Could debt deflation be just around the corner?

A state of excess credit in the economy is the precondition of debt-deflation. There has to have been an inflation of debt before it can deflate.

The chart below shows the level of U.S. non-financial corporate debt as a percentage of gross domestic product (GDP).

Back in 1951 it hovered around 22%, but has increased relentlessly over 70 years to over 50% of GDP today.

Is this the precondition for debt-deflation? Well, we might have said that at 35% back in the 1970s, and indeed debt did deflate on this basis for a few vears.

We could also have cried wolf at 40% and 45% but, although there have been brief episodes of debt-deflation, after a time the old uptrend has re-established.

So why now, at over 50% of corporate debt to GDP, would we think that it might be time for an extended period of debt-deflation?

This particular metric could, of course, be resolved through GDP growing rather than debt being reduced. However, excess debt can persist only whilst social mood is trending positive.

It is when confidence starts to turn and social mood waxes negative that excess debt becomes an issue.

When the level of economic growth falls below the cost of servicing the debt, borrowers start to default and / or borrow less.

The chart below shows that, perhaps, the chart of corporate debt to-GDP itself could be showing a completing 70-year wave. If that is true, the next period of debt-deflation might persist for many, many years.