The Beginning of the End

In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt.

—George Soros speech at the Institute of International Finance in Vienna, June 10, 2010

The bankruptcy of Lehman Brothers in the fall of 2008 drew the curtain on a very long 60-year Act I in the debt supercycle. You could feel in the air the end of a golden period, when ever-increasing quantities of debt could lead to ever more consumption and “wealth.” As stock markets crashed globally and the lines of unemployed lengthened, the end of the era was something we could observe in real time.

And let’s be very clear. That debt did fuel growth, not just in the United States but throughout the developed world. Figure 1.1 shows total U.S. debt as a percentage of GDP. We will return to this chart later, but here you can see the explosion of debt in the United States, both public and private. As we will see, there are any number of countries with similar charts. ...

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