We’re just now seeing the economic effects of the coronavirus, but whether it’s truly a pandemic or an overblown scare fanned by governments and the media, those effects will be substantial. From Charles Hugh Smith at oftwominds.com:
If you think global demand will rebound as global debt and confidence implode, you better not be making consequential decisions based on Euphorestra-addled magical thinking.
Even before the Covid-19 pandemic, the global economy was slowing for two reasons: 1) everybody who can afford it already has it and 2) overcapacity. One word captures the end-of-the-cycle stagnation: saturation.
Everyone who can afford a smartphone (or can borrow to buy one) already has one. Everyone who can afford an auto loan already has a car. Everyone who could afford an overpriced house already bought one. Everyone who can afford a tablet or laptop already has one. And so on.
This saturation isn’t just in the consumer market–the corporate market is equally saturated. Corporations leased too much space, bought more cloud services than needed, increased headcount willy-nilly, and increased capacity just as the market for their goods and services stagnated from global saturation of markets and debt.
Paint-daubed members of the Keynesian Cargo Cult (paging Chief Humba-Humba Paul Krugman) love to claim that “debt doesn’t matter” but in their frenzied dance around the campfire they ignore one little feature of debt: interest. In a world in which money is borrowed into existence, all new money issuance and all new debt (the same thing) accrues interest.
And as Japan has proven, even if the interest rate is near-zero, if you borrow relentlessly enough, the interest due even on near-zero interest rates soon dominates your entire income.
The Keynesian Cargo Cult, busy with their rock radios (the dials are painted on), ignore the sad reality that marginal borrowers default because they can’t afford to make the principal payments, never mind the interest, and the inevitable result is cascading defaults throughout the financial system.