If Cash Is King Then Credit Is God - January 2015

originally published August 2013
updated January 2015

Only one financial metric really matters, and it's a crime that it doesn't get the attention it deserves. Then again the whole financial system is a scam so why should that be surprising.

The financial metric that rules the world is called Total Credit Market Debt, or as it's now referred to, All Sectors; Credit Market Instruments; Liability, Level (TCMDO). The Fed changed its title because the original name was too easy to understand, and the last thing the Fed wants is for people to comprehend what the hell is really going on with the economy.

When big numbers get thrown around, the one that usually gets the most attention is Gross Domestic Product which currently clocks in at roughly $18 trillion. That's a big number, right? Wrong. Here's a big number - $58 trillion. That's the amount of Total Credit Market Debt Owed in the system right now. That number includes all federal debt, state and local debt, household debt, financial sector debt, and rest of the world debt, whatever the hell that is. Total Credit Market Debt is a monster, and it makes the Gross Domestic Product of the United States look minuscule by comparison.

The Total Credit Market Debt behemoth becomes truly horrifying when you consider the following: when a bank makes a loan it does not create the money necessary to repay the interest attached to the loan. The only way the original loan gets fully repaid with interest is through the creation of more credit. David Icke takes this explanation a step further

Or put another way

That's not exactly what he said from jail, but it might as well have been. Unless new borrowers are constantly entering the financial system the whole scheme collapses. When the massive mortgage market imploded, the government immediately stepped in to offset the exodus of borrowers. The cash for clunkers program was revved up to bring more borrowers into the auto market; federal lending standards were loosened to bring more borrowers into the student loan market, and Quantitative Easing was launched to recapitalize the bankrupt banks. Anything to bring more suckers, I mean borrowers, into the system and keep it alive, lest it blow up like Bernard L. Madoff Investment Securities LLC, or worse, wind up hanging lifeless from a metal beam like his son, Mark.

As always, FRED charts tell the real story...

Understanding Total Credit Market Debt

The small dip that appears on the TCMD chart is revealed to be an epic collapse when viewed on a year over year basis

That same dip is equally as devastating when looked at from a year over year percent perspective

Plotting the two TCMD year over year charts together shows the true synchronized severity of the recent credit calamity

Technical Analysis of Total Credit Market Debt

Curvilinear Wave Analysis, developed by your Chartist Friend, excels at identifying trend reversals. This is the idealized curvilinear wave diagram

Analyzed in this way the trend reversal in the growth of Total Credit Market Debt becomes obvious

Clearly the growth of TCMD reversed lower in the mid 1980's and has been trending down ever since. Due to the multi-trillion dollar coordinated efforts of the federal government, the free fall of Total Credit Market Debt growth during the credit collapse was arrested in 2009, and the debt based system was put on life support. Thanks to Helicopter Ben the growth rate was given a support level from which to bounce, and bounce it did. Unfortunately (or fortunately, depending how you look at it) for the managers of Camp Usury as Max Keiser calls the financial system, the 5% level from which it broke down is now looming overhead as strong technical resistance, and as Robert Prechter has pointed out on many occasions, unless the Fed intends to destroy the US Dollar through exponential monetizing, there simply isn't enough credit available to get the growth rate back above 5% to reverse the trend higher and negate the breakdown.

Economic Significance of Total Credit Market Debt - Broad Metrics

The strong downtrend in the velocity of M2 Money Stock suggests that the recent bounce in TCMD growth is not sustainable

Economic Significance of Total Credit Market Debt – Stock Market

Economic Significance of Total Credit Market Debt – Housing Market

Economic Significance of Total Credit Market Debt – Commodity Market

Economic Significance of Total Credit Market Debt – Automotive Market

Economic Significance of Total Credit Market Debt – Employment

Economic Significance of Total Credit Market Debt – Government Finances