Ben Bernanke’s legacy: The looming contraction he only delayed

Ben Bernanke testifies before the House Financial Services Committee on Wednesday concerning the state of the American economy Photo: AP

NEW YORK, July 16, 2013 — In a real-life sequel to the movie “Groundhog Day,” Federal Reserve System Chairman Ben Bernanke testifies before the House Financial Services Committee on Wednesday concerning the state of the American economy. The next day, he will deliver a similar report before the Senate Banking Committee.

Like the weatherman Bill Murray played in the 1993 comedy, Chairman Bernanke seems stuck 20 years later in exactly the same place, trying every trick to spring the American economy out of winter doldrums.

Famed publisher Alfred A. Knopf once observed, “an economist is a man who states the obvious in terms of the incomprehensible”. Rather than waiting to decipher Chairman Bernanke’s remarks, here are some truths that help explain why the American economy seems headed straight for trouble.

Truth # 1: Inflation is Rising which means that the Cost of Servicing America’s Existing Debt Balances will also Rise

Not long ago, esteemed market observers seemed certain the world entered a new era where the cost of borrowing and the returns available to equity investors would remain far lower than historical experience.

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The party seems to be over—interest rates have been rising in 2013 and borrowers across all sectors of the American economy are about to discover the hard way what happens when “real” interest rates jump closer to levels seen over the full course of a business cycle.

Fig. 1

Fig. 1

Truth # 2: Americans have Run out of Room to Borrow More Money—We Soon will have to Reduce our Debt Balances

As the strongest and largest economy in history, America enjoyed one enormous privilege—governments, households, corporations, and financial institutions were able to borrow with abandon.

>Fig. 2

Fig. 2

Starting from year-end 1965, Americans increased total borrowings each year through 2012 with the exception of 2009 or in 46 out of 47 intervals. Surface level evidence suggests that we Americans have become addicted to borrowing—the over-riding question is can we afford to service and repay our accumulated debt obligations as these grow and mature?

Truth # 3: Americans do not have Unlimited Stores of Asset-Based Collateral that Readily Can be used to Reduce Debt

As of December 31, 2012, America’s total debt stood at $ 54.0 trillion. Count on Chairman Bernanke, his many acolytes and those addicted to debt to minimize the alarm—“our total debts are small in relation to our total assets,” they likely will assert.

Fig. 3

Fig. 3

Information concerning total debt and household assets is worth examining more carefully—too few Americans, even among those who consider themselves “professional” analysts, take the time to pour through statistics The Federal Reserve System prepares that are available online.

Looking more closely, we find that large elements in household balance sheets (real estate and the assumed value of pensions, for example) are not easy to sell quickly at assumed values. Furthermore, levels of total debt that households may ultimately have to repay in the short-term have soared.

Truth # 4: America’s Debt Balance seems far too High in Relation to Total Private Sector Incomes

From 1965 through 1981, total debt averaged just 3.2 x private labor income. From 1982 through 1997, total debt increased to an average of 5.0 x private labor income. Thereafter, leverage jumped to a peak level of 8.4 x private labor income in 2009, remaining at the elevated level of 7.8 x private labor income in 2012.


Fig. 4

Fig. 4

Assuming incomes remained constant at 2012 actual levels, total debt would have to decline by $ 16.8 trillion  to return to the leverage ratio experienced in 1997 (from $ 54.0 trillion to $ 37.2 trillion).

Truth #5: The Unusual Composition of America’s Population Will Continue to Depress Incomes and Demand for Decades

Chairman Bernanke and his team of experts have not devoted enough time to studying stimulants and depressants to aggregate demand caused by the changing make-up of the American population.

Persons aged 25 to 54 form the “active” cohort—this group earns the highest annual incomes and tends to drive capital formation. In contrast, persons above age 55 in the “senior” cohort earn reduced average incomes and generally are risk adverse. Persons below age 25 typically are dependent on others for care or just starting independent lives. This “youth” cohort has the lowest average income.

In the future, productive members inside the American economy will have to support a much larger number of dependents.


Fig. 5

Fig. 5

The American population has shifted in favorable ways that will not repeat in near future—the number of senior persons per 100 active persons actually dropped from 55 in 1980 down to 47 in 1997. In addition, the number in the youth cohort declined so that the number of dependents dropped from 187 per 100 active persons in 1971 to 128 by 1997.

Going forward, projections prepared by the Census Bureau suggest that the proportion of senior persons relative to active persons will jump up to the high levels seen now in Europe and Japan. Starting in 2030, the number of senior persons per 100 active persons is expected to reach 80, which is 70% higher than the low point experienced in 1997.

Fig. 6

Fig. 6

In addition to the drag placed on demand by internal forces arising from changes in America’s population mix, most private sector incomes will face relentless downward pressure from foreign labor alternatives and technological innovations that engineer humans out of production and delivery systems.

Considering Chairman Bernanke’s Remarks in Perspective

The Federal Reserve Chairman will probably not share his worst fears—that extraordinary fiscal stimulus and monetary easing practiced with abandon under his watch have only succeeded in delaying disaster for a few short years.

Chairman Bernanke and his illustrious predecessor painted the American and global economies into a dark corner—a painful debt contraction is near, most likely starting in earnest some time between October 2013 and March 2014.

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Charles Ortel

Charles Ortel became a lapsed member of the silent majority in August 2007 when he began alerting the public to dangers posed by structural changes in the global economy. Since then, Charles has appeared in the print, radio and television media with increasing frequency. Brass Tacks will attempt to offer non-partisan perspective on factors contributing to the unresolved, burgeoning crisis and discuss potential solutions. Graduated from Horace Mann School, Yale College and Harvard Business School, Charles tries to learn each day.  

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