Category Archives: Economy

Global Debt Is Exploding At A Shocking Rate, by Tyler Durden

There is no way this will end well. From Tyler Durden at zerohedge.com:

The primary reason why the global financial system is on the verge of daily collapse, and is only held together with monetary superglue and central bank prayers thanks to now constant intervention of central banks, is because of debt. And, as BofA’s Barnaby Martin succinctly puts it, much more debt is coming since “the legacy of the COVID shock is debt, debt and more debt.” In short: use even more debt to “fix” a debt probem.

So in this world of explosive credit expansion coupled with tumbling economic output where helicopter money has become the norm, central banks – and specifically the ECB – are scaling their QE policies to monetize and absorb much of this debt (relieving the pressure on private investors to buy bonds), more debt “hotspots” mean more vulnerabilities for the global economy.

We won’t preach about the consequences of this debt binge which has catastrophic consequences – we do enough of that already – but below we lay out some of the more stunning facts of global debt levels at the end of Q1 2020 as compiled by the BIS, courtesy of Martin:

  • Global debt/GDP surged to an all-time high in Q1 ’20, with overall debt for the non-financial sector now worth 252% of global GDP. This is up from 241% at the end of 2019, the biggest quarterly jump ever according to BIS data.

  • The chart also confirms that central bank inflation targets are higher, much higher than the “”official 2%: to erase this debt, central banks needs inflation to be in the 10%+ range. Anything below that would require debt defaults instead of inflation to wipe away the debt… and that is unacceptable.

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How to Tackle the Depression Head On, by MN Gordon

To tackle a depression head on, the first step is to admit its inevitability, and to pretend that government and central bank debt and spending will prevent one only makes the problem worse. From MN Gordon at economicprism.com:

I want to see people get money.” – Donald J. Trump, U.S. President, September 17, 2020

“Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet.” – Steven Mnuchin, U.S. Secretary of the Treasury, September 14, 2020

Money for the People

The real viral contagion that has infected the American populace is not an illness of the body.  It’s something far worse than COVID-19.  The American populace is suffering from an illness of the mind.

The general malady, as we diagnose it, is the unwavering belief that the government has an endless supply of free money, and the expectation that everyone, except the stinking rich, has claim to it.  Why pursue self-reliance and independence when a series of stimulus acts promises the more abundant life?  This viral contagion’s really ripped through the population in 2020.

For example, just a year ago, the American populace thought they could all live off the forced philanthropy of their neighbors.  That to pay Paul you had to first rob Peter.  The CARES Act proved to Boobus americanus that, without a shadow of a doubt, there’s free ‘money for the people’ in Washington.  Sí se puede!

This week the Congress did its part to further the greatest show on earth.  The people want stimulus.  Congress intends to get to them, in good time.

Of course, the need to sprinkle the Country with printing press money was already a foregone conclusion.  There was no discussion of the wisdom of not having a stimulus bill.  The debate at hand was centered on how much.

Crazy Nancy wants $3.4 trillion.  Senate Republicans want $500 billion.  Something called the House Problem Solvers Caucus wants $2 trillion.

President Trump wants Republicans to “go for the much higher numbers.”  His rationale: “it all comes back to the USA anyway (one way or another!).”

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Record Numbers Of Companies Drown In Debt To Pay Dividends To Their Private Equity Owners, by Tyler Durden

One day many of the practices described in this article will be illegal. From Tyler Durden at zerohedge.com:

One week ago we used Bloomberg data to report that in the latest Fed-fuelled bubble to sweep the market, now with Powell buying corporate bonds and ETFs, private equity firms were instructing their junk-rated portfolio companies to get even deeper in debt and issue secured loans, using the proceeds to pay dividends to owners: the same private equity companies. Specifically, we focused on five deals marketed at the start of the month to fund shareholder dividends, which accounting for half of the week’s volume, and the most in a week since 2017, according to Bloomberg.

Now, a little over a week late, the FT is also looking at these dividend recap deals which have become all the rage in the loan market in recent weeks, among other reasons because they are “ringing alarm bells since they come on top of already high leverage and weak investor protections and against a backdrop of economic uncertainty.”

Having updated our calculation, the FT finds that in September a quarter (24% to be exact) of all new money raised in the US loan market has been used to fund dividends to private equity owners, up from an average of less than 4% over the past two years: that would be the highest proportion since the beginning of 2015, according to S&P Global Market Intelligence.

As we wrote a little over a week ago, while the loan market — where PE firms fund the companies they own by selling secured first, second, third and so on lien debt — had until recently not seen the same volume of issuance as other parts of the financial markets. That changed after the Fed stepped into the corporate bond market sending yields crashing to record lows, and forcing US investors into the last corner of the fixed income world to still offer some modest yields: leveraged loans. And since this is the domain of PE firms which desperately need to extract as much cash as they can from their melting ice cubes (another names for single-B and lower rated portfolio companies which will likely all be broke in the next 3-5 years), everyone is rushing to market with dividend recaps to pay as much to their equity sponsor as they can before the window is shut again.

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California Burnin’ – A Warning Against One-Party Rule, by Niall Ferguson

Liberals want all sorts of power but by and large, they do a lousy job of managing things. California is a perfect example. From Niall Ferguson at bloomberg.com via zerohedge.com:

Authored by Niall Ferguson, op-ed via Bloomberg.com,

Fires, blackouts, high taxes, poverty, scarce housing, urban squalor, lousy schools – it’s a wonder anybody stays.

“California, folks, is America fast forward.” Thus Governor Gavin Newsom, hoarsely, amid brown smoke at the North Complex Fire on Sept. 11.

“What we’re experiencing right here is coming to a community all across the United States of America… unless we get our act together on climate change.”

I was with him all the way until he said the words “on climate change.”

As my Hoover Institution colleague Victor Davis Hanson put it last month, California is “the progressive model of the future: a once-innovative, rich state that is now a civilization in near ruins. The nation should watch us this election year and learn of its possible future.”

Let’s start with the fires. So far this year, they have torched more than five times as much land as the average of the previous 33 years, killing 25 people and forcing about 100,000 people from their homes. At one point, three of the largest fires in the state’s history were burning simultaneously in a ring around the San Francisco Bay Area. According to the California Department of Forestry and Fire Protection, or CAL FIRE, of the 10 largest fires since 1970, five broke out this year. Nine out of 10 have occurred since 2012.

No doubt high temperatures and unusual thunderstorms bear some of the responsibility for this year’s terrifying wildfires on the West Coast. It is deeply misleading to claim, as some diehard deniers still do, that temperatures aren’t rising and making wildfires more likely. But it is equally misleading to claim, as the New York Times did last week, that “scientists say” climate change “is the primary cause of the conflagration.”

In reality, as Stanford’s Rebecca Miller, Christopher Field and Katharine J. Mach argue in a recent article in Nature Sustainability, this crisis has at least as much to do with disastrous land mismanagement as with climate change, and perhaps more. Anyone who thinks solar panels, Teslas and a $3.3 billion white elephant of a high-speed rail line will avoid comparable or worse fires next year (and the year after and the year after) doesn’t understand what the scientists are really saying.

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First CMBS Mega-Casualty On Deck: $700MM Starwood Portfolio On Verge Of Default, by Tyler Durden

A CMBS is a commercial mortgage backed security, a package of commercial mortgages. A big one will soon default, which is how credit crises get started. If this one doesn’t kick the crisis into high gear, another will, and soon. From Tyler Durden at zerohedge.com:

Over the past 6 months we have repeatedly discussed the plight of commercial real estate which unlike most other financial assets, failed to benefit from a Fed bailout or backstop (but that may soon change). It culminated in June when we wrote that the “Unprecedented Surge In New CMBS Delinquencies Heralds Commercial Real Estate Disaster.” The ongoing crisis in structured debt backed by commercial real estate in general and hotel properties in particular, prompted Wall Street to launch the Big Short 3.0 trade: betting against hotel-backed loans, which had the broadest representation in the CMBX 9 index, whose fulcrum BBB- series has continued to slide even as the broader market rebounded.

Yet while prominent failures within the CMBS universe had so far been rare due to overcollateralization of even highly distressed portfolios, as the economic slump drags on, as various stimulus measures expire and as landlords fail to make rent payment, the various embedded liquidity buffers have been rapidly draining and as a result we are now approaching the moment where one or more prominent names are about to suffer a spectacular blow up.

The first among them will almost certainly be the Starwood Retail Property Trust 2014-STAR, a portfolio which is backed by an almost $700 million defaulted loan which is collateralized by several malls – including The Mall at Wellington Green in Florida – owned by Barry Sternlich’s Starwood Capital, and whose investors are starting to take losses according to Bloomberg, after the Covid-19 pandemic shuttered stores, crippled rental payments and wiped out emergency cash reserves that had been keeping interest payments flowing.

A big reason for the devastation is that The Mall at Wellington Green, the core property of the portfolio and Wellington’s biggest taxpayer, saw its taxable value drop 32% in 2019 to $150 million as a result of the Nordstrom departure, according to the Palm Beach County Property Appraiser’s Office. Starwood Retail Partners bought the property in 2014 for $341.1 million, marking the largest real estate deal ever recorded in the county at the time. It is now worth less than half, and that’s before most of its other anchor clients also fled or filed for bankruptcy.

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1920: The Crash That Cured Itself, by Pedro Almeida Jorge

After World War I, there was an epic financial and economic crash that was righted in less than two years. What did the US government do? Very little. From Pedro Almeida Jorge at austriancenter.com:

The Spanish Flu of 1918 is an event that, unsurprisingly, is being revisited by many observers today. And yet, at the same time, another major event occurred a century ago which we would also do well to remember: namely, the largely forgotten economic depression of 1920.

We all hear, from time to time, about the ghost of the 1929 Crash, of the dreadful decade of the Thirties, of the Great Depression from which the world (supposedly) only recovered at the cost of a new World War. It is even likely that, in the COVID-19 context we currently face, many people believe that, unless all national and international governments and organizations move ahead with drastic measures, we are condemned to a similar fate. Nonetheless, the depression of 1920 can provide us with a starkly different picture.

After the end of World War I, some months of high profits and renewed expectations followed. Unfortunately, due to the gigantic inflation and government controls introduced during the war, as well as the deaths caused by that same war and the pandemic that followed, a great economic readjustment was unavoidable, which eventually came along in 1920.

Renowned financial analyst James Grant, author of the book The Forgotten Depression: 1921: The Crash That Cured Itself, provides shocking data for the United States. Grant tells us that the Federal Reserve index of industrial production fell by 31.6% from 1920 to 1921. In comparison, in the crisis years 2007-09, it “only” fell by 16.9%. And with respect to the unemployment rate, Grant estimates that it may have reached as high as 15.3%.

Meanwhile, according to Grant, “over the course of 12 months, wholesale prices plunged by 36.8 percent, consumer prices by 10.8 percent and farm prices by 41.3 percent (for speed of decline, not even the Great Depression would match the break of 1920–21). The Dow Jones Industrial Average, then comprising 20 stocks rather than today’s 30, crested in November 1919 at 119.62 and bottomed in August 1921 at 63.9, for a peak-to-trough decline of 46.6 percent.”

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The Political Business Cycle in Reverse, by Thomas DiLorenzo

The economy plays a big part in elections, and the coronavirus gave the Democrats a  perfect chance to try to throw an economy that was doing pretty well into reverse. Then came the riots, another way to destroy businesses and jobs. From Thomas DiLorenzo at lewrockwell.com:

In the late 1970s/early ‘80s the economic subdiscipline of public choice (the application of economic theory and methodology to the study of political decision making) spawned a body of literature on the “political business cycle.”  The book Democracy in Deficit: The Political Legacy of Lord Keynes, by James M. Buchanan and Richard E. Wagner was the main inspiration for this.  There are now hundreds of scholarly articles and numerous books on the subject.

At the time standard Keynesian macroeconomics held that selfless and omniscient public servants would manage monetary and fiscal policy in such a way as to stabilize the business cycle “in the public interest,” minimizing its peaks and troughs along with the costs of inflation and unemployment.  Even by then, however, that notion had been proven to be a farce and a fraud.  Keynesian economics was discredited by the existence of “stagflation” in the ‘70s which it had no explanation for and thought it to be an impossibility.

In addition to many other reasons why central planning under the guise of “stabilization policy” is an inherent failure, the theory of the political business cycle added a new twist:  Politicians are not selfless and omniscient; they are rationally self interested just like everyone else.  They want to keep their jobs, just like everyone else.  One trick that they employ to achieve this goal, says the theory of the political business cycle, is to ramp up government spending just before elections, funded by debt and inflation.  The perceived benefits to voters occurs in the short run, with the bills to be paid after the election.  The conclusion is that political reality dictates that so-called stabilization policy will frequently be destabilizing.

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Governments Will Impose New Lockdowns If They Think They Can Get Away with It, by Ryan McMaken

Once governments seize new powers, they never willingly relinquish them. From Ryan McMaken at mises.org:

This year’s stay-at-home orders and lockdowns imposed by governments on their populations represent a watershed moment in the history of the modern state.

Before March 2020, it is unlikely that many politicians—let alone many ordinary people—thought it would be feasible or likely for government officials to force hundreds of millions of human beings to “self-isolate.”

But it turns out governments were indeed able to force a sizable portion of the population to abandon jobs, religious practices, extended families, and community life in the name of “flattening the curve.”

Whether through fear manufactured by the news media or through outright threats of punishment, business owners shuttered their shops and offices, churches closed down, and schools abandoned their students.

Over time, most governments lessened their restrictions, largely out of fear that tax revenues would collapse and out of fear that the public would become unwilling to obey lockdown edicts indefinitely.

Those fears—not scientific objectivity—have been guiding the gradual loosening of lockdowns and lockdown-related restrictions in recent weeks. After all, in many jurisdictions—both in the USA and in Europe—cases and case growth are far above what they were back in March and April when we were told that high case totals absolutely required strict lockdowns. If case numbers are higher now than during the previous peak, why no new lockdowns?

Make no mistake, many politicians would love to impose lockdowns again, and indefinitely. After all, the power to micromanage the behavior of every business and household in the manner of covid lockdowns is a power undreamed of by even the most despotic emperor of old. It’s not a power a regime would abandon lightly.

But could they get away with it? This is a question every prolockdown politician is asking. For the extent to which lockdowns have been scaled back and lessened, we cannot thank any enlightenment or change of heart on the part of politicians. If lockdowns now seem to be receding, it’s because policymakers fear another round of lockdowns would be greeted with resistance rather than obedience. In short, the retreat of lockdowns is a result of an uneasy truce between the antilockdown public (which is by no means the whole public) and the prolockdown politicians. The politicians have conceded nothing in terms of their asserted authority, but they nonetheless fear greater resistance in the future.

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Open letter from medical doctors and health professionals to all Belgian authorities and all Belgian media.

Belgian doctors make the medical and scientific case for immediately ending all Covid-19 restrictions. From Belgian doctors and health professionals at docs4opendebate.be:

We, Belgian doctors and health professionals, wish to express our serious concern about the evolution of the situation in the recent months surrounding the outbreak of the SARS-CoV-2 virus. We call on politicians to be independently and critically informed in the decision-making process and in the compulsory implementation of corona-measures. We ask for an open debate, where all experts are represented without any form of censorship. After the initial panic surrounding covid-19, the objective facts now show a completely different picture – there is no medical justification for any emergency policy anymore.
The current crisis management has become totally disproportionate and causes more damage than it does any good.
We call for an end to all measures and ask for an immediate restoration of our normal democratic governance and legal structures and of all our civil liberties.

‘A cure must not be worse than the problem’ is a thesis that is more relevant than ever in the current situation. We note, however, that the collateral damage now being caused to the population will have a greater impact in the short and long term on all sections of the population than the number of people now being safeguarded from corona.
In our opinion, the current corona measures and the strict penalties for non-compliance with them are contrary to the values formulated by the Belgian Supreme Health Council, which, until recently, as the health authority, has always ensured quality medicine in our country: “Science – Expertise – Quality – Impartiality – Independence – Transparency”. 1

We believe that the policy has introduced mandatory measures that are not sufficiently scientifically based, unilaterally directed, and that there is not enough space in the media for an open debate in which different views and opinions are heard. In addition, each municipality and province now has the authorisation to add its own measures, whether well-founded or not.

Moreover, the strict repressive policy on corona strongly contrasts with the government’s minimal policy when it comes to disease prevention, strengthening our own immune system through a healthy lifestyle, optimal care with attention for the individual and investment in care personnel.2

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Debt is the Real Pandemic, by Ron Paul

Long after coronavirus is but a memory, our children and grandchildren will be paying for it. From Ron Paul at ronpaulinstitute.org:

According to the Congressional Budget Office’s (CBO) latest “Update on the Budget Outlook,” this year’s $3.3 trillion federal deficit is not just three times larger than last year: it is the largest federal deficit in history. The CBO update also predicts that the federal debt will equal 104 percent of the gross domestic product (GDP) next year and will reach 108 percent of GDP by 2030.

The CBO update also shows that the Social Security, Medicare, and highway trust funds will all be bankrupt by 2031. This will put pressure on Congress to bail out the trust funds thus further increasing the debt.

This year’s spike in federal spending was caused by the multi-trillion dollar coronavirus relief/economic stimulus bills passed by Congress and signed by the president. However, spending had already increased by $937 billion from the time President Trump was sworn in until the lockdown.

Federal spending is unlikely to be reduced no matter who wins the presidential election. Former Vice President Joe Biden has proposed increasing spending on everything from Obamacare to militarism to “green” cronyism. Yet some progressives are attacking Biden for being to “stingy” in his spending proposals. Even more distressing is how few progressives are critical of Biden’s support for increasing the military budget.

With some notable exceptions, such as his infrastructure plan, President Trump is not proposing any massive new spending programs. However, he Is not promising to stop increasing, much less cut, federal spending.

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