A probabilistic model for the unfreezing of the US and European credit markets


Modelling the 2008-2009 Global Finance System Crisis using "primitive" finance system equations and functions (+, %, DIV, Average()) is possible. Such oversimplified models can reveal highly probable outcomes that might not otherwise be obvious -- in spite of the overt unrealistic nature of these models.

So far, the primitive equations for the payment series of (20, 25, 30 and 35) Year mortgages indicates that the nearest year the global finance markets will exit the global recession will be around 2026 (-/+ 6 years). The return to nominal health in the US credit market (equivalent to the health of 2008) is at best as far off as 2037.

History of the current market conditions
There was a massive bubble of debt unleashed on the world finance markets after 2002. This bubble was created by imposing artificially low interest rates in the US in late 2001. This was coupled with European and Asian investors massively investing in US bonds (corporate and federal), as well as USD derivatives.

In the case of EU investors, excessive investment in the US reached a point such that it set up circumstances that fatally weakened the European economy with respect to its ability to cope with downturn conditions. Even though the global finance markets had been awash in a longer wavelength debt bubble created at the end of the Cold War, this new 2002-2008 debt bubble was of several orders of magnitude greater than previously known.

Known modelling issues

Inflation is not factored into this primitives based model at all. Inflation's "future value" should not be explicitly assumed due to the sheer amount of outstanding debt in the US and EU finance systems -- debt adequate enough to generate several cycles of hyperinflation. Inflation by its very nature has the curse of being chaotic -- as well as sector specific -- making it hard to model. Real world inflationary circumstances can arise in ways that most inflation models can never predict.

The US economy is subject to hyperinflation (or at least long term high inflation) due to the injection of the ~2 Trillion (2 000 000 000 000) into the economy via the late-2008 Federal Government banking and finance sector rescue packages. At this point making assumptions on how the 4 to 5 Trillion USD or EUR thrown at the global credit markets will be paid off is unknown.

There is also the gaping unknown computational issue that hides behind these computations -- the US and European Union tax burden of this finance system rescue. Not a single one of these vitally important factors can be incorporated into any simplified model as it is unclear [or simply unknown] how to do so.

This is not a "total debt model", if you want a model that takes into account all US debt from all sources it is recommended that you go here
  • The wiki spreadsheet, the only possible way to measure "total US debt" ... that I know of.
  • It is known, and should be more widely known: the US has no federal governmental authority to keep track of the nation's total debt.
  • Australia, Canada and NZ (as well as Ireland and Iceland, of recent market meltdown fame) don't have any central authority to keep track of the total national debt either. This could be construed as a governmental failure to regulate not only personal debt, but corporate and sovereign debt as well.
  • See Spredsheet wiki


The US [and European (Union) credit markets to a lesser extent] are more or less frozen as of January 2009. There is no clear pathway to know when these credit markets will start to unfreeze, and when normal lending will resume. Yet, these credit markets must unfreeze at some future date. It can only be assumed that the "paying off of the current loans" will be the primary function that determines the return of bank lending in the US, with but lesser magnitude impacts in Europe (that has credit market problems that are not as bad as the US).

The only way to have any kind of meaningful "guesstimate date" emerge (per the unfreezing of the US credit markets) is to run multiple mortgage payment series, average their magnitudes across 7 years and at least 4 contract duration types (20, 25, 30 and 35 Years) and hope that some residual de-dispersed energetic structure will appear.

What this model does pay attention to
  • Mortgages made in 2001 to 2008.
  • How they are paid off, that is to say the "explicit nominal payoff series" are computed for each year of the debt bubble.
  • The average for the "mortgage amounts paid off" for each year, averaged across the 7 years when the mortgage contracts were made.
  • Finding the break even year (where the debt bubble payoff series reaches its 51% time series point).
  • Nominally: The impact of re-mortgaging on the time delay of the credit availability crisis. The re-mortgaging is not varied within the individual sets of the mortgage contract durations {35, 30, 25 and 20 Years}. The re-mortgaging time delay impact is only considered at the final stages of the calculation.
  • Nominally: That mortgage contracts can force overpayment to a small degree. I tried to stop all the payment series at the 105% mark, worst case. The averaging method used smooths out the overpayment year, and never produces a resulting number that is near 95%. Any "payment series" average payoff percentage beyond 90% (implying 92% to 98%) probably should be considered potentially bad or misleading data.

What the mechanical aspects of this model ignores
  • Mortgages made before 2001 that are still being paid off right now. They affect the way that the US credit market can unfreeze, but it unknown how to factor them in as their magnitude is unknown and unclear.
  • Home owner credit availability, non-housing.
  • Home owner cash availability, you could call it "Home Owner Net Savings" -- an important adjunct pool of money of importance to the US credit market.
  • Mortgage householder's overall cash and credit availability.
  • There are no 40 year mortgages taken into consideration in this model. Canada (as of Fall 2008) has more or less deregulated them out of existence, but there may be a substantial number of 40 year mortgages that are active in the US. I have no idea to what extent 40 year mortgages may have contributed to the current US finance system problems.
  • The weights of 35 Year, 30 Year, 25 Year and 20 Year mortgages. In each country there are substantial variances in the spectrograms of the {% Number of Years of Mortgage Contracts} -- it treats them all as equals.
  • INFLATION and HYPERINFLATION. If the inflation rate in the US or EU runs at 10% to 15%, and wages keep pace -- then the credit markets could unfreeze in the US or EU in about half the time.
  • The use of "ordinary differential equations (ODEs)" like the ones used in typical finance system analysis -- however any related model using ODEs will probably return similar kinds of results.
  • The impact of the global economy having (as of mid-2006) of the global finance system having 473 000 000 000 000 in derivatives, most of which exist in the mortgage market in the US and the European Union (EEC).
  • The impact of the global economy having (as of mid-2006) of the global finance system having 119 000 000 000 000 in the share market (stock market) and bond market.
  • Inflation is not factored into the model, as it has not happened yet -- and very often tends to be chaotic. The US economy is specifically subject to hyperinflation (or at least long term high inflation) due to the injection of the 2 Trillion USD in the economy via the late-2008 Federal Government banking and finance sector rescue packages.

Model Output

Chart interpretation issues
  • The year 2009 is underlined and bold.
  • You can if you want ignore the part of the dataset that predates 2009, it is only there for historical and checksum reference.
  • The maximum debt burden year is 2021.
  • The 50% payoff point is 2031.
  • The midpoint of the "maximum debt burden year" and the "50% payoff point" is 2026 (in italics).
  • There will not be 2009 credit market conditions until 2037.

Average Payoff % Year Re-mortgaging at ~2%
Re-mortgaging at 1.5%
Re-mortgaging at 0.5%
0.500% 2001 2.49% 2.05% 1.00% 2001
1.501% 2002 3.49% 3.05% 2.00% 2002
3.002% 2003 4.99% 4.55% 3.50% 2003
5.004% 2004 6.99% 6.55% 5.50% 2004
7.506% 2005 9.50% 9.06% 8.01% 2005
10.508% 2006 12.50% 12.06% 11.01% 2006
14.011% 2007 16.00% 15.56% 14.51% 2007
17.833% 2008 19.82% 19.38% 18.33% 2008
21.656% 2009 23.65% 23.21% 22.16% 2009
25.479% 2010 27.47% 27.03% 25.98% 2010
29.301% 2011 31.29% 30.85% 29.80% 2011
33.124% 2012 35.11% 34.67% 33.62% 2012
36.947% 2013 38.94% 38.50% 37.45% 2013
40.769% 2014 42.76% 42.32% 41.27% 2014
44.592% 2015 46.58% 46.14% 45.09% 2015
48.415% 2016 50.40% 49.96% 48.91% 2016
52.237% 2017 54.23% 53.79% 52.74% 2017
56.060% 2018 58.05% 57.61% 56.56% 2018
59.883% 2019 61.87% 61.43% 60.38% 2019
63.705% 2020 65.70% 65.26% 64.21% 2020
67.528% 2021 69.52% 69.08% 68.03% 2021
67.383% 2022 69.37% 68.93% 67.88% 2022
67.057% 2023 69.05% 68.61% 67.56% 2023
66.551% 2024 68.54% 68.10% 67.05% 2024
65.865% 2025 67.85% 67.41% 66.36% 2025
64.998% 2026 66.99% 66.55% 65.50% 2026
60.573% 2027 62.56% 62.12% 61.07% 2027
55.842% 2028 57.83% 57.39% 56.34% 2028
54.774% 2029 56.76% 56.32% 55.27% 2029
53.580% 2030 55.57% 55.13% 54.08% 2030
49.029% 2031 51.02% 50.58% 49.53% 2031
44.249% 2032 46.24% 45.80% 44.75% 2032
39.239% 2033 41.23% 40.79% 39.74% 2033
33.999% 2034 35.99% 35.55% 34.50% 2034
31.909% 2035 33.90% 33.46% 32.41% 2035
26.452% 2036 28.44% 28.00% 26.95% 2036
20.800% 2037 22.79% 22.35% 21.30% 2037
14.953% 2038 16.94% 16.50% 15.45% 2038
12.144% 2039 14.13% 13.69% 12.64% 2039
9.244% 2040 11.23% 10.79% 9.74% 2040
6.253% 2041 8.24% 7.80% 6.75% 2041
3.172% 2042 5.16% 4.72% 3.67% 2042


The computational model results
  • The primitive equations say that the best probable year to exit the global depression is around 2021-2026. These "steady state" outcomes seem reasonable given probable reasonable finance market and consumer market (consumption and production) conditions.
  • Five years into a global depression there probably will be steady state conditions for 15 to 20 years into the future, as once a depression settles in -- it effects tends to act in the background as the population becomes accustomed to the set of living conditions. This is an implicit conclusion from the model, not an explicit one.
  • Similar credit market conditions to 2008 (for mortgage loans) will not return until 2037, based on the existent rigid model conditions. I consider this to be overly unrealistic even given the worst case finance system outcomes into the 2010s.

Longer term non-model effects not accounted for yet
  • Is this 10 to 35 year recession (or depression) part of the effects of a Kondratiev wave? It is hard for me to say. Many mechanical interpretations of the Kondratiev wave properties of the global economy exist, but trying to apply them to the existent (and erratic) finance sector data at this point is hard. To further make matters worse -- a lot of the "Western Finance System Datasets" (ie: historical EU / EEC / US finance system data) are contaminated by long term political interference.
  • Is this recession and probable depression part of a longer run Elliot Wave? Long term pessimism leading to a contraction in global consumer spending did contribute to the Great Depression, so that aspect I will not rule out -- as it is contributing to the downturn in the current day.
  • However weather this downturn is part of longer term seasonality of the global economy is difficult to call as it is too early into the event to tell.

Shorter term non-model effects not accounted for
  • The actual psychology at work in the upper echelons of the banking system in the US.
  • According to mainstream and non-mainstream economists -- there is enough cash in the system for "some kind of normal lending" to resume as of Spring 2009.

Kondratiev wave FAQ
In heterodox economics, Kondratiev waves — also called Supercycles (an Elliot wave term), long waves or K-waves — are described as regular, sinusoidal cycles in the modern (capitalist) world economy.
  • These K-waves average fifty years
  • These K-waves range from approximately forty years to sixty years in length
  • These K-wave cycles consist of alternating periods between high sectoral growth and periods of slower growth across all sectors.
  • Most academic economists do not posit the existence of these waves, due to the great ambiguities in their definition.
  • The Russian economist Nikolai Kondratiev was the first to bring these observations international attention in his book "The Major Economic Cycles" (1925) alongside other works written in the same decade.

The global business cycle is supposedly more visible in international production data than in individual national economies. It affects all the sectors of an economy, and concerns output rather than prices (although Kondratieff had made observations about the prices only). According to Kondratieff, the ascendant phase is characterized by an increase in prices and low interest rates, while the other phases consists of a decrease in prices and high interest rates.

Kondratieff identified three phases in the cycle: expansion, stagnation, recession.

More common today is a contextual refinement that states that there is a division into four periods with a turning point (collapse) between the first and second two.

Writing in the 1920s, Kondratieff proposed to apply the theory to the 18th and 19th century

  • 1790 – 1849 with a turning point in 1815.
  • 1850 – 1896 with a turning point in 1873.
  • Kondratieff supposed that in 1896, a new cycle had started.

The phases of Kondratieff's waves also carry with them social shifts and changes in the public mood. The first stage of expansion and growth, the "Spring" stage, encompasses a social shift in which the wealth, accumulation, and innovation that are present in this first period of the cycle create upheavals and displacements in society. The economic changes result in redefining work and the role of participants in society. In the next phase, the "Summer" stagflation, there is a mood of affluence from the previous growth stage that change the attitude towards work in society, creating inefficiencies. After this stage comes the season of deflationary growth, or the plateau period. The popular mood changes during this period as well. It shifts toward stability, normalcy, and isolationism after the policies and economics during unpopular excesses of war. Finally, the "Winter" stage, that of severe depression, includes the integration of previous social shifts and changes into the social fabric of society, supported by the shifts in innovation and technology.

It is tempting to expand the theory to the twentieth and twenty-first centuries. Some economists, such as Schumpeterians, have proposed that the third cycle peaked with World War I and ended with World War II after a turning point in 1929. A fourth cycle may have roughly coincided with the Cold War: beginning in 1949, turning with the economic peak of the mid-1960s and the Vietnam War escalation, hitting a trough in 1982 amidst growing predictions in the United States of worldwide Soviet domination and ending with the fall of the Berlin Wall in 1989.

The current cycle most likely peaked in 1999 with a possible winter phase beginning in late 2008. The Austrian-school economists point out that extreme price inflation in the absence of economic growth is a form of capital destruction, allowing either stagflation (as in the 1970s and much of the 2000s during the gold and oil price run-ups) or deflation (as in the 1930s and possibly following the crash in commodity prices beginning in 2008) to represent a recession or depression phase of the Kondratieff theory.

Conventional Kondratiev analysis would suggest that the 2000s should represent a Kondratiev winter. The fact that it is thus far (2006) not occurring suggests either monetary inflation and pumping of global liquidity on a massive scale in an attempt to deny the business cycle, or that a cycle of a larger magnitude than the Kondratiev cycle is operative and that the Kondratiev winter has effectively been overwhelmed by this larger-degree up-thrust.

There is no credit-led expansion in recorded history that has failed to end in a dramatic credit crunch and economic catastrophe. See "Financial Reckoning Day" by Bill Bonner and Addison Wiggin, and "The Great Reckoning" by James Dale Davidson and William Rees-Mogg.

Kondratiev's own work showed a Winter beginning 1914-20. That would normally have ended around 1945, but most theorists would agree that it lasted until 1949, with a new Spring commencing in that year. Given the shortest time period for the K-Wave of 40 years that would mean a new Spring Phase beginning in 1989, and an Autumn Phase beginning in 1999, with the Winter beginning in 2009. With the longest time period for the wave of 60 years, then the new Spring Phase should begin in 2009, but that would mean the Winter Phase should have begun in 1994, and now be almost over. Given any time period between the shortest 40 year and longest 60 year span of the cycle it is impossible to arrive at a Winter Phase beginning in 2000 or thereabouts.

In fact, a Spring Phase beginning in 1949 and lasting around 25 years until the mid-70s does appear to conform with the post-War boom period, and the collapse of that boom into the slump of the 1970s, and protracted recessions of the 1980s and early 90s. Trying to connect this to periods of stock market performance is a corruption of Kondratiev's work which was to do with cycles in the real economy, not in the fictional economy of stock markets.

Related reading

Related topics



Economic Theory
  • Macroeconomics (general topic)
  • Heterodox_economics (economic theories not considered to be in the mainstream, however this category has probably contributed more to modern economics theory since the end of the Cold War.)
  • Kondratiev_wave (this recession / depression may be part of longer term wave property of finance systems)
  • Nikolai_Kondratiev (theorized long term business cycles could exist, but is devoid of any Elliot Wave psychology)
  • Grand_supercycle (slightly shorter cycle than a Kondratiev wave, longest kind of Elliot Wave)
  • Elliott_wave_theory (The wave principle posits that investor psychology (or crowd psychology) moves from optimism to pessimism and back again.)

Schools of Economic Though

Governmental parties to the problem

Computational models & modelling

Created by
Max Power

Document created
29 January 2009

Last updated
21 September 2012 (cleaned up appearance)