Everyone has now gotten used to the idea that we're "deleveraging." But what do we think that means? We think it means that banks, consumers, companies, and the government have to cut down their debt a bit.

Actually, more than a bit.

Unless it's different this time, banks, consumers, companies, and the government need to cut their debt by more than half--to about $20-$25 trillion from the current $51 trillion. That's a lot of buying power that is going to go "poof."

Huh?

From the early 1920s through 1985, the average level of debt-to-GDP in this country was 155%. The highest peak in history (until the recent debt boom) was in the early 1930s, when debt-to-GDP soared to 260% of GDP. In the 1930s, the ratio then cratered to 130%, and it remained close to that level for another half century. (See chart below).

In 1985, we started to borrow, and last year, when we got finished borrowing, we had borrowed 350% of GDP. To get back to that 155%, we need to get rid of more than $25 trillion of debt.

Do we have to get back to 155% debt-to-GDP? No, we don't have to. But given what happened after the 1920s, and given what people will probably think about debt when they get through getting hammered this time around, we wouldn't be surprised if we got back there. It seems to be sort of a natural level.

The banks have written off $650 billion so far. So we suppose that's a start.

Hayman Advisors:

See Also: More Bearish Than Roubini