Private debt has plunged rapidly since 2008. This includes mortgages, credit card debt, and other kinds of consumer debt. School loans continued to rise but even that appears to be peaking.
By contrast, the national debt has surpassed $15-trillion and is still rising. The Federal Reserve has monetized $2-trillion of debt into new money since 2008: that dollar figure is more than twice the amount monetized between 1913 and 2007.
Please take a look at the chart below:
"A lot of people are saying the government is going to go further into debt forever and the Fed is going to monetize forever...I think there are changes in the wind."
Robert Prechter at the 2011 New Orleans Investment Conference, (10/27)
A "change in the wind" indeed. The private sector's anti-spending psychology is starting to infiltrate the political class. And the Fed is feeling the pressure to "stop inflating."
Still, many people say that the Federal Reserve will just keep "printing money." But to say that the government will just keep "stimulating" is to ignore the simple truth that institutions consist of people. Even people in authority come under the influence of prevailing psychology -- which today is one of increasing financial constraint.
We've experienced a similar psychological shift in the past.
Paul Johnson's book "Modern Times" describes events in the late 1920s and early 1930s: The quote below explains what happened before the deflationary spiral of The Great Depression:
"The fact is that America's presidents, and her congressional leadership...sought to keep the world prosperous by deliberate inflation of the money supply. This was something made possible by the pre-war creation of the Federal Reserve Bank system..."
Sounds familiar? Indeed, there are many parallels between then and today. There are also differences. One difference is that today's trend is much bigger. Another difference is that today's trend is taking longer.
Robert Prechter was comparing the late 1920s and early 1930s with today when he wrote this in the November Elliott Wave Theorist:
"The financial and economic deterioration that began in 1929 was...rapid, ending in 1932 for financial trends and in early 1933 for the macroeconomic trend, a period of less than four years. The current change in conditions, which began in 1999, has been slower. This slowness had accommodated authorities' insufferable meddling, which in the long run will make the entire implosion more agonizing for society."
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