Debt of The Financial Sector

Here's a scary chart, one that I believe explains why the current Debt Crisis merits capitalization, and why it won't go away easily - certainly not by merely "printing" money and giving it to the FIRE sector (finance, insurance, real estate).

 USA:  Financial Sector Debt Soared Sixteen-fold Between 1952 and 2008

In a most dramatic way, the chart shows that in the United States debt issued and owed by the financial sector (banks, insurers, brokers, etc.) soared to nearly one third of all debt outstanding.  A similar pattern is observable across the entire Western economy.

The process gathered steam between 1995 and 2005 because of:

(a)  financial speculation (leverage, derivatives, etc) and,
(b) securitization of all manner of bona fide and financially engineered loans, from mortgage debt and credit card receivables, to CDS hybrids (CMO's, CDO's, CPDO's, etc).

The end result was the financial/debt/monetary bubble that burst spectacularly in 2008 - and is still bursting, since the shadow-banking bubble machine has not been shut down.

It is, therefore, highly ironic that the Debt Crisis caused by a virulent out-of-control financial sector has now infected the once safest haven of them all: government debt.  Bankers, brokers, money managers and rating agencies - whose inter-connected behinds were collectively rescued from self-immolation three years ago - now lash out at the very governments whose deep pockets (a.k.a. taxpayers) saved their bacon.

Italian Government 10-Year Bond Yield

Putting it another way, the massive expansion of finance and its subsequent collapse is suffocating the world's real economy.  We need hundreds of billions of fresh capital to invest in productive projects like energy and network infrastructure, but the FIRE sector is demanding (blackmailing?) that governments continue to dump good money after bad down a bottomless pit, one dug by their own greed and perfidy.

Of course, governments are not innocent babes in this operatic auto-da-fe.  First, they foolishly deregulated finance, a notoriously self-serving, risk-loving and cyclical business (for example, by abolishing the Glass-Steagall Act).  And then, they kept looking the other way while finance mutated and morphed into a menacing giant, albeit one with extremely weak legs.

It is high time that governments act decisively and forcefully to reverse the "financialization" of the real global economy.  We cannot survive, never mind thrive, on the "free-markets" mantras of  Wall Street and City alone.    The FIRE sector must be forced to de-leverage.

There are many ways to do this: higher capital requirements, strictures on own-account trading, transaction taxes, regulating off-balance sheet derivatives.  In my opinion all of them, and more, must be implemented.  The purpose is as simple as it is difficult: Kill the beast before it kills us.

Is There Life After Debt?

Fact: The debt crisis is global - and, yes, this includes the so-called creditor nations, such as China.  After all, in our fiat currency world it takes a debit in order to create a credit.  

The way we got into this mess is well known: the West foolishly (even criminally, if you ask me) gave up its industrial/manufacturing base and the high earned-income jobs it generated, replacing them with services and low value-added jobs.  However, it didn't lower its consuming and spending habits to balance the losses, instead it piled on debt from vendor nations, and constructed Rube Goldberg asset bubble contraptions that attempted to generate "wealth" out of thin air (e.g. real estate, derivative-based bonds, etc.).

 Anyone Still Making Anything in the US?

As the chart above shows, the process of de-industrialization is not new, at least not in the U.S. where goods-producing jobs have fallen steadily over the last 60 years, from 40% to 13.8% of total non-farm payrolls.  As a direct consequence (in my opinion) wage and salary income has dropped from 68% of total personal income to just a little over 50% (see chart below).

Earned Income Has Dropped Drastically

Consequently, total debt soared to 550% of earned income - even excluding debt of the financial sector (see chart below).

 Can The Real Economy Sustain This Debt?

This chart raises one very important question: can the real American (and Western) economy sustain its debt load, or will it collapse under it? To put it another way: Is there life after debt?

The answer to this question involves much more than quantitative easing, classical econometric ratios, or Tea Party dogma.  We must go straight to the heart of the global " Permagrowth" economic paradigm, the one we have been using and abusing for well over a century.  In this outdated and obviously crumbling model, debt and growth are intrinsically linked, one becoming the enabler for the other in a sort of pushme-pullyou perpetual motion machine.

But it can't go on. Debt is a call on tomorrow's growth - and if such growth is impossible then the debt becomes untenable. The Earth's diminishing resources, benign climate included, can no longer sustain Permagrowth, therefore we cannot repay or even adequately service the immense debt/credit loads we have created.

Yes, there is life after debt.  But it will be very different from the consumerist Shangri La we had become used to.  I believe we are headed towards a low-intensity, decentralized type of macro-economic paradigm where energy and most consumer goods are produced locally from renewable sources, and where the sociopolitical system is likewise decentralized.

The important question is this: can such a paradigm shift be accomplished relatively smoothly and peacefully, or will it take a major upheaval? I really don't know..

P.S. On the eurozone: Dear Mrs. Merkel (or is it Ms.?), when your entire neighborhood is on fire it is not a good time to argue the bad structure and poor management practices of the Fire Department.  Rather, please make sure the firemen have plenty of water and leak-proof hoses.