Debt Deflation and Asset Price Collapses

An excellent article on what, I think, we all know, but may not want to believe. That is, the great debt unwind is only beginning, it’s going to be a rather ugly period, and the consequences are, as of yet, highly uncertain.

via Digging Out of Debt at

Some of the stats they reported on, courtesy of a McKinsey Global Institute study, that are staggering. Britain and Spain have total debt to GDP of 465% and 365% respectively, which combines public and private sector debt. That’s a staggering and sobering statistic. Just doing a back of the envelope calculation as I sit here and drink some coffee, I imagine the time it would take to pay off that debt load – without taking on new debt – would probably be 15 to 20 years. Think about that.

So of course, there’s another question: what was all of that debt going to? Well, everything. And that leads me to this passage I found in the World Economic Forum’s “Global Risks 2010” report:

The risk of a global asset price collapse – where everything that is not cash goes to zero – is quite high. And the World Economic Forum highlights this with a very cool info visualisation:

As somebody who likes to make sure I have my bases covered, I’d like to draw your attention to the left side of the picture and look at two things: likelihood and severity. This scenario has a high likelihood of occurrence (1 chance in 5), and high severity ($1tn or more). The ultimate scenario to give you a lump in the back of your throat. If you want to read the World Economic Forum report in its entirety, I put it here:

The way I think about this occurring is this: think of a machine that runs on perpetual motion. It needs inertia to keep moving (for our economies, I use velocity of money as an inertia measure). But as inertia slows, momentum/energy leaves the system. And this keeps feeding on itself until your perpetual motion machine has no, well, motion.

So if we’re losing velocity in the economy, and other economies that have followed the same policies see the same, you can see how this scenario plays out. Cash is king, and essentials like food, water, as well as precious metals, are held as secondary instruments for payment. But just as there was this feeling of doom and panic in September-October’08, I don’t know what this scenario would feel like if it were to play out.

And that’s the thing that really has me worried…


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Filed under finance, macro, Markets, Way Forward, You're kidding

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