Category Archives: Debt

This former trillionaire is flat broke, by Simon Black

Holding on to wealth can be harder than acquiring it. From Simon Black at sovereignman.com:

It’s hard to imagine, but today is actually Sovereign Man’s 9th birthday.

Nine years ago, on June 19, 2009, I sent out the first ever Notes from the Field email.

To commemorate the occasion, I thought I’d republish that first article… because I think it still captures the challenges we face, as well as the boundless solutions ahead of us.

I hope you enjoy.

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William “Bud” Post is flat broke.

He has dealt with lawsuits, jail time, bankruptcy, and now lives on food stamps.

It seems strange to think that he used to be a multi-millionaire… but it’s true. In 1988 he won $16.2 million from the Pennsylvania lottery (valued at $30 million in today’s increasingly worthless money), and Bud became drunk on his own wealth.

You’ve probably heard similar stories—the struggling, working class lottery hopeful hits it big in the Powerball only to return to the trailer park, broke, within a few years.

In irresponsible hands, wealth can evaporate faster than Nancy Pelosi’s approval ratings… and the lottery winners like Bud generally make bad decisions.

They become careless and foolish with their wealth, spending enormous sums of money on opulent consumer goods, gambling trips, and nights in the champagne room.

Banks line up to provide them with generous lines of credit that they blow on useless toys or handouts to a fawning entourage.

At the height of this bubble, someone like Bud has fame, wealth, power, friends, women, houses, yachts… but no foundation for the future.

Each trip to the ATM is a missed opportunity to make a smart decisions… but Bud never cared. He thought the money would last forever. He thought the banks would always give him a loan. He thought his friends would never leave him.

Then one day Bud went to the ATM and found that his balance was ZERO. He went to the bank for a loan and was declined. The money was gone. His friends had disappeared.

The lawsuits started rolling in. Suddenly poor Bud found himself with absolutely nothing but distant memories of drunken consumption.

Sound familiar? It should. Bud is the United States of America.

America hit the lottery after World War II. We had defeated the Germans, nuked the Japanese, and remained the only developed country in the world that had not been devastated by the war. The US instantly became the richest kid on the block, and like Bud, spent the next several years in an alternate universe devoid of rational thinking.

To continue reading: This former trillionaire is flat broke

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America’s Debt Dependence Makes It An Easy Economic Target, by Brandon Smith

Can a nation whose nominal debt is over $20 trillion and unfunded liabilities somewhere between $150-200 trillion bre considered strong? No. From Brandon Smith at alt-market.com:

There is a classic denial tactic that many people use when confronted with negative facts about a subject they have a personal attachment to; I would call it “deferral denial” — or a psychological postponing of reality.

For example, point out the fundamentals on the U.S. economy such as the fact that unemployment is not below 4% as official numbers suggest, but actually closer to 20% when you factor in U-6 measurements including the record 96 million people not counted because they have run out of unemployment benefits. Or point out that true consumer inflation in the U.S. is not around 3% as the Federal Reserve and the Bureau of Labor Statistics claims, but closer to 10% according to the way CPI used to be calculated before the government started rigging the numbers.  For a large part of the public including a lot of economic analysts, there is perhaps a momentary acceptance of the danger, but then an immediate deferral — “Well, maybe things will get worse down the road, 10 or 20 years from now, but it’s not that bad today…”

This is cognitive dissonance at its finest. The economy is in steep decline now, but the mind in denial says “it could be worse,” and this is how you get entire populations caught completely off guard by a financial crash. They could have easily seen the signs, but they desperately wanted to believe that all bad things happen in some illusory future, not today.

There is also another denial tactic I see often in the world of politics and economics, which is what I call “paying it backward.” This is what people do when they have a biased attachment to a person or institution and refuse to see the terrible implications of their actions. For example, when we point out that someone like Donald Trump makes destructive decisions, such as the continued support of Israel and Saudi Arabia in Syria and Yemen, or the reinstatement of funding for the White Helmets in Syria who are tied to ISIS, Trump supporters will often say “Well what about Obama?”

This is a game of shifting accountability. Is one person worse than the other? Possibly. I say give it time and make notes. However, the negative decisions of one politician we don’t like do not diminish the negative decisions of another politician we might like. They should BOTH be held accountable.

To continue reading: America’s Debt Dependence Makes It An Easy Economic Target

Italy challenges the Western order, by Frank Sellers

Italy doesn’t like its debt, its immigrants, or the EU, and thinks perhaps Europe’s ought to loosen up towards Russia. This is all contrary to the EU playbook. From Frank Sellers at theduran.com:

With a massive influx of immigrants from across Africa and the Middle East, and growing poverty, Italy voted in a populist government representing policies which would seem to virtually overturn the postwar European order.

The austerity measures which have been imposed upon the Italian people have pushed more and more of them down into poverty, with the poverty rate doubling over the course of the past decade.

Relative to migration, Italy is one of the Southern European countries taking the brunt of the migrants who are flooding into Europe by the thousands, helped along by various NGOs which seek to alter the demographic makeup and economic and political order of Europe under the guise of humanitarianism.

The present economic metrics tend to perceive the profits of multinational corporations as a gauge of the health of the economy, rather than the economic situation on the ground level, faced by the Italian citizen. All of these and more are things which this new government has a view towards radically changing.

To combat Austerity, which may be tossed out the window, the option on the table is to review treaties to which Italy is partied which impose or advise them. Rather than gutting the population for the money which the government needs in order to cover obligations to multinational financial interests, a proposal was broached of launching a universal basic income, reduction in the pension age, as well as a flat tax system.

And while the migrant policy is still evolving, it has had a view towards repatriating the migrants which are already within Italy’s borders. Italy has already flexed its will on the migrants issue over refusing a ship full of migrants port in Italy, forcing it to set sail for Spain.

Foreign policy aims at softening the approach towards Russia by eliminating sanctions and by putting the focus on improving relations, benefitting Italy both by allowing a resumption of trade, and the perspective of Russia’s will and capacity to help get a handle on the situation in the Middle East, which is part of what prompts the migration issue, due to the region’s instability.

What this could mean is that an already strained relationship between Italy and the EU could be put to the test, or altered in a significant manner if these proposals are put into play after the fashion in which they were introduced during the elections cycle.

To continue reading: Italy challenges the Western order

Could Big European Banks Drag the World Economy Down? by Peter Schiff

The European banking sector may be where the next financial crisis starts, but all of the world’s banks have assets and liabilities far in excess of their capital, and they are all interlinked, so once the crisis starts it will spread quickly. From Peter Schiff at schiffgold.com:

Humans are by nature somewhat myopic. We tend to focus primarily on what is right in front of us and filter out things further removed. As a result, we can sometimes overlook important factors.

As Americans, we generally devote most of our attention on American policy. We follow political maneuverings in Washington D.C., study the Fed’s most recent pronouncements and track the US stock markets. But we also need to remember there is a whole wide world out there that can have a major impact on the larger economy and our investment portfolio.

One factor that could potentially rock the world economy that a lot of American may not be aware of is the mess in the European banking system.

In a recent podcast, Peter Schiff talked about the impact the European Central Bank could have on the economy. Mario Draghi’s comments indicating he plans to hold interest rates at zero for another year roiled the markets. But that’s not the only issue facing the eurozone. As economist Dr. Thorsten Polleit noted in a recent article published by the Mises Wire, many euro banks are in “lousy” shape.

So what? you might ask. Well, the European banking system is huge. It accounts for 268% of gross domestic product (GDP) in the euro area. If the sector collapses, that’s bad news for the broader world economy.

One of the biggest problem children in European banking is Deutsche Bank. As of March 2018, the German giant had a balance sheet of close to 1.5 trillion euro, accounting for about 45% of German GDP. Polliet described this as an “enormous, frightening dimension.”

Beware of big banks — this is what we could learn from the latest financial and economic crises 2008/2009. Big banks have the potential to take an entire economy hostage: When they get into trouble, they can drag everything down with them, especially the innocent bystanders – taxpayers and, if and when the central banks decide to bail them out, those holding fiat money and fixed income securities denominated in fiat money.”

To continue reading: Could Big European Banks Drag the World Economy Down? 

The Smart Money Gets Ready for the Next Credit Event, by Wolf Richter

The vultures are gathering, hovering above the credit markets. From Wolf Richter at wolfstreet.com:

“It feels like we’re about 12 months away, but we could get into extended innings.”

As corporate indebtedness in the US has reached precarious heights, and as risks are piling up, in an environment of rising interest rates and a hawkish Fed, the smart money is getting ready.

The smart money is preparing for the moment when the air hisses out of the exuberant junk-bond market, when liquidity dries up for over-indebted companies, and when their bonds collapse. The smart money is preparing for the arrival of “distressed debt” – it’s preparing now because these preparations include raising billions of dollars for their funds, and that takes some time.

“Distressed debt” is defined as junk-rated debt that sports yields that are at least 10 percentage points above equivalent US Treasury yields.

Distressed-debt investors can make a killing by buying bonds for cents on the dollar during times of economic stress, of companies that they believewill make it through the cycle without defaulting. In this scenario, a distressed bond might sell for 40 cents on the dollar, and two years later, the company is still intact and the credit squeeze is resolved, and now the bond is worth face value. For those two years, the bond paid a huge yield to investors that bought at 40 cents on the dollar – and the profit might be 200% in capital gains and interest.

The thing is: The junk-bond market has been booming. There’s no credit squeeze yet. And the riskiest end is flush as the “dumb money” is still chasing yield. And for the smart money, there’s not much to pick at the moment; but down the road, the future looks bright.

S&P Global tracks distressed debt in its US High Yield Corporate Distressed Bond Index. The index peaked in early July 2014, on the eve of the oil bust. Over the next 18 months, it plunged 56% as the oil bust was wreaking havoc on oil-and-gas bonds. But on February 11, 2016, the index bottomed out. New money began flowing into the oil-and-gas sector. Banks started lending again. The surviving bonds soared. And the index skyrocketed 113% in 28 months:

To continue reading: The Smart Money Gets Ready for the Next Credit Event

The Pension Train Has No Seat Belts, by John Mauldin

Pensions are the same unsustainable trajectory as the rest of our debt-saturated world. From John Mauldin at mauldineconomics.com:

In describing various economic train wrecks these last few weeks, I may have given the wrong impression about trains. I love riding the train on the East Coast or in Europe. They’re usually a safe and efficient way to travel. And I can sit and read and work, plus not deal with airport security. But in this series, I’m concerned about economic train wrecks, of which I foresee many coming before The Big One which I call The Great Reset, where all the debt, all over the world, will have to be “rationalized.” That probably won’t happen until the middle or end of the next decade. We have some time to plan, which is good because it’s all but inevitable now, without massive political will. And I don’t see that anywhere.

Unlike actual trains, we as individuals don’t have the option of choosing a different economy. We’re stuck with the one we have, and it’s barreling forward in a decidedly unsafe manner, on tracks designed and built a century ago. Today, we’ll review yet another way this train will probably veer off the tracks as we discuss the numerous public pension defaults I think are coming.

Last week, I described the massive global debt problem. As you read on, remember promises are a kind of debt, too. Public worker pension plans are massive promises. They don’t always show up on the state and local balance sheets correctly (or directly!), but they have a similar effect. Governments worldwide promised to pay certain workers certain benefits at certain times. That is debt, for all practical purposes.

If it’s debt, who are the lenders? The workers. They extended “credit” with their labor. The agreed-upon pension benefits are the interest they rightly expect to receive for lending years of their lives. Some were perhaps unwise loans (particularly from the taxpayers’ perspective), but they’re not illegitimate. As with any other debt, the borrower is obligated to pay. What if the borrower simply can’t repay? Then the choices narrow to default and bankruptcy.

Today’s letter is chapter 6 in my Train Wreck series. If you’re just joining us, here are links to help you catch up.

To continue reading: The Pension Train Has No Seat Belts

America’s Greatest Crisis Upon Us…Debt-to-GDP Makes It Clear, by Chris Hamilton

The current trajectory of US government spending and debt growth is unsustainable. From Chris Hamiton at economica.blogspot.com:

America in the midst of the greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the “challenges” end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues…resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation’s balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed’s interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.

The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of “austerity” where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nation’s history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.  Instead, the CB’s and Federal government wanted perpetual youth…growth without end.  The chart below shows the debt to GDP ratio but this time against the decelerating growth of the total US population as a percentage (black line) but also against the faster decelerating growth of the 0-65yr/old population (yellow line).

To continue reading: America’s Greatest Crisis Upon Us…Debt-to-GDP Makes It Clear