Debt saturation and debt fatigue = diminishing returns on central bank tricks.
Does anyone else have the feeling that things are not just unraveling, but that the unraveling is gathering speed?
Though quantifying this perception is more interpretative than statistical, I think we can look at the ongoing debt crisis in Greece as an example of this acceleration of events.
The Greek debt crisis began in 2011 and reached a peak in 2012. The crisis was quelled by new Eurozone/IMF loans to Greece, and European Central Bank chief Mario Draghi’s famous “whatever it takes speech†in late July, 2012.
We can discern the same diminishing returns in Federal Reserve/central bank interventions, as the initial rounds of quantitative easing pushed stock and bond markets higher for years at a time, while the following interventions generated lower returns.The Greek debt crisis quickly went from “boil†to “simmer,†where it stayed for almost two-and-a-half years. But no one with any knowledge of the gravity and precariousness of the situation expects the latest “extend and pretend†deal to patch everything together for another two years. Current deals are more likely to last a matter of months, not years.
What factors are reducing the positive effects of intervention and causing increased volatility? Let’s start with the engine behind every central bank/state intervention and every “save†of the status quo: debt.
Debt Brings Forward Consumption & Income
Debt has one primary dynamic: borrowing money to consume something in the present brings forward consumption and income. Economists describe trading future income for consumption today as bringing consumption forward. And since debt must be repaid with interest, bringing consumption forward also brings income forward.
Let’s say we want to buy a vehicle with cash, and it will take five years to save up the lump-sum purchase cost. We forego current consumption to save for future consumption.
If we get a 100% auto loan now, we get the use of the vehicle (present-day consumption) and in exchange, we sacrifice some of our income over the next five years to pay back the auto loan. We brought consumption forward, and in essence took future income and brought it forward to pay for the consumption we’re enjoying today.
