By Chris Martenson
The next 20 years are going to be completely unlike the last two decades. How the world works, how stocks grow, the very nature of investing and how our economy functions—all of these are due for fundamental, earth-shaking change. As investors, we have to adjust the way we look at the world.
We want growth. We need economic growth. It's all you hear about when the treasury secretary talks about how we are going to get the economy growing again or when the president talks about jobs. When our money system is growing, things are reasonably happy. When it is not growing, things are very unhappy. As long as everything is growing, our economy functions reasonably well. And when it stops growing, it throws giant fits and gets into trouble. That is why we are always chasing growth. And there is a reason for that: Money. But what is money?
I don't care what color it is or whose picture is on it or what counterfeiting measures you have in place. All money in the world today shares one characteristic: it is loaned into existence. It seems like a simple enough statement, but this has enormous implications. Because it is borrowed, we pay interest on it. That interest drives a peculiar feature in our money system (by "our" I'm referring to all fiat currencies in the world because all of them operate by this same loaning principle). When you loan money into existence, you have to pay both the principal and the interest back. That means there is always more debt than money in the system.
We are constantly growing our money supply because our population is growing. In the past, we had a seemingly endless supply of resources, energy and land to occupy—all of that has been OK. But we are coming to a point where it's not OK anymore.
Consider a chart of total credit market debt. It tops out at about $52 trillion (T). Each of those big, blue, upside-down triangles mark a doubling of credit market debt. From 1970 to about 1977, total credit market debt doubled. It doubled again by 1983. Then it doubled again and again and again. Over four decades, we had five doublings of our credit market debt. In order for the next 20 years to look like the last 20 years, we would need two complete doublings of credit market debt. Let me put those numbers in: $52T to $104T to $208T. That is an absolutely obscene amount of credit growth. This is not how our economy is supposed to function. It was a result of the abandonment of the gold standard, and it is not sustainable.
The second thing I want to point out is the blue line. That is a curve fit. It is an attempt to mathematically model what is going on with that red credit market debt line. It shows that our money system, our credit system, has been growing nearly perfectly exponentially.
Debt:GDP Explosion
Another way to evaluate the economy is by looking at the debt:GDP ratio, because if you have a lot of income, it is OK to have a lot of debt: GDP is our income. Something really unusual is happening: The ratio is skyrocketing in an unprecedented range, with the exception of a blip during the Great Depression when manufacturing dived. We are in the middle of a very interesting experiment in this country. We can't dig through the data series and say, "Oh, the last time we did that, this is how it turned out." We don't have any historical examples of any country in history getting out from under a debt:GDP load this high without going through some kind of a massive currency adjustment. There is one example from 1815 to 1900 where England got out from under 260% debt:GDP load, and it did that by cutting war spending after the Napoleonic Wars with help from the Industrial Revolution. Nothing on our horizon indicates that we are going to cut spending or increase our overall economic output by huge amounts. So we have to ask the question: How do we get out from under that? This debt:GDP imbalance is a global phenomenon. It is not just a U.S. problem.
That is why the economy must grow. In order to be happy, in order to service those debt loads, it must grow. Exponential growth, the kind that starts out nice and easy in a linear fashion and then shoots up suddenly, is what I am really worried about. It is everywhere. Human population grew rather sedately for a long period of time and, recently really accelerated. Oil consumption has increased on the same model. Starting in the early 1940s, it really turned up. The more we produce, the more we use. The same is true on the environmental side; water use, forest loss, species extinction, fisheries exploited—all of this turned up aggressively in in the 1940s and 1950s. We could look at miles of roads paved, numbers of McDonald's hamburgers served; it doesn't matter. We are surrounded by all of these nonlinear, very J-shaped curves. This is really critical if you believe in boundaries. There is only so much arable land. There is a limit to how much water is in an aquifer. There is a limit to how much oil is in the ground. We can argue about whether we are close to those limits, but we can't argue about the fact that the limits exist. So we need to understand how we are using these things.
I like to use a thought exercise to explain exponential growth. I have this magic eyedropper. A drop of water from this thing is going to double every minute. So one drop will become two drops in one minute. In another minute it will be four drops. After about six minutes, it will be enough to fill a thimble. If we started this experiment at noon on the pitcher's mound of Yankee Stadium and you are handcuffed to the highest row of the bleacher seats, how long would you have to escape from your handcuffs? By 12:50 that same day, the park would be completely overrun with water. In fact, at 12:45 this is still 97% empty space with a little water in the infield. You have 45 minutes to sort of fool around, but the next five minutes are critical. That is the power of exponential increases. If you have that sense that world events are speeding up, you are right. They absolutely are.
