Global Tipping Point: “Good” Debt Vs. “Bad” Debt (Which is Winning?)
All major U.S. economic depressions were “set off” by this single factor
by Bob Stokes
Updated: December 17, 2020
Isn't all debt "bad"?
Well, in a word, no.
Broadly speaking, there are two types of debt. One of them actually adds value to the economy if handled in the right way, so you might call this a "good" form of debt. However, there's another type of debt (or credit) which hurts the economy.
A classic quote from an Elliott Wave Theorist provides insight:
Self-liquidating credit is credit that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan generates the financial return that makes repayment possible. It adds value to the economy.
Non-self-liquidating credit is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income... Such lending is almost always counter-productive; it adds costs to the economy, not value.
With that in mind, our December Global Market Perspective mentions "non-self-liquidating" debt as it shows this chart and says:
Total global debt has risen dramatically this year and [is expected] to exceed an eye-watering $277 trillion by the end of 2020, [which] will equate to around 365% of global Gross Domestic Product, up from 320% at the end of 2019.
[The] increase in private sector debt is not healthy, self-liquidating debt which, for example, would come from borrowing to invest in a new factory, the debt being paid off via the increased production. No, this is unhealthy, non-self-liquidating debt which is being added and the same is true for U.S. households' binge on mortgage debt.
It's important to know about this big surge of non-self-liquidating debt in the global financial system because it strongly suggests that the eventual deflation of this debt will be devastating.
You see, bank credit expert Hamilton Bolton conducted a study of major depressions in the U.S. and said (Conquer the Crash, 2002):
All were set off by a deflation of excess credit... Deflation of non-self-liquidating credit usually produces the greater slumps.
And, considering the size of the current debt bubble, the next "slump" may be one for the history books.
Prepare now by getting more insights from our Global Market Perspective. Just follow the link below.
Get Coverage of 50-Plus Worldwide Markets – Including Crypto-Currencies
Are you in the habit of focusing on only one market or region of the world?
Expand your awareness of investment opportunities -- instantly!
You can do so by reading our Global Market Perspective, which provides coverage of currencies, crypto-currencies, metals, rates, energy, equities and much more.
You also get actionable financial insights into China, Japan, South Korea, Taiwan, India, Australia, Germany, France, Britain, the U.S. and many more nations.
Our Global Market Perspective was once reserved for institutional clients and now -- it's available to you.
Dig in now.
Just follow the link below.
China Evergrande was the world’s "most valuable" real estate brand. Yet when the bottom fell out, not all investors were surprised that Evergrande is in trouble: See why the unsurprised includes Global Market Perspective subscribers.
Sir Isaac Newton said: "I can measure the motions of bodies, but I cannot measure human folly." Get the financial context of this famous mathematician's statement, plus learn how investors can lose money in the best performing mutual fund.