25 june 2013, the dragon of debt

Amidst calls across the western world to let loose the genie of growth through the tamed beast of borrowing (look how cheap it is !), I remain fixated about the dragon of debt. Our concept of spend comes from an utterly unsustainable pattern established as the norm during the working lifetime of most of today's policymakers. Like geese stuffed for foie gras (I'll credit that to john lancaster) consumers, companies and sovereigns gorged on cheap credit. I recall the ecb vice-president telling how he was alerted to the coming crash while having his haircut in new york and being regaled about how his stylist had just bought a third house. Most of us have simply got used to buying everything we want, an extreme and gross consumerism that enabled the "great moderation" of the period, when cheap credit-fuelled growth kept inflation low, employment high and pumped up asset prices. Companies took on vast new levels of debt too, oiled by the high-yield (junk) bond revolution, that made capital cheaper and penalised companies for keeping cash. This was a happy world, and low interest rates, implicit guarantees and the government's balance sheet kept it that way. No-one dared remove the punchbowl from the party. Borrowing though needs lending, and hence now we are all in hock to china and the oil exporters, whose reserves have grown to the dizzying heights of today's global imbalances. Whether the cause of this is their savings glut or our generational binge is irrelevant; the fact is it's here, and probably has a way to run, as many of its constraining factors - irrational confidence in the american economy, investors' difficulties in emerging markets, and their dwarfish levels of domestic demand - are now slipping away. That epochal perspective is the unavoidable backdrop of any decision today. We are not in control. The "debt supercycle" is finally at an end, and the great deleveraging is upon us, like it or not.