The Debt-Liquidity Spiral

Reflecting on the End-game (Part 1)

The ultimate cause of all financial crises always remains the lack of liquidity as compared to the tendency of modern credit systems to over-accumulate debt. Crises are always and everywhere, debt re-financing crises. In other words, they concern the inability to roll-over our huge piles of debt.

The accelerating financialization of the World economy reflects the growing importance of the global financial sector. The financial sector has leapt in size to surpass traditional industry as the driver of the modern economy. Not only are wealth effects from asset markets now crucial determinants of spending, but their whopping indebtedness now makes governments’ interest payments a key source of income for the private sector.

In fact, capital markets themselves are no longer systems for raising new capital, but have become vast mechanisms for refinancing these huge debts. This makes the balance sheet capacity of the financial sector, or ‘liquidity’, far more important than interest rates as a cycle determinant and it means that the business cycle increasingly hums along at the tempo of the 5-6 year debt refinancing cycle.