Thursday, January 28, 2016

The 75-Year Debt Supercycle Is Coming To An End...........

The 75-Year Debt Supercycle Is Coming To An End

The ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.

We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about 5 to 7 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.

There are limits to spending growth financed by a combination of debt and easy 
money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed "pushing on a string."

Risk premia — the return of risky assets such as bonds compared with cash — are currently at historically low levels. This makes it harder for central banks to keep pushing up the prices of these assets with loose monetary policy, such as low interest rates and quantitative easing, because there is less incentive, or yield, to compensate investors for taking the risk on debt.

As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth. When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

This debt fatigue explains why central banks are still locked into near-zero interest rates, seven years after the financial crisis that prompted their fall. In this scenario too, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics.

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