Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly.
When private credit shrinks — that is, as businesses and households stop borrowing more and start paying down existing debt — the result is at best stagnation and at worst recession or depression.
Courtesy of Market Daily Briefing, here is The Chart of Doom, a chart of private credit in the five primary economies:
The Daily Reckoning
Why is this The Chart of Doom? It’s fairly obvious that private credit is contracting in Japan and the eurozone and stagnant in the UK.
As for the US: After trillions of dollars in bank bailouts and additional liquidity, and $8 trillion in deficit spending, private credit in the US managed a paltry $1.5 trillion increase in the seven years since the 2008 financial meltdown.
Compare this with the strong growth from the mid-1990s up to 2008.
This chart makes it clear that the sole prop under the global “recovery” since 2008-2009 has been private credit growth in China. From $4 trillion to over $21 trillion in seven years — no wonder bubbles have been inflated globally.
Combine this expansion of private credit in China with the expansion of local government and other state-sector debt (state-owned enterprises, SOEs, etc.) and you have the makings of a global bubble machine.
In other words, both the faltering global “recovery” and all the tenuous asset bubbles around the world depend on a continued hypervelocity rocket rise in China’s private credit. What are the odds of this happening? Aren’t the signs that this rocket ship has burned its available fuel abundant?
Three out of the five major economies are already experiencing stagnant or negative private credit growth. Three down, two to go. Helicopter money — government-issued “free money” to households — is no replacement for private credit expansion.
Once private credit rolls over in China and the US, the global recession will start its rapid slide down the Seneca Cliff: The global economy could fall farther and faster than pundits expect.