The Next Revolution in our Credit-Driven Economy

Chapter 3Anatomy of a Credit Crisis and Examples in the Real World

Economies have an uncanny ability to create spectacular booms as the country deploys savings from a loan/deposit ratio LDR of about 0.6 up to an LDR of 1. Those in power are lucky, as they ride a wonderful gravy train of credit creation, rising asset prices, and rising productivity (we will see later that new calculations of productivity are mostly predicated on credit creation; this is one of the dirty secrets of the modern age). A modern example of this has been the spectacular rise of Lula in Brazil. He rode a great wave of credit creation in the 2000s in Brazil and could do no wrong. He became a darling of the developing world.

Now that Brazil's LDR is at a dangerous level and there is simply no credit around, President Roussef is having a harder time. The Brazilian fiscal deficit at the end of 2014 is heading to US$10 billion. And the current account deficit is heading to US$80 billion, one of the highest globally. The same was true of President Yudhoyono when he became president of Indonesia. When the credit cycle is in your favor, you can do no wrong as a leader (for example, President Reagan in 1980–1988). When the credit cycle stalls and asset prices fall, you can do nothing right (President George H. W. Bush in 1992). President Lula was a hero in a great wave of credit, President Roussef is hanging on by her fingernails, and their policies are very similar. President Clinton's reign was one of spectacular ...