Creditism and the Threat of a New Depression

Once we broke the link between dollars and gold, all the constraints on how much credit could be created were removed.

Total credit first went through one trillion dollars in 1964 in the United States, and over the next 43 years, it expanded from one trillion to fifty trillion. So we had a fifty-fold expansion in credit in the United States in 43 years, and this explosion of credit, created our world. It made us all much more prosperous than we would have been otherwise.

The ratio of debt to GDP went from 150%, all the way up to 370%. So it’s easy to understand how rapid credit growth drives economic growth.

But the day always comes, as the Austrians remind us, when credit can’t expand any further, and as Mises put it, that’s when the Depression begins, and that’s what started to occur in 2008.

We would have had a New Depression had the government not intervened, and the government sector then started borrowing and spending trillions of dollars every year, and that kept the total credit expanding still.

So now we have a total credit base of 59 trillion dollars. As I mentioned earlier, looking back to between 1950 and 2008, every time total credit adjusted for inflation, grew by less than two percent, we had a recession, and the recession didn’t end until we had another very big surge of credit expansion.

But since 2008, credit hasn’t been expanding by two percent, and that’s why the economy’s been weak, and that’s why the Fed has felt it necessary to intervene by creating trillions of paper dollars and pumping that into the financial markets to cause the stock market to go up and the property prices to reflate.

But at this point, the question is will credit ever begin to grow again enough to drive the economy? We now have such a large base, 59 trillion dollars. If we assume that the inflation rate is two percent, then we need total credit to grow by four percent so that total credit, adjusted for inflation, will hit this “two percent recession threshold”.

So four percent of 59 trillion dollars is 2.4 trillion dollars of credit growth that we need this year just to stay out of recession.

If you look at all the big sectors of the economy, there are just a few of them. You can see that none of them are going to expand their debt enough to make total credit grow by two percent.

So, essentially, this economic system we have, (I like to sometimes call it “creditism”) needs credit growth to survive, and without the credit growth, it’s going to collapse just as the Austrian economist taught.

The thing is if it collapses into a New Depression, this is not going to be something that involves some pain for a year or two and then takes us back to some sort of laissez-faire Garden of Eden. This is going to be after a five-decade sixtyfold expansion of credit we, that our government has managed to grow decade after decade after decade one way or the other.

If this collapses now, we’re going to have an equally protracted crash, and it’s not going to be a matter of taking a pain for a couple of years. The consequences of it would, I think, be a replay of the 1930’s and the 1940’s, but this time with nuclear weapons involved.

Would there be a recovery? Well, when Rome fell, there was a recovery, but it took a thousand years. So I don’t believe anyone alive today would still live long enough to see the recovery that would follow a New Depression.