The Debt Intensity of Economic Growth or,
The Sardine Can
The previous post (see below) showed the un-sustainability of current trends in new debt creation in the
It immediately becomes apparent that the
Such capital, therefore, has been created as “money” via the ever expanding synergy between lending and asset appreciation, i.e. a debt bubble. At some point, however, “someone” may want out of the game and wish to liquidate his asset(s). If there is no lender immediately available to provide incremental credit then the seller must find a buyer with “equity” and/or accept a lower price. That is how debt bubbles burst, historically.
There is a story that illustrates this point (NB - thanks to Sandra):
Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him too about how great those sardines are. The process gets repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER”. Well, Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick:
“You crook! You liar! I paid you a million bucks for just plain ordinary sardines. They were not the greatest tasting sardines - EVER”, yells Zeb.
Yorick shrugs and replies…
“Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"
Likewise for overinflated assets, if someone decides to "eat them", instead of just "trade" them.
But what consitutes "eating" an asset?
And what does that mean for the economy?