The Debt Supercycle Reaches Its Final Chapter

Thursday, January 19, 2012
By Paul Martin


“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

~John Maynard Keynes

This year will mark my 32nd year in the business. I began my career in 1980 after spending several years in corporate life, which I did not find to my liking. I had too much of an independent streak and eventually came to the realization that I’d be much better off starting my own business. When I entered the financial world interest rates were beginning to peak, as the long upward climb in inflation was coming to an end under the leadership of Paul Volker at the Fed. It is hard to believe today that interest rates on treasuries were as high as 15.7%. The yields on money market funds were over 18%. Inflation rates were over 14%, with oil prices at $40 a barrel. Gold and silver would eventually peak at $850 and $50 an ounce, respectively.

Where the Debt Supercycle Begins

I spent my first decade in the business as a broker before transforming my business to a fee-based money management firm. All I sold in the 1980’s was fixed income. Who wanted to invest in stocks when you could get double digit returns in guaranteed deposits at a bank or by investing in government debt? I still remember one of my first trades—a 10-year treasury note paying a 15% interest rate.

What I did not realize at the time was the U.S., and the western world in general, was about to embark on what we now refer to as the “Debt Supercycle”—a theory articulated by the investment strategists at Bank Credit Analyst out of Canada. The Debt Supercycle is a description of the long-term decline in U.S. balance sheet liquidity and the rise in indebtedness during the WWII period. Economic expansions in the post WWII world were associated with the buildup in debt as western governments introduced automatic stabilizers through entitlements such as unemployment benefits, Social Security, Medicare, and deposit insurance at financial institutions. During the early stages of debt buildup, government policies were successful in preventing the frequent depressions that plagued the pre-WWII economy. Western economies would experience periodic corrections during recessions, but these recessions did not reverse the long-term trend of debt buildup that continued to grow with each successive decade.

The Rest…HERE

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