Category Archives: Debt

How Washington’s Reaction to Trump’s Budget Justifies the Rise of Bitcoin, by Tho Bishop

In a world in which many governments, particularly the US government, will somehow default, Bitcoin looks like a viable wealth preservation strategy. From Tho Bishop at mises.org:

Earlier this week the Trump administration announced their proposed budget for 2018. The plan bears some striking resemblance to Trump’s first budget attempt in three key ways: it contains some legitimate cuts to a number of government programs, it features increases to America’s irrational war budget, and all together it reflects a significant increase in government spending from current levels. It also has zero chance of passing in Washington, which may be the most significant aspect of the budget.

As soon as details emerged, it was already being torn apart by a web of pundits, think tanks, and politicians. Not because it doesn’t adequately address America’s growing debt bomb, but because it promoted an “extreme” view of austerity. In spite of its refusal to address the trillions in entitlement obligations for Social Security and Medicare, the budget’s modest reductions to Medicaid were deemed “radical.” New York City mayor Bill de Blasio warned that proposed cuts to additional social programs will literally kill children. Meanwhile, the dependably absurd Jennifer Rubin was up in arms because Trump wasn’t spending enough on war.

As such, Republicans in both the House and Senate have made it clear that they aren’t interested in Trump’s “New Foundation for American Greatness.”

In spite of the obvious failings within the Trump budget, it’s hard not to sympathize with his Director of Budget and Management, Mick Mulvaney. In defending the proposed cuts, he told Congress on Thursday:

This is a moral document and here’s the moral side: If I take money from you and have no intention of ever giving it back, that’s not debt — that is theft. If I take money from you and show you how I can pay it back to you — that is debt.

This makes sense in the real world, but not in a city that hasn’t had to worry about paying off its debt in quite some time. By controlling the world’s reserve currency and placing massive entitlement programs off the books, politicians have mastered the art of kicking the can down the road.

Of course, this can’t last forever.

To continue reading: How Washington’s Reaction to Trump’s Budget Justifies the Rise of Bitcoin

 

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The Trump Collapse Scapegoat Narrative Has Now Been Launched, by Brandon Smith

Brandon Smith reiterates his hypothesis that the world’s financial powers that be, including central banks, are conspiring to bring down the world’s financial and economic systems and blame it on Trump and populist movements. From Smith at alt-market.com:

Last week was a rather crazy one for the news feeds, with cyber attacks and “Comey memos” and a host of other wild mayhem, it may have been difficult for many people to keep track of it all. That said, there was one event that I think went partly under the radar, and I think it is an important signal for anyone concerned with the ongoing process of economic collapse in the U.S.

Generally, the American public holds very little vigilance when it comes to economics. They are distinctly unaware of fundamental indicators such as commodities demand, energy usage, manufacturing, imports, exports and international shipping, etc. What they do take note of, and what the mainstream news will tell them about in 30 second blurbs, is the state of unemployment and whether stock markets were down for the day or up for the day. These two “indicators” are the extent of the average person’s exposure to fiscal health.

This is why the Federal Reserve and the establishment have been meticulous over the past several years in their efforts to keep employment statistics highly manipulated to the positive side and why they have been injecting untold trillions into stocks around the world through various measures including no cost overnight loans.

However, over the past couple of years something has changed. As I warned they would do in 2015 in my article The Real Reasons Why The Fed Will Hike Interest Rates, central banks including the Fed have been backing off of stimulus measures and they have now begun a series of interest rate hikes. Look at it this way — imagine the economy has a terminal disease and the only thing keeping it alive is a highly addictive drug called “free money.” It’s a rather terrible life, barely worth living, but the economy still has a faint pulse as long as the drug is administered. Now, what would happen if the Fed suddenly cuts off the drug supply? Well, the economy will die in a very frantic and horrible way.

To continue reading: The Trump Collapse Scapegoat Narrative Has Now Been Launched

 

Will Venezuela Be The Battleground In The Next U.S.-Russia Proxy War? from Anti-Media

The prize in Venezuela is obvious: the world’s largest oil reserves. It’s hard to believe that either the US or Russia would pass up that prize. From the Anti-Media News Desk at theantimedia.org:

There’s no denying that Venezuela is deeply embroiled in a significant crisis. While most are aware of the country’s recent string of violent protests, food shortages and government crackdowns on opposition protesters, few are aware of the opposition’s use of underhanded and downright illegal tactics, as well as the United States’ role in funding opposition forces.

The U.S. has long had its sights set on Venezuela, which possesses the largest proven oil reservesin the world, particularly following the “revolution” that began with the election of the late President Hugo Chávez and has continued under his successor Nicolás Maduro. But changing circumstances within Venezuela may soon push the U.S. to repeat a nefarious practice it has carried out elsewhere – funding a proxy war in order to prevent Venezuelan oil from falling into Russian and Chinese hands.

At first, the U.S. government seemed content to let Maduro’s administration run out of steam on its own. But the U.S. has already issued separate sanctions against the country three times this year alone, with more planned in the coming months, as evidenced by the introduction of a recent U.S. Senate bill that would target Venezuelan government officials. The bill, titled “Venezuela Humanitarian Assistance and Defense of Democratic Governance Act” (S.1018), would funnel $20 million to the Venezuelan opposition, which has already received an estimated $50 to $60 million since Chávez’s election in 1998.

And now, the stakes may now be too high for the U.S. to allow Maduro’s regime to collapse under the weight of economic sabotage. By all accounts, Venezuela’s state-owned oil company PDVSA is already on the brink of collapse.

While this would normally be good news for those who seek to see Maduro toppled, there is a caveat that is causing panic in Washington. As the text of S.1018 points out, PDVSA – if and when it collapses – would default on its $4 to $5 billion loans from Rosneft, Russia’s state-owned oil company.

Although Russia and Venezuela enjoy a political alliance, Russia has already taken action over the unpaid debt. In April, a Russian state-run shipping company took $30 million in Venezuelan oil hostage over PDVSA’s unpaid debt. Rosneft would likely follow suit in the event of a major default.

To continue reading: Will Venezuela Be The Battleground In The Next U.S.-Russia Proxy War?

Does the World End in Fire or Ice? Thoughts on Japan and the Inflation/Deflation Debate, by Charles Hugh Smith

SLL actually doesn’t think there’s much of an inflation/deflation debate. Gigantic debt bubbles pop and when they do, it’s invariably deflationary. From Charles Hugh Smith at oftwominds.com:

Japan has managed to offset decades of deflationary dynamics, but at a cost that is hidden beneath the surface of apparent stability.
Do we implode in a deflationary death spiral (ice) or in an inflationary death spiral (fire)? Debating the question has been a popular parlor game for years, with Eric Janszen’s 1999 Ka-Poom Deflation/Inflation Theory often anchoring the discussion.
I invite everyone interested in the debate to read Janszen’s reasoning and prediction of a deflationary spiral that then triggers a monstrous inflationary response from central banks/states desperate to prop up their faltering status quo.
Alternatively, economies can skip the deflationary spiral and move directly to the collapse of their currency via hyper-inflation. This chart of the Venezuelan currency (Bolivar) illustrates the “skip deflation, go straight to hyper-inflation” pathway:
If we set aside the many financial rabbit holes of the inflation/deflation discussion, we find three dominant non-financial dynamics in play:demographics, technology and energy.
As populations age and retire, the resulting decline in incomes and spending are inherently deflationary: less money is earned, and less money is spent, reducing economic activity (gross domestic product).
The elderly also sell assets such as stocks, bonds and their primary house to fund their retirement, and if the elderly populace is a major cohort (due to low birth rates and increasing life spans, etc.), then this mass dumping of assets is also deflationary, as the increasing supply of sellers and the stagnating supply of buyers pushes prices lower.

TINA’s Legacy: Free Money, Bread and Circuses and Collapse, by Charles Hugh Smith

We borrow, therefore we are seems to be the motto of modern governments. But sooner or later, the credit line gets revoked. From Charles Hugh Smith at oftwominds.com:

TINA’s legacy is revealed in this chart of the Venezuelan Bolivar, which has plummeted from 10 to the US dollar to 5,800 to the USD in a few years of rampant money-emission.
Every conventional “solution” to the systemic ills of our economy and society boils down to some version of free money: Universal Basic Income (UBI) schemes– free money for everyone, funded by borrowing from future taxpayers (robots, people, Martians, any fantasy will do); debt jubilees funded by central banks creating trillions out of thin air, a.k.a. free money, and so on.
Free money is compelling because, well, it’s free, and it solves all the problems created by burdensome debt and declining incomes for the bottom 95%. Just give every household $100,000 of free money that must be devoted to reducing interest, then give every household $20,000 annually for being among the living, and hey, a lot of problems go away.
But is creating money out of thin air really truly free? There are two appealing answers: yes and yes. If the Treasury literally prints money, it’s almost “free,” and if the Federal Reserve creates money and buys bonds paying near-zero yields, the money that is borrowed into existence is almost free because the interest due is so minimal.
The problem, of course, is that creating free money is not quite the same as creating new wealth. New wealth is a new gas/oil field that comes online, new cropland that produces a new source of food, new goods and services, etc.
In effect, every dollar of free money reduces the purchasing power of all existing units of currency unless the expansion of output (additional goods and services) matches or exceeds the added dollar.
This line of thinking is driven by two realities: governments have issued many promises to their citizens, employees, corporations, etc. These include pensions, medical care, backstops against losses, tax breaks, subsidies, and on and on in an endless profusion.

 

Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario, by Wolf Richter

Generally credit expands in a healthy economy. Credit is contracting now. From Wolf Richter at wolfstreet.com:

It’s always associated with a recession: last time, the Financial Crisis.

Over the past five decades, each time commercial and industrial loan balances at US banks shrank or stalled as companies cut back or as banks tightened their lending standards in reaction to the economy they found themselves in, a recession was either already in progress or would start soon. There has been no exception since the 1960s. Last time this happened was during the Financial Crisis.

Now it’s happening again – with a 1990/91 recession twist.

Commercial and industrial loans outstanding fell to $2.095 trillion on May 10, according to the Fed’s Board of Governors weekly report on Friday. That’s down 4.5% from the peak on November 16, 2016. It’s below the level of outstanding C&I loans on October 19. And it marks the 30th week in a row of no growth in C&I loans.

Based on the Fed’s monthly reports, C&I loans outstanding at the end of April, at $2.095 trillion, were down a smidgen from October’s $2.098 trillion and were down 4.3% from the peak in November. This marks the seventh month in a row of no growth in loans.

This chart shows C&I loans outstanding at all US banks going back to 2012. Note how that 30-week stagnation-period is unique in this time span:

Since the Financial Crisis, the mantra has been: credit growth no matter what. Businesses have been exhorted to borrow, money has been cheap, and borrow they did. There have been periods of four or five weeks of stalling C&I loan growth, only to be succeeded by a vigorous surge. But after ballooning in this manner for six years straight, C&I loans have now languished for 30 weeks. And it’s not the oil bust; banks are lending to the oil patch again.

To continue reading: Oops, this Wasn’t Supposed to Occur in a Rosy Credit Scenario

Commodities Bust Hits Farm Lenders, Delinquencies Surge 225%, by Wolf Richter

Here is one more bubble popping. From Wolf Richter at wolfstreet.com:

Just as the deflating Farmland bubble leaves its marks.

When it comes to agricultural debt, the numbers aren’t huge enough to take down the global financial system. But this shows how much pain the commodities rout is producing in the farm belt just when the farmland asset bubble that took three decades to create is deflating, and what specialized lenders and the agricultural enterprises they serve – some of them quite large – are currently struggling with in terms of delinquencies.

This is what delinquencies on loans for agricultural production – not including loans for farmland, which we’ll get to in a moment – look like:

 

From Q4 2014 to Q1 2017, delinquencies have soared by 225% to $1.4 billion, according to the Board of Governors of the Federal Reserve, which just released its report on delinquencies and charge-offs at all banks. This is the highest amount since Q1 2011, as delinquencies were falling after the Financial Crisis. That amount was first breached in Q4 2009.

The delinquency rate rose to 1.5%, the highest since Q3 2012. On the way up, going into the Financial Crisis, delinquencies breached that rate in Q1 2009.

These were the loans associated with agricultural production. In terms of loans associated with farmland, delinquencies have soared by 80% from Q3 2015 to Q1 2017, reaching $2.15 billion:

Farmland values have surged for three decades but are now in decline in many parts of the US. For example in the district of the Federal Reserve of Chicago (Illinois, Indiana, Iowa, Michigan, and Wisconsin), prices soared since 1986, in some years skyrocketing well into the double-digits, including 22% in 2011, and nearly tripling since 2004. It was the Great Farmland Bubble that had become favorite playground for hedge funds. But starting in 2014, prices have headed south.

To continue reading: Commodities Bust Hits Farm Lenders, Delinquencies Surge 225%