''...not a sustainable situation. There is presently around $3.75 in debt for every $1 in national income, whereas the historical chart indicates that the national economy can normally support around $1.50.''
In 2007, the international financial elite knew very well that there were serious problems with the world's largest banks. Perfectly good loans were being called, long-standing corporate relationships were being cast aside for short-term benefit and there was a palpable perception of something wicked on its way. While news of the so-called credit crunch was duly reported by all the major newspapers, few outside the financial world had any idea that consequences such as the meltdown of 2008 were rapidly approaching.
But if you knew what to look for, it was fairly obvious that something big and ugly was developing, which was why I wrote that "the United States was fast approaching an interesting juncture" in my WND column published March 24, 2008. In a similar manner, what appears to be the minor matter of a Dubai-based corporation requesting a six-month moratorium on its debt payments looks very much like a warning that the next stage in the global financial crisis will be upon us soon.
Debt is the primary cause of significant economic shocks, both to the upside and the downside. This is because it magnifies profitable activity, and it multiplies losses. The following chart from Morgan Stanley shows the historical level of total debt compared to U.S. gross domestic product; note that the relative amount of debt was actually increasing from 1929 through 1933 as GDP shrank and governments and corporations attempted to stave off the effects of the contraction through debt-financed spending.
It is important to remember that the signal event of the global Great Depression was not the stock market crash of October 1929, but the failure of the Austrian Creditanstalt bank 19 months later, in May 1931. (In light of the FDIC's strategy of having "good" banks take over "bad" bank assets, it is probably worth noting that it was the Creditanstalt's forced takeover of the bankrupt Bodencreditanstalt that caused it to fail.) Is the feared default of Dubai World the modern equivalent of the Creditanstalt collapse?