Expert Commentary

Debt Inflation Explodes. Can Deflation Be Far Away?

The debt bubble just keeps inflating. When will the reckoning come?

This week’s debt statistics make for ugly reading if you’re a believer in sound economics. On Tuesday, the Federal Reserve Bank of New York reported that household debt in the U.S. reached a new record of $14,350,000,000,000 ($14.35 trillion) in the third quarter, fueled by a boom in mortgage refinancing. Households are not only taking advantage of lower interest rates to refinance existing mortgages but are adding debt in the process. I mean, with rates near zero and the Fed saying that they will stay there, then why not leverage up huh? We’ll come to that later.

On Wednesday, the Institute of International Finance (IIF) issued a research report stating that its measure of total global debt has risen dramatically this year and it expects the total to exceed an eye-watering $277,000,000,000,000 by the end of 2020. That $277 trillion will equate to around 365% of global Gross Domestic Product, up from 320% at the end of 2019.

When will this madness end and debt inflation turn to debt deflation? Well, the IIF stats are skewed by the incredible increase in public sector debt as governments have borrowed to mitigate the fall-out from pandemic lockdowns and the cratering of economic activity. Public sector debt can (some would say should) expand a great deal in an economic slump (just look at Japan from the 1990s) and so, although undoubtedly an economic burden, increasing public sector debt can be misleading because it can still rise during deflation.

Private sector debt is where the real focus should be and private sector debt, it is true, has also expanded this year as corporates have sought to shore up balance sheets and extend debt maturities in an effort to survive the economic implosion. But the clue to debt deflation comes in that observation. This increase in private sector debt is not healthy, self-liquidating debt which, for example, would come from borrowing to invest in a new factory, the debt being paid off via the increased production. No, this is unhealthy, non-self-liquidating debt which is being added and the same is true for U.S. households’ binge on mortgage debt.

Debt-bubble-deniers state that the level of debt is not a problem as long as the debt can be serviced. Sounds plausible but the ability to service the debt requires income, and income relies on a growing economy. This is why the only policy of the Fed and other central banks is to continually (try to) pump up the economy on any sign of deflation with counterfeited money. They started digging this hole for themselves twenty years ago and are now so deep in it that the only option they have is to keep digging. At some point, though, they will reach solid rock and all digging will have to cease. That’s when reality will dawn and the debt bubble will be able to deflate unhindered, driven by a negative trend in social mood.


Global Debt- Percentage of GDP Nov 2020