Endgame – The end of the Debt Supercycle is a great book. It is short on investment tips (which is good actually). However it has a great discussion on how things interact within economies.
You can NOT get something from nothing and fueling economic expansion through debt (called leveraging) is just that (you need to pay for consumption someday).
Economic growth comes from two things only – population growth and/or productivity growth. If you have a leveraged expansion – it should be no surprise then that the contraction following would be because of de-leveraging.
“Our argument in End game is that while the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it.” pp109.
“Sovereign debt as an investment for banks was a good idea only a little while ago. Take cheap money, lever up, and make a nice spread. No longer is it such a good idea. Credit spreads are widening all over Europe. Interest rates are rising for the European periphery.” pp127. This means risk is rising since investors are perceiving, and in some cases experiencing (see next) losses.
“The problem with having more liabilities than you can service means that someone has to take the loss.” pp129. So far this has meant investors … however, burn them once and where will money come from later?
“The modern euro is like a gold standard. Obviously, the euro isn’t exchangeable for gold, but it is similar in many important ways. Like the gold standard, the euro forces adjustment in real prices and wages instead of exchange rates. And much like the gold standard, it has a recessionary bias.” pp217. In other words, countries are forced to contract their economies.
The authors go through a country by country, or region by region, assessment after establishing how debt affects the economy.
Paper Promises – is another book that explains how debt emerged globally.
These should be read in tandem to get a greater understanding about what happened, and what needs to (or more than likely will) happen to unwind too much spending.