What will get us out of this hole?
A. Hamilton Bolton, who founded the Bank Credit Analyst in Montreal back in the 1940s (now BCA Research), struck up a friendship with R.N. Elliott for a few years before the latter died. So enamoured was Bolton with Elliott’s discovery of the Wave Principle that he featured an Elliott Wave Supplement in the Bank Credit Analyst publication for many years, himself becoming the leading Elliott practitioner of the day.
Bolton was interested in cycles of credit and debt, and he could see how Elliott waves might help in identifying them. In his other work, Bolton undertook a study of severe economic downturns in the U.S. from the 1800s. His main conclusion was that every one of those periods was presaged by a state of excess credit in the economy. This is the precondition of debt-deflation. There has to have been an INflation of debt before it can DEflate.
The chart below shows the level of U.S. non-financial corporate debt as a percentage of gross domestic product (GDP). Back in 1951 it hovered around 22%, but has increased relentlessly over 70 years to over 50% of GDP today. Is this the precondition for debt-deflation? Well, we might have said that at 35% back in the 1970s, and indeed debt did deflate on this basis for a few years. We could also have cried wolf at 40% and 45% but, although there have been brief episodes of debt-deflation, after a time the old uptrend has re-established. So why now, at over 50% of corporate debt to GDP, would we think that it might be time for an extended period of debt-deflation?
This particular metric could, of course, be resolved through GDP growing rather than debt being reduced. However, excess debt can persist only whilst social mood is trending positive. It is when confidence starts to turn and social mood waxes negative that excess debt becomes an issue. When the level of economic growth falls below the cost of servicing the debt, borrowers start to default and / or borrow less. Aside from the current Elliott wave structure in the U.S. stock market, which is anticipating a turn from positive to negative mood, the chart below shows that, perhaps, the chart of corporate debt-to-GDP itself could be showing a completing 70-year wave. If that is true, the next period of debt-deflation might persist for many, many years.