When Entertainment Passes for Investment Advice

The undisputed king of macro-tainment is Peter Schiff. Schiff has managed to combine the most effective form of political entertainment — right-wing talk radio — with the most popular and addictive flavor of macro-tainment, Austrian economics. Schiff was elevated to dizzying heights of popularity after 2007, when one of his many, many, many, many bubble calls proved to be right. Since then it has seemed like Schiff is everywhere — I’ve seen his face on three banner ads in three different magazines just this morning.

 

Government Debt Isn’t the Problem—Private Debt Is

What’s alarming is that, of the two ingredients for an economic crisis—high private debt and rapid private-debt growth—one is still with us even after the 2008 collapse. Private debt in the U.S., relative to GDP, stands at 156 percent. That’s lower than the 173 percent it reached in 2008, but it’s still nearly triple the level—55 percent—it was at in 1950. Indeed, across the globe there has been a steep climb in the ratio of private debt to GDP over that period.

.. Applying our private-debt early-warning criteria to China, we can see that its economy is at risk of a major financial crisis in the near future—a significant concern because of its size and importance to the world economy

.. What’s more, excessive private debt may contribute to one of the great problems of our time: growing income inequality and the hollowing out of the middle class. The middle class tends to grow when there is too little capacity and low private debt (as after World War II). In contrast, the middle class plateaus or shrinks when there is too much capacity and too much debt (as at the present). Stated differently, inequality increases when there is high capacity and high debt; it decreases when capacity and debt are low.