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The Near Future May See One of the Biggest Wealth Transfers in Human History

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Thursday, October 24, 2013, 11:34 PM
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Executive Summary

  • Why GDP growth is very unlikely to support the rate of credit growth the Fed wants
  • If it can't, what is most likely to happen?
  • Why the current bubble threatens to end in one of the biggest wealth transfers in human history
  • How to increase your odds of being on the right side of that transfer

If you have not yet read Part I: The Fed Can Only Fail, available free to all readers, please click here to read it first.

The (Delusional) Plan: Growth Will Cover Past & Future Debts

Currently, the U.S. debt-to-GDP ratio stands at around 350% in 2013. This is an historically elevated number, so much so that we really don't have anything in our economic history books to tell us what comes next. Robust economic growth, we suppose, that can reduce that imbalance painlessly.

But looking at the past 220 years of history, we find that the average yearly growth in U.S. GDP has been 3.8%:

(Source

Now, I have some quibbles with the idea that the U.S. will be able to sustain that long-run average of 3.8% over the next 30 years, because debt levels are already crushing growth, as are high oil prices (double whammy!). But let's spot the Fed every advantage here. 

If U.S. GDP grows at 3.8% annually, but credit grows at 8%, that means the nation's debt-to-GDP ratio would balloon to 1,130% by 2043. That's equivalent to someone with a $50,000 salary carrying $57

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