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XMFSinchiruna (26.50)

Crossing the Debt Saturation Threshold



June 01, 2010 – Comments (16)

We have plunged through the debt saturation threshold, where we can no longer purchase GDP growth with ever-increasing scales of deficit spending ... an activity that has been so central to this entire post-Bretton Woods experiment in unbacked fiat currency (and every preceding fiat experiment before it).

The image in comment #1 below charts the dramatic failure of an entire financial paradigm. Place it next to a chart of gold, and the picture becomes clearer still. 

What options remain when you can no longer spend your way out? So far the Fed's actions have made it clear that no alteration of present policy is on the table. So far the Obama administration has not backed away from its own frightful (albeit reliably understated) deficit projections. So far all Congress has done is to endorse too-big-to-fail even under the guise of "financial reform". 

I said it on the Capitol Hill lawn on the eve of the TARP vote in 2008, and I'll say it again today: you can't solve a debt crisis with debt unless you're willing to sacrifice the underlying currency and impoverish your people in the process. Austerity is an unpopular word, but by hook or by crook, it will eventually become the law of the land. The window of voluntary austerity continues to close, leaving behind only one scenario to play out ... a stagflationary depression that will reshape the global balance of power and erase words like "land of opportunity" from the modern American lexicon.

We don't have to take it lying down. Tell your representatives in Congress to enact real financial reform that addresses the root causes of this crisis (expecially the world-altering obscenity that is the global market for derivatives), and make it clear to them that you intend to replace them unless they support rational fiscal policy and an unfettered audit of the Federal Reserve. Too much is at stake for us to remain hapless victims of Congressional whimsy and Western fiscal malfeasance.

16 Comments – Post Your Own

#1) On June 01, 2010 at 9:11 AM, XMFSinchiruna (26.50) wrote:

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#2) On June 01, 2010 at 9:19 AM, binve (< 20) wrote:

Hey Sinch!

You know that this is a topic that I have been hapring on for months now. See   Debt Saturation - and  More on Debt Saturation Equals Diminishing Growth, Employment, and Capacity Utilization… -

Investors need to understand how this influences the macro picture. That is that all of our stimulus and GDP 'growth' is fueled by unsustainable debt. The puts the sustainability of the recovery into its proper perspective. Thanks!.


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#3) On June 01, 2010 at 9:29 AM, XMFSinchiruna (26.50) wrote:


Thanks for posting those. I did recall you had posted on the topic, but didn't have time to look for it. :)

Yes, it does mean that the illusion of growth is propagated by unsustainable debt, but it also means that at an alarming rate we're getting successively less bang for each buck ... which is a bitter pill to swallow when that condition is coupled with the resulting loss of purchasing power over time.

Because the fates of the U.S. and Europe are now ingloriously intertwined in this derivatives nightmare, this condition of debt saturation makes the incredibly tepid market respose to a $1 trillion European intervention significantly easier to understand.

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#4) On June 01, 2010 at 10:06 AM, russiangambit (28.71) wrote:

What I don't understand is why the power that be thought the outcome would be different in case of the US when we had a very good example of Japan in front of us, and they are 20 years ahead on the curve.

Or they simply had no other ideas or no political will to try something else? And FED is still plannign to keep rates at zero for forever hoping for a different outcome and in the process ensuring that malinvestment and the destruction of rpoductive economy continues.

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#5) On June 01, 2010 at 10:56 AM, outoffocus (23.81) wrote:

He who oppresses the poor to make more for himself
         Or who gives to the rich, will only come to poverty


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#6) On June 01, 2010 at 12:15 PM, PeteysTired (< 20) wrote:

Do you have a way to calculate this threshold or is this more of a feeling?

I am not looking to pick a fight, but wanted to know if there is a certain number or range where you feel uncomfortable?

Also, do you believe the GDP numbers being reported?


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#7) On June 01, 2010 at 2:13 PM, jesusfreakinco (28.23) wrote:


The millions dollar question is how much longer the Fed can keep up this charade.  It seems to me this is going to end in hyperinflationary tears rather than a slow leak over many years. 

I've been warning friends and family to prepare.  However, I think it will be too late because the tornado will whip through taking out everything in its path.

Keep up the good work.  I read and rec often, but don't always reply.  You are a beacon of truth in the world of MSM BS.



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#8) On June 01, 2010 at 2:43 PM, silverminer (30.05) wrote:


Please reference the above chart. The chart, derived from Treasury data, tracking delta in GDP over delta in debt, provides the quantitative threshold you are asking for. 

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#9) On June 01, 2010 at 5:05 PM, SockMarket (34.55) wrote:


3 issues with the chart:

1) it strikes me as misleading since data from the time immediatly following this with positive GDP growth would probably bring the blue line up to about the trend line, perhaps higher.

2) this is a measure that only works for one situation. If we were to reduce our debt while growing GDP the chart would look terrible. It only works when debt is increasingI don't expect that we would ever (willingly) reduce our debt, but I think one could find better measures.

3) I can't prove this but I would guess they are using rGDP, I think it would be better if they used nominal (unless they adjusted debt for inflation) since both GDP and debt are equally affected by inflation.

It is entirely possible that I am missing something here so let me know if I am. 


That said 

I would not be surprised if we did enter the type of depression you are talking about, but I wouldn't be stunned if we missed it either; I don't think that it is the only option left to us at this point. 

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#10) On June 01, 2010 at 7:11 PM, XMFSinchiruna (26.50) wrote:


Thanks for your reactions to the chart. As you'll see in the legend, the chart is reasonably up-to-date, drawing from data through March 11, 2010. I see no cause for interpreting the chart as "misleading".

I think it may be a premature assumption to suppose that recent nominal improvement in GDP would bring the ratio of delta GDP to delta debt back to zero. Our debt has expanded drastically even during the most recent quarters. To be clear, that zero line in the chart is NOT a trendline... that is the breakeven point ... where an additional dollar added to the debt yields zero GDP growth.

I also see no evidence that this chart used inflation-adjusted data for one measure and not for another. "I can't prove it but I would guess ..." does not constitute a very damning critique of the graphic. The chart's appearance on Jim Sinclair's website translates to an endorsement by one of the most knowledgeable experts on currencies and debt that you'll find anywhere. If anyone wants to run the numbers and come up with their own chart, you are more than free to do so, but in the meantime I am inclined to judge the above chart as both wholly representative of the losing endeavor that is this attempt to solve a debt crisis with increasing mounds of debt. 

I appreciate your feedback ... I just don't see any evidence to support the critiques offered therein.


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#11) On June 01, 2010 at 8:55 PM, SockMarket (34.55) wrote:


based on the chart and silverminer's (your alter CAPS ego's?) comments on this it appears that the chart is simply measuring a $ change in rGDP / $ change in debt. 

Since both GDP and debt have been growing since Q4 2009 I don't quite understand how change in GDP/change in debt for that time could be less than 0. 

Therefore I assume that the chart was based on a report published on that date but compiled during Q4 2009 (without that quarter's data) and as such only shows declines in GDP. Since there has been growth in GDP since that time and this is not shown we are not actually plunging off a cliff, as the chart would indicate. Hence why I said it was misleading. 

I think it may be a premature assumption to suppose that recent nominal improvement in GDP would bring the ratio of delta GDP to delta debt back to zero.

Unless I am wrong about what the chart measures, I don't see how this is possible. Let's say GDP rose by 1% and debt rose by 10%, you would calculate (assuming a base of 100 for each): 0.01/0.1 which is 0.1, which is above 0. As long as both numbers are rising it is impossible to to get 0 as an aswer. I can guarantee that GDP rose and I would bet that debt rose as well.

If debt for some reason fell over that time, to give us that negative number, then it would suggest that we can grow without debt being increased, which would be a very positive sign and not indicitive of a recession/depression.

That is why I believe it was misleading, sorry if I wasn't clear the first time around.


of course if I am wrong in what the chart is measuring I would be wrong in my critiques as well.


#2 I don't believe you addressed, but it probably isn't much of a problem because I doubt debt will fall for quite some time 


#3) if it was prepared by an expert I am happy to go with it. I simply saw that it was done by a blogger and assumed that it was an amatuer (like me!) who put it together. 


I would tend to agree that plugging debt holes with more borrowing is a bit ridiculous and that the added debt is a huge issue. I would also agree that one way or another we will see strong inflation (hence why most of my picks are commodity related) although I don't know that it will be in a depression.  

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#12) On June 01, 2010 at 8:58 PM, SockMarket (34.55) wrote:

my apologies I meant GDP not rGDP in the first paragraph. sry.

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#13) On June 02, 2010 at 9:37 AM, XMFSinchiruna (26.50) wrote:


I am short on time, so forgive my brief response. Of course you are right to point out that so long as both delta values are positive, the resulting datum would likewise be positive. After scrutinizing further, it appears you are correct that the chart may relate data only through Q409. You would also be correct that we have therefore bumped up past the zero mark in the interim, but ...

I still don't think that renders the chart misleading ... the line on the chart does not extend through 2010 on the x-axis, so there is clearly no effort to deceive. The message of the chart, furthermore, is longer-term in nature, and is all about the dropping trendline over a 44-year span.

Sorry for not being clear on those points in my first response (and yes, silverminer = TMFSinchiruna). :)

You're right, I didn't address #2 ... I agree with your last statement that it's a moot point. :O

I won't declare the chart-maker an expert, although I do see he is a published author with a book out, which is a step better than an anonymous blogger. What I did suggest is that the chart was vetted by some of the best people in the business of tracking relationships between debts, currencies, and and macroeconomic forecasts.

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#14) On June 02, 2010 at 1:34 PM, richthegeek (< 20) wrote:

[danielthebear]>I would also agree that one way or another we will see strong inflation.

The fact that we are in for a long and deep correction I get. As a society we are far use to buying it now and earning it later, and the market is going to correct that behavior. What I'm not sure I understand, however, is the inflation part of it. The fed will pump in more money in an attempt to monitarily inflate, but won't the collapsing credit offset that?

Thanks all - great read.

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#15) On June 02, 2010 at 2:09 PM, silverminer (30.05) wrote:


Key into the monetary debasement as an ainflationary input, rather than the more traditional "velocity of money" paradigm.

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#16) On June 03, 2010 at 1:23 AM, SockMarket (34.55) wrote:


I guess it depends on what you are looking at for. I already knew about the trend line down--and was kind of expecting it so the end was what drew my attention. So that is what I was focusing on. The trend is very clear and it does a great job of illustrating that.



well I figure that we won't see anything significant right now. Loans are just too hard to get for money to flow through the economy (so the money the fed creates will not multiply itself by nearly as much). So I don't know that we will see anything right now. That said I think that the economy will eventually recover, banks will stop having such high costs from defaults, and credit will be more attainable and at that time all the money will start moving and the flood gates will open, so to speak. 

If we go into a severe depression, the likelyhood of which I would question, then it is entirely possible that the defaults will destroy an amount large enough to mostly counteract all this new debt but that would have to be a VERY deep depression.

I would tend to agree that the idea that velocity of money remains constant is complete BS. I do, however still go by the old school equation, since I don't know anything different. The equation is MV=PY. Right now M is up and V is down. When V goes up P and Y will likely follow in tandem. (this is essentially the "mathematical" reasoning behind the first paragraph)

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