidence I am presenting -- that it is PRIVATE DEBT that is the villain, and the cause of our collapse. And Public Debt is now growing as it takes on the burden of absorbing the Private Toxic Debt accrued from 2001-2008, mainly caused by the Housing Bubble (again).

From the Comstock Report:

In fact, the eight years between 2000 and 2008 the debt grew from $26.5 trillion (265% of GDP) to $54.5 trillion (or $28 trillion from 2000 to 2008).

The private sector debt that grew the most was the household debt, mostly because of the massive purchases of homes and goods imported largely from emerging economies. This sector of debt was historically about 50% of GDP and 65% of Disposable Personal Income, but by the mid 1980s it starting growing exponentially until it was in a full blown debt bubble. This sector debt rose from $6.5 trillion in 2000 to almost $15 trillion in 2008. This sector is presently de-leveraging and is down to about $13 trillion on its way to below $10 trillion (in our opinion) as the de-leveraging continues to take a toll on the U.S. (as well as the global economy, since the rest of the world needs U.S. consumption). This is very similar to what took place in Japan starting at the end of 1989 (except that the bubble in Japanese debt resided in the non-financial corporate sector).

Currently, most observers are much more focused on GOVERNMENT DEBT where the debt ceiling was $6 trillion in mid 2002 and just recently President Obama signed a bill lifting the debt ceiling by $2.1 trillion to $16.4 trillion. If you count the unfunded liabilities (or the promises we made to retirees) this debt could be higher than $100 trillion. We believe this debt will have to be addressed thru either inflation (printing our way out at the expense of the U.S. Dollar), or deflating our way out through de-leveraging or defaulting on the enormous debt (we believe the deflationary solution to be the highest probability, at least initially). It is very difficult to inflate out of our present situation since banks will only lend to the best credits and the best credits don't want to take on more debt-this is called a "liquidity trap" and stifles the "velocity of money."

The problem with all of the above solutions is that they will not be easy to resolve since the government sector debt will have to grow to replace the private debt declines, in order to curtail the collapse of the economy. This is exactly what happened in Japan as their government debt grew to 225% of their GDP as the private debt declined in the deflation. We expect the solution that will evolve in this country will start with deflation. We will show exactly how we view deflation by displaying the chart "Cycle of Deflation" (see attachment) which we have used in many prior reports.

I am not suggesting that government debt is not a problem. I'm reminding the reader where this crisis began and where it still mostly resides: with the DEREGULATION of Big Business. The proper role of Big Business is to pursue profits; and the proper role of Big Government is to regulate (provide laws and police powers to enforce these laws) Big Business. Where there are no laws -- DEREGULATION is the removal of laws, a kind of lawless state where no one protects the interests of the weak -- there will be only criminals, at least until we all pass into the Spiritual Kingdom in which selfishness and greed are no longer human problems.

We are heading down a long slow path of debt deflation. Don't listen to those who claim that only American Ingenuity and Free Unregulated Business can get America back on its feet again -- because those are the very same people who just threw America on its back, while pursuing their own economic empires -- the world be damned. There will be a time for the ideology of empire and ingenuity and entrepreneurialism again -- but not for another couple of decades.

We are not saints yet. Until we are all saints we need laws and police to protect decent people from the sharks who believe the world should and must be a world of shark-eat-shark only.

Ok, I have ground my first axe. Surely the debt problem in Europe is a different story. We all know about lax European social spending, too many holidays, too many government workers who are not needed, a retirement age that is much too early, and over-generous pensions for retired workers...

But wait.

According to Paul De Grauwe, writing in the web-page below, only Greece, Italy and Belgium have government debt over 100% of GDP.

In fact, Spain and Ireland had very little government debt when the global economy sank in 2008. But they had huge levels of Private Debt, all connected to the Housing Bubbles out of which they were just emerging. Spanish government debt was less than 40% of GDP until the Titanic struck the ice. Ireland's Public Debt was a fraction over 20%.

France (socialist France) had Public Debt that was only 45% of GDP.

Mister De Grauwe writes:

Source: European Commission, AMECO, and CEPS

While the government debt ratio in the Eurozone declined from 72% in 1999 to 67% in 2007) the household debt increased from 52% to 70% of GDP during the same period. Financial institutions increased their debt from less than 200% of GDP to more than 250%.

  • With the exception of Greece, the Eurozone governments were more disciplined than the private sector in containing their debt.
  • The explosion of the government debt after 2007 was the result of a necessity to save the private sector, in particular the financial sector.

Those who say that it is government profligacy that is the source of the debt crisis are mistaken. They also fail to see the inevitable connection between private and public debt. This connection is particularly strong in countries like Spain and Ireland that have been hit badly by the debt crisis.

As can be seen from Figure 2, Spain and Ireland were spectacularly successful in reducing their government debt to GDP ratios prior to the financial crisis, i.e. Spain from 60% to 40% and Ireland from 43% to 23%. These were the two countries, which followed the rules of the Stability and Growth Pact better than any other country - certainly better than Germany that allowed its government debt ratio to increase before 2007. Yet the two countries, which followed the fire code regulations most scrupulously, were hit by the fire, because they failed to contain domestic private debt.

(click to enlarge)

So, what happened to us? Why did we crash? We crashed because businesses and individual consumers (Wall Street and Main Street) over-leveraged in an attempt to reap dream-like profits on the Housing Bubble, both as credits and as debtors. This feeding frenzy -- encouraged by the Fed and the banks -- it is an illusion that the Fed Chairman is not the pet figurehead of the banking establishment -- destroyed our economy and is sending us into decades of pain.

The idea that the government caused this through misguided social policies -- the most misguided policy was the DEREGULATION OF THE BANKS by Bill Clinton and his friends who needed to finance Democratic Party elections -- is an attempt by the Far Right to cover up the Greed Factor and Wall Street's complicity in the collapse. If they can shift the Private Debt to the Public account, why can't they also shift the blame for the death of the global economy to their old enemies in Big Government?

But these charts show that they are trying to tell the BIG LIE.

Now -- as Japan did -- we are attempting to pare down Private Debt by handouts and bailouts and by the government buying toxic assets of the guilty parties -- that is, to turn Private Debt into Public Debt, while we try to preserve the status quo, keep Old Money in Power, and avoid civil war -- i.e., spending billions to try to keep asset prices elevated, and voters/citizens soporific.

There is a moral element that we should not miss: giving public money to the fools and crooks that destroyed the economy through greed and self-interest so they can try to do it again -- the idea that Ben Bernanke would squat on interest rates so that he could feed money to reckless billionaires at the expense of retirees and savers is appalling. And no one speaks about this hideous moral position in the media -- it should be the number one issue being discussed. Oh, that's right: the 1% of the rich getting bailout money also own the media. Right.

Japan turned Private Debt into Public Debt and they are dying a very slow death because of it -- still dying a very slow debt, which began in 1989, heading on 3 decades now. If it doesn't work -- this exchanging bad debt from one hand to the other hand -- then it doesn't work. Bad debt needs to be destroyed. And the inflation of prices that happened from 1983-2001 needs to be reduced and balanced. Deflation is supposed to moderate both price gains and the wealth-gap that happened in the preceding inflation -- and Bernanke is spending retiree's and savers money to try to make sure this does not happen.

There will be no growth in the economy again until we have MANY bankruptcies and defaults -- until we can live with mark-to-market banking accounting again. Are our banks healthy? Return to mark-to-market accounting as see how healthy they really are.

The Austerity Movement is necessary. We need to cut unnecessary spending in governments. We need to stop bailout out Private Business from their massive spending orgy in the last decade. And we need to raise taxes of the nations wealthiest individuals and corporations, and use this money specifically to pay off our debts.

Billion dollar Wall Street bonuses, given to CEO's and friends, who just engineered the destruction of the Titanic, should be taxed at a 'confiscatory rate' -- all of it taken.

Those who cry that higher taxes will cut economic growth need to understand that there is a growing season in the economy (inflation) and a non-growing season (deflation). We will not be able to grow at all until we dig up all the weeds from our overgrown economic garden. The weeds are the bad debts.

I will save my suggestion that American Bank reform should use the American public power utilities as a model for what banking should become in the future -- I will save this for a future article. Bankers should be technicians and functionaries who serve the public and who provide guaranteed financial stability, not entrepreneurs, not gamblers, who now have learned they can always count on public bail-outs if their gambles turn to dust. Let the capital gamblers and entrepreneurs work in non-financial industries, such as technology and weapons-production. Leave the banks to the geeks and bean-counters who don't know how to get the entire world in trouble by leveraging their risky gambles sometimes 30-1.

Oh, one more thing: let's fill up our prisons with those who broke the law during capitalism's Last Great Party for the next half Century.

Clark's Gate Timing System
Hanoi, Vietnam


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.