In a recent letter, economic observer John Mauldin discussed the impact of the system-wide deleveraging occuring across the the economy.

This shift marks the end of a 30-year period of growth driven by financial innovation.

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The current rate of government borrowing is likely to keep total debt to GDP continue to rise, but consumers and businesses are going to continue to work to wind down their levels of debt.

As Mauldin observes, that is a problem.

The world of finance is going to its own New Normal. It will be a world that is less leveraged. The growth in leverage that helped spur growth on the way up is a drag on growth as it is wound down.

The chart to the right shows the growth in debt in relation gross domestic product since 1951.  Today, debt stands at nearly 4 times our annual domestic economic output.

In the simplest terms, the relationship indicates that we would it would nearly four years of productivity, at our current rate, to pay down the debt.

You can’t layer any more debt onto consumers.  Businesses need profits to grow to justify increased leverage.  Consumer consumption is the primary driver of business profits.  Consumers will only be able to consume at rates consistent with their wage growth.

The outcome: a slow, grinding recovery that Mauldin describes so eloquently.