The War Between Creditors and Debtors

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The news headlines have been fixated on the debt drama unfolding in Europe. It’s important that we give some thought to this since it paves the groundwork for the upcoming 120-year cycle bottom in 2014 and will increasingly play a bigger role in the financial market in 2012 and beyond.

CNBC ran an article stating that the austerity measures being rolled out in countries across Europe will have a “devastating effect” on European living standards. James Shugg, senior economist at Westpac, told CNBC: “We are looking at a decade of lost living standards across most of Europe. The austerity measures are part of the solution but they are also going to deepen the downturn.” He added that countries in Europe would face a prolonged period of economic hardship because tax revenues would be impacted by the debt crisis.

In the above sentences we have a summation of the two major issues facing virtually every major nation of the world today, namely austerity and taxes. These issues may fall under the category of being “boring but important” but they could also turn out to be much more than that. If my reading of the long-term cycles of history is correct, these two issues have the potential to light the fuse which ignites a powder keg of revolution both here and abroad.

Before we can discuss the issue of austerity, it’s important that we define what exactly it means. Since last summer when the Greek debt problem was first thrust into the news headlines, we’ve seen an increasing number of references to the word. To many, the word austerity brings to mind a humble standard of living bordering on poverty. But when it’s used in a political context, austerity means something else. In global economic terms, austerity essentially means forcing the taxpayers of a nation to shoulder the burden of the creditors.

In other words, because banks and individuals issued too much debt and made poor lending decisions, instead of being willing to “bite the bullet” and suffer losses, they decide that borrowers (be it nations or individuals) must pay back every penny owed plus interest. When this happens at a time when money circulation is imperiled by general economic malaise, this insistence on the part of creditors puts a strain on the entire economic system and can create a downward spiral of deflation.

The U.S. resolved its own credit crisis of 2007-2009 by recapitalizing the big banks at taxpayers’ expense. This may have temporarily postponed the day of reckoning, but it did nothing to solve the underlying problem. All it did was transfer the burden of debt repayment to the public’s shoulders. But with the 120-year cycle of deflation coming down hard between now and 2014, the public will find itself increasingly unable to shoulder this heavy burden. Sooner or later, the credit crisis “solution” will be shown to be lacking and a new showdown between creditors and debtors will begin.

We can see the early rumblings of this showdown in the Occupy Wall Street movement in which the “99 percent” protest the wealth gap between them and the richest 1 percent. History repeats, and this in many ways is a repetition of the great social unrest of the 1890s in the years when the last 120-year cycle bottomed. You may remember from your childhood history lessons that Coxey’s Army, which was a protest march on the nation’s capital by unemployed workers led by the populist Jacob Coxey. The march was in 1894, the exact year when the 120-year cycle bottomed, and the second year of what was the worst depression in U.S. history at that time.

According to Wikipedia, “The purpose of the march was to protest the unemployment caused by the Panic of 1893 and to lobby for the government to create jobs which would involve building of roads and other public works improvements, with workers paid in paper currency which would expand the currency in circulation, consistent with populist ideology.”

Incidentally, if you want to know what the likely outcome of the Occupy Wall Street movement will be, consider that federal troops were brought in to quell the uprising and succeeding in apprehending many of the protestors. According to Wikipedia, “[The] military intervention…proved to be a rehearsal for the federal force that broke the Pullman Strke that year.”

All of this is not to say that debtors should be excused of their burdens. The moral burden is on any debtor to repay his debt in full; this is only fair since a law abiding society can only exist when contracts between two parties are fulfilled. It would be one thing if debtors steadfastly refused to pay what they’ve vowed to their creditors. The problem isn’t so simple, however, since creditors are equally guilty in that they’re excessive greed for gain led them to place onerous interest rates on the credit they extended. This desire to receive a more than ample return on their money has led creditors worldwide in a steadfast refusal to entertain the idea of debt forgiveness.

The ideal scenario in any standoff between debtors and creditors is for the debtors to agree to fulfill their promises to their creditors as best as they are able to under present circumstances. But creditors should also be willing to meet their debtors half way, whether it be a reduction or elimination of interest payments, a scaling down of the actual debt burden or, at the very least, an extension of the repayment schedule. Demanding payment in full, plus interest, in a time where most debtors are struggling to meet their daily living expenses is a recipe for revolution.

Freeman Tilden, author of the book, A World in Debt, made the following comment on the government's prerogative of debt cancellation: "Every government borrowing, therefore, carries with it the political germ from which a repudiation may more easily develop than in loans to individuals." This is an extremely important point that seems to be overlooked by debt crisis commentators.

In his book, Jubilee on Wall Street, David Knox Barker details the Roman debt crisis of A.D. 33 as chronicled by the historian Lightner. The crisis began by a series of money panics attended by a number of runs on Roman banking houses. The crisis was solved by the emperor Tiberius, who "suspended temporarily the process of debt and distributed 100 million sesterces from the imperial treasury to the solvent bankers to be loaned without interest for three years. Following this action, the panic in Alexandria, Carthage and Corinth quieted." Indeed, history is rife with instances of the "temporary" suspension of the process of debt. Debt suspension is in fact one of the primary tools by which debt crises are alleviated.

Citing the experience of the Roman Empire in attempting to outlaw usury, Tilden comes to the conclusion that "if a man could have the longevity of Methusaleh, it would pay him to be never out of debt, for he could count on a political upheaval which would relieve him of his burden every so many years." In the final analysis, as Tilden concluded, debt will likely never be prohibited and there will always be "credit crises" followed by debt cancellations in which the creditor class is swindled by the borrowing class. History is rife with examples of this and it would be a revolutionary innovation if the European debt crisis is settled in any other way.

The cycles of history tell us who will likely emerge the victor in this war between the debtor and the creditor: the debtor will “win” but not without a fierce and potentially violent struggle, one which could last many years.

U.S. Retail Economy

As addressed in the previous commentaries, the New Economy Index (NEI) has been confirming that the U.S. retail sales and economic outlook is positive for the near term outlook and that the holiday retail selling season should be a bullish one. Indeed, initial reports have already confirmed that the holiday sales season has already started off at a record pace. Below is the latest update of the NEI chart.

new economy index

The interpretation of this chart is straightforward: when the indicator itself is in a rising trend above its 12-week (black line) and 20-week (red line) moving averages, the U.S. retail spending economy for consumers and businesses is considered to be improving (or at least holding steady). If the two moving averages are in a confirmed decline, then the short-term retail economic outlook is bearish. To date this indicator has reflected a buoyant economic outlook in terms of retail spending as we head into the critical Christmas shopping season. As stated in the previous commentary, “The economy will probably be able to end the year on a relatively positive note in spite of the fact that the middle class is still in a wage and balance sheet recession and the jobless rate is still high.”

According to reports just released this weekend, Black Friday sales were up an impressive 6.6 percent, while foot traffic was up 5.1 percent. E-commerce sales are also set to make record numbers this quarter. There is a debate as to whether the holiday shopping boom is sustainable but that shouldn’t deter us from concluding that fourth quarter 2011 will almost certainly end on a high note for retailers. There are two questions that need addressing, however, as we seek for a perspective on the longer-term retail economic outlook.

The first question is what is the reason for U.S. shoppers’ buoyant spending mood in the midst of a soft overall economy? This can be answered by realizing that the current retail spending boom is both a seasonal phenomenon as well as a psychological reaction to the financial market rebound of the past two-and-a-half years. It can also be partly attributed to rising prices, which tend to stimulate spending in the short-term due to consumers’ fears of future price increases. The residue from the recently peaked 6-year Kress cycle may also have something to do with the bullish kickoff to the retail sales season.

The question as to whether or not this spending boom is sustainable depends to a large extent on central bank policy. Through most of 2012 the only cyclical support the economy will enjoy comes from the lowly 4-year cycle (a.k.a. the Business Cycle or Presidential Cycle). The 4-year cycle alone is rising in 2012 while the rest of the yearly cycles which comprise the Kress 120-year cycle are in decline. By itself it’s highly doubtful that the rising 4-year cycle will be able to counteract the negative deflationary currents that are still rippling throughout the global economy and now being felt in Europe. But if the world’s biggest central banks manage a coordinated policy response – a global QE3 if you will – it’s possible that the deflationary can will be successfully be kicked down the road for another year until the 4-year cycle peaks next October.

Knowing the belated, reactionary ways of central bankers, the banks will probably rest on the assurance that the fourth quarter economic numbers will be positive enough and will assume that all is as it should be. The global economy clearly has some major leaks, however, and if these aren’t vigorously dealt with we can expect to see more trouble emerging early in 2012 once the retail spending season ends. Needless to say it’s going to be a very interesting 2012.


We got an immediate-term sell signal for gold earlier this month when the SPDR Gold Trust (GLD), our gold proxy, violated its 15-day moving average. GLD opened strongly on Monday, Nov. 28, in the face of the bullish U.S. retail sales news and temporary abatement of eurozone worries. GLD looks to challenge the overhead 15-day moving average this week and if it can overcome it we’ll likely move back to a buy.


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About Clif Droke