Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

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Tuesday, April 12, 2011

The Fundamental Problem

Too much debt  (oh, and let's not forget the impending shortage of oil)

Look how the debt ratio collapsed in the aftermath of the Great Depression.  The resulting low debt levels enabled the boom of the 50s, 60s, 80s and 90s.  But each upswing needed more debt.

Debt ratios have to decline like they did in the 30s and 40s.  And that is a huge structural headwind to longer-term growth.

[Source: Morgan Stanley]


  1. What is "Non-Finanacial Debt?" The term seems oxymoronic.

    I find it curious that the real explosion on the chart occurs after the crash of Oct. 1929. Of course, the graph is of percentage of GDP, not the actual dollar amount of debt. Did industrial production dive after '29, making existing debt a larger percentage? Did debt just disappear in the years of the depression because of massive bankruptcies? It wasn't growth that caused the steep decline between 1934 and 1938.

    The graph gives an amplified impression, since the bottom is 100% and the lowest it was in these 90 years is 120%

    I wish the European line had been drawn for the whole period.

  2. Non-Financial debt is debt owed by the non-financial sector. In other words, debt owed by households and companies outside debt to the banking system.

    European data are not as good as American. Although we know the liabilities of the banking system (= the money supply) and its assets (outstanding credit plus holdings of government stock) it's only been in recent years that debt outside the banking system has started to be measured, at least in Europe. Partly this reflects the absence of decent corporate bond markets outside the US: measurement was more or les unnecessary when corporate bond issuance was tiny.

    And yes, both real and nominal GDP fell in absolute terms between 1929 and 1933. Of course, this *increased* the debt burden, in a doom loop which continued until the Fed's circuit breaker of massive open market operations in 1933.