Debt Saturation: Off the Cliff We Go, by Charles Hugh Smith

The marginal value of an additional unit of debt goes negative when an economy reaches debt saturation. The cost of servicing and repaying the debt is higher than the economic return on the debt. From Charles Hugh Smith at oftwominds.com:

When the system can’t borrow more and distribute the insolvency, it implodes

I started writing about debt saturation back in 2011. The basic idea is we can continue to borrow and spend as long as one of two conditions hold: 1) real (inflation-adjusted) income is rising, so there’s more income to service additional debt, or 2) the cost of borrowing declines so the same income can support more debt.

After 13 long years of declining interest rates and stagnant incomes for the bottom 90%, we’ve finally reached debt saturation: after dropping to near-zero, interest rates are now rising, pushing the cost of debt service higher, while wages are losing purchasing power (a.k.a. inflation), so there’s less disposable income left to service debt.

The game plan for the past 13 years was to fund “growth” today by borrowing vast sums from future incomes: the $1.6 trillion in student loan debt, for example, was supposed to be paid by the soaring wages of all those student-loan-serfs, and all the sovereign debt was supposed to be paid by the soaring tax revenues from rapidly expanding economies.

These fantasies have now run aground on the unforgiving shoals of reality. There’s no way to expand debt if income is losing ground and the cost of borrowing is soaring.

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