Why do I believe that the world is headed into a full-scale depression within a few years?
There could be any number of "precipitating" events, that is, events which seem to be the proximate causes, but the fundamental and underlying reason is the gigantic buildup of debt, a phenomenon which has occurred worldwide.
Of course the worldwide buildup of debt is the largest in history in absolute terms—because the world economy is the largest in history—but that's not really the right way to measure it. A given absolute level of debt is meaningless. What matters is the percentage of debt compared to GDP, and that is where this global buildup of debt is historic.
Take the United States. Its current total debt, public and private, is estimated to be around $37 trillion, and its total GDP per year (the economy on which that debt depends for payment) is about $11 trillion.
So the ratio of U.S. debt to GDP is over 300%, which just happens to be the highest in history. The second highest percentage, 250%, was recorded in the Great Depression of the 1930s. And the debt percentage in 1929, just before the great crash? 150%, less than half what it is now.
Prodigious efforts are being made to keep this mountain of debt increasing so that it won't implode. "Easy credit" abounds. But the fact that consumers, cities and states, corporations and the federal government are all awash in historic percentage levels of debt should give us pause.
Does this mean that the whole debt structure must come crashing down right away? Not at all. It's impossible to say exactly when a bubble will be pierced, and the game could go on for several more years yet. But eventually, mountainous levels of debt outrun the ability of debtors to service the debt. That's when the trouble begins.
This situation is by no means limited to the United States. Whether we look at Canada, Mexico, Brazil, Argentina, Germany, France, Britain, Italy, China, India, Thailand, Russia, Australia or whatever, the story is the same. That this debt phenomenon is taking place on such a global scale is also unprecedented.
The thing about financial bubbles is that they always implode eventually. There is no example in history where one did not. A gigantic financial bubble becomes like a balloon blown up too far—the slightest thing that jars it will cause it to burst.
At that point whatever jarred the balloon will be blamed for the bursting, but the real cause of it is simply that the balloon was blown up too far in the first place.
This is what has happened with the current Great Global Credit Bubble. It has blown up so far that nothing now can prevent it from bursting, in my opinion. It's just a matter of time and a precipitating event to blame it on.
Stock markets, which are anticipatory mechanisms, are in the midst of a gigantic bear market—with sharp rallies from time to time, of course—that will probably reach a bottom around August, 2008. There may be a second bottom in 2010 or 2011. At the ultimate bottom I expect the Dow Jones Industrials to be in the low triple digits.
But the deep depression antipated by the markets will, in my opinion, just be getting warmed up at that time. The debt implosion will be so tremendous that the resulting depression will most likely grind on—with intermittent rallies of course—way beyond our lifetimes.
This will have political repercussions. As the depression deepens, the economic system of free-market capitalism and the political system of representative democracy will be imperiled as never before.
As people become more desperate and demanding of answers, the "leader on a horse" syndrome will tend to occur and dictators offering simplistic solutions may very well come to the foreground. At that time, the laws and procedures now being established in the "war on terror" will be the precedents used by authoritarians to complete their take-overs.
The financial, economic and geopolitical implosions will not even be the most of it. Ultimately, a greater threat than these will be the ecological catastrophe waiting in the wings. The denoument of this latter situation will come a bit later, but will eventually threaten the very survival of the human race.
Though all of this will be very traumatic and painful, it's not the end of the story. These eventualities will also have some very constructive consequences. For other aspects of the story, please see The heart of the planet, A context for the future and The Future, Part One.
—jim sloman, 8/01/02 for Sept 10
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