For each of the past thirty years or so, total US debt (government, business, consumer, etc.) has grown much faster than either national income or Gross Domestic Product (GDP). (See chart below: ‘Total America Debt.’)

Source: Grandfather Economic Report by Michael Hodges/financialsense.com

I believe that this debt growth is likely to end in the next few years — or sooner — for the simple reason that creditors will fear non-repayment of principal! Consumers’ ability to take-on more debt is extremely limited, as savings rates are close to zero and continue trending down (see chart below ‘Personal Savings Rate’). When creditors begin to back-off lending, the effects on US growth will be decidedly negative unless the country can learn to create growth on much less debt. This is possible, as the US came close to that between 1950 -1980 (again, see above chart ‘Total America Debt’).

Source: Grandfather Economic Report by Michael Hodges/financialsense.com

Why has debt grown so much faster than income or GDP?
I believe there are two ways of understanding the furious pace of US debt growth. Firstly, I think it is a failure of individual consciousness, and secondly, a failure of collective consciousness as it relates to federal and international economic or financial structures.

It is primarily a failure of individual consciousness as it relates to the lack of personal fulfillment and critical thinking. Bereft of inner fulfillment, the individual seeks it mostly in material well-being. Thus he or she focuses, uncritically, on material accumulation, no matter what the cost, and avails themselves with massive amounts of debt to satisfy that material quest. Just like a drug junkie, they need more and more ‘stuff’ to sustain the thrill.

It is a failure of federal and international economic or financial structures because they have encouraged mass, loose credit, and unfettered monetary expansion and leverage. Examples of this are many. They include:

• The lowering of bank lending standards (i.e. the sub-prime mortgage fiasco).
• Massive growth of money supply (http://www.shadowstats.com/cgi-bin/sgs/data modeling US M3 growth at 14+% annually, many times faster than GDP growth).
• US Federal Reserve’s forcibly reducing market interest rates (especially between the years 2002-5).
• Foreign lending to the US of huge, accumulated dollar surplus holdings by China, Japan, and others in order to help keep US interest rates low and maintain, forced, low rates of exchange for their own currencies.
• The lack of international oversight (read collective consciousness) regarding financial leverage and the development of over five hundred trillion dollars in derivatives (with a ‘notional’ value forty times the size of the US economy) and which Warren Buffett has labeled, ‘potential weapons of financial mass destruction.’

How will this debt growth stop?
The credit growth stops when creditors become nervous about repayment of their principal. Loan standards tighten and a credit crunch ensues. This is beginning to happen. However, we are just in the early stages of this process. Attempting to mitigate a credit collapse, the US Federal Reserve, European Central Bank, Bank of England, Bank of Japan, and others are beginning to provide huge sums to lenders who get into trouble and infuse into financial markets unimaginable sums to aid market liquidity. Thus they hope to convince lenders to keep lending.

However, this whole process of pushing liquidity into the markets is flawed from the start, as it circles round to the numerous Americans not being able to meet their mortgage or other loan payments to begin with. Mortgage default rates are skyrocketing (RealtyTrac Inc. says they are up 100.1% in third quarter of 2007 over one year ago) and credit card debt defaults are rising too. With enormous loan write-offs, the capital of lending institutions will also be lower, requiring them to reduce their outstanding loans even further. Eventually, no matter how much the central banks push money onto the lenders, the lenders begin to balk at offering new loans, while overstretched consumers resist taking on new debt. Before this process ends, monetary and price inflation could escalate and create a possible hyper-inflationary environment, leading to a classic deflationary bust.

The conditions for non-debt growth. The way forward.
Conditions for economic growth where increases in debt and income are better balanced, are possible. This can be attained if Americans — and individuals everywhere — first gain more inner fulfillment and improve their ability to think critically. That will bring greater balance and creativity to their minds and reduce their addiction to material goods. It requires the materialistic drug junkie to go on ‘methadone drug replacement programme’ to ‘chill-out’ and see the world anew.

Please do not misunderstand me about the need for continuing gains in material comforts and economic security. Such things are fundamental to human life and progress. But practically, Americans must get back to much higher rates of saving to reduce their demand for debt and to re-balance their economy.

Historically, American savings rates have been 10-15+% of disposable income. In part, that was due to the fact that individuals living in past decades did not have the comprehensive government and private safety nets of today, nor was credit so easily available.

Over the longer term though, higher savings rates will provide superior financial stability and income for consumers, while providing the foundation for sound economic growth.

On the collective level, a similar psychological transformation has to occur among those who govern federal and international, economic and financial structures. The governors and directors of such institutions have to go back to the mindset of Paul Volker, who as Chairman of the US Federal Reserve in 1980, stood fast against the enormous threat of inflation. He raised interest rates to as high as 19%. America then suffered its worst recession since the 1930s. But he possibly saved the US from something much worse. That could have been a hyper-inflationary event possibly leading to a depression on an unimaginable scale.

I am not saying interest rates need to go anywhere near 19%. What I am saying is that the present mindset of the individuals at the top of the economic and financial establishment of throwing ‘money on to the fire’ by downward manipulation of interest rates and encouraging consumers to take-on even more debt — is simply nuts! (I would love to talk more about the dangers of present day central, and fractional reserve banking, but I will leave that for another post!)

At the present time, despite the protestations to the contrary by Mr. Paulson, the Treasury Secretary, the American government probably wants a lower US dollar versus other major currencies in order to reduce its trade and current account deficits. This would help the US to stimulate exports and jobs at home, as well as pump-up the earnings of US based companies who translate their foreign currency profits into dollars. This, therefore, would also help to support US stock prices. Conversely, at home, higher prices of imported goods would reduce material consumption, help slow down consumer loan demand and encourage savings.

The Euro, Canadian and other floating currencies are rising fast against the US dollar. However, the big Asian ‘partners’, China and Japan do not want to see their currencies appreciate against the US dollar. At this time it looks like there is paralysis at the international level to adjust exchange rates to market levels that allow for free-market determination of rates that incorporate fundamental trade and services imbalances. In fact, we might be close to an era where countries engage in competitive devaluations of their currencies.

Such currency ‘wars’ is what the French President, Mr. Nicolas Sarkozy, recently described as being entirely possible. Following on from that could be trade protectionism and a repeat of the 1930s trade wars.

Such national, international and global deadlocks must, and can only be resolved with a change in consciousness in America and all the participating nations. The reduction of US debt and increasing its savings rates is an international enterprise. And it can be done peacefully with a change in individual and collective consciousness, or forcefully and painfully, which will happen, if the change in consciousness does not occur soon!

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