Tag Archives: Debt saturation

Here’s Why Stagflation Will be the Dominant Theme of the Decade…by Chris MacIntosh

Posted on December 15, 2022 | Leave a comment

We now have so much debt that additonal debt burdens rather than helps the economy. It’s going to take a long time to dig out. From Chris MacIntosh at internationalman.com:

Stagflation

Why stagflation — and not inflation or deflation — will prevail as the dominant theme for the decade?

This period is analogous to the 1930-40 period with an exception. The countries going into this particular crisis are debt laden as we’re at the tail end of the long-term debt cycle. Not only that but the largest reserve currency economic blocks (US, Europe, UK, and Japan) are now moving into the contraction/restructuring stage of the cycle.

Consider where we are now. In every major economic bloc with a currency system that is used as reserves (most notably the US, UK, EU, and Japan) we have reached levels where growth has stalled. This growth stall was prior to the 2020 lockdowns, by the way. Debt had already begun to be unsustainable in so far as debt laden assets had reached insane levels with simultaneous levels of accompanying debt. The ROI provided was in many instances negative. Remember those negative yielding sovereign bonds in Europe? Remember loss making (high tech whizz bang “growth”) such as the ARK Innovation Fund.

The premise, of course, was that increasing levels of debt would continue to bring marginal real growth. We always said it was nonsense and now it’s proving to be. I guess we got lucky.

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Debt Saturation: Off the Cliff We Go, by Charles Hugh Smith

Posted on April 16, 2022 | Leave a comment

The marginal value of an additional unit of debt goes negative when an economy reaches debt saturation. The cost of servicing and repaying the debt is higher than the economic return on the debt. From Charles Hugh Smith at oftwominds.com:

When the system can’t borrow more and distribute the insolvency, it implodes

I started writing about debt saturation back in 2011. The basic idea is we can continue to borrow and spend as long as one of two conditions hold: 1) real (inflation-adjusted) income is rising, so there’s more income to service additional debt, or 2) the cost of borrowing declines so the same income can support more debt.

After 13 long years of declining interest rates and stagnant incomes for the bottom 90%, we’ve finally reached debt saturation: after dropping to near-zero, interest rates are now rising, pushing the cost of debt service higher, while wages are losing purchasing power (a.k.a. inflation), so there’s less disposable income left to service debt.

The game plan for the past 13 years was to fund “growth” today by borrowing vast sums from future incomes: the $1.6 trillion in student loan debt, for example, was supposed to be paid by the soaring wages of all those student-loan-serfs, and all the sovereign debt was supposed to be paid by the soaring tax revenues from rapidly expanding economies.

These fantasies have now run aground on the unforgiving shoals of reality. There’s no way to expand debt if income is losing ground and the cost of borrowing is soaring.

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The Zombification of the Economy, by Schiffgold

Posted on February 16, 2022 | Leave a comment

Too much debt enervates and eventually destroys an economy. From Schiffgold at schiffgold.com:

Another hotter than expected CPI print in January put even more pressure on the Federal Reserve to do something about inflation. Suddenly, there is talk of a 50 basis point interest rate hike at the next FOMC meeting.

But “doing something” is is easier said than done, particularly in this zombie economy.

The Fed has gotten itself into a tight spot. Raising rates will expose another major economic problem that lurks just under the surface.

The world is buried in debt.

Economist Daniel Fernández Méndez described the 21st century as the “decade of debt.”

And if things continue the way they are, it could well be called the century of the great debt default.”

We’ve talked a lot about the massive levels of debt piled up by the federal government during the pandemic. But that’s just the tip of the iceberg. In 2021, US consumer debt grew at the fastest pace in five years. And then we have corporate debt and the proliferation of “zombie companies.”

Could this lead to a “Minsky Moment” — the point at which it becomes impossible for debtors to pay off their debts?

Daniel Fernández Méndez thinks it could.

The following was originally published by the Mises Wire. The opinions expressed are the authors and don’t necessarily reflect those of Peter Schiff or SchiffGold. 

More and more economists and finance specialists are warning of the potential arrival of a new “Minsky moment.” The last time this term was used with such conviction was in 2008 at the onset of the Great Recession. It seems that 2021–22 could have some parallels with the world’s last severe recession.

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Posted in Banking, Business, Collapse, Debt, Economy, Financial markets, Governments, Investing

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The Global Financial End-Game, by Charles Hugh Smith

Posted on March 7, 2021 | Leave a comment

It’s going to end badly, and here’s a blow-by-blow from Charles Hugh Smith at oftwominds.com:

The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

For those seeking a summary, here is the global financial endgame in fourteen points:

1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

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How Even “Low” Interest Rates Screw Up the Economy, by Wolf Richter

Posted on August 29, 2019 | Leave a comment

Low interest rates make the problems they purport to cure worse. From Wolf Richter at wolfstreet.com:

Interest rates don’t have to be negative to make a mess in the era of low demand.

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

Now the plot thickens: I’ve got a former Secretary of the Treasury backing me up. We’ve already seen, including in my last podcast, how negative interest rates screw up the economy. Negative interest rates are so absurd that just thinking about them gives me a headache.

In the era of negative interest rates, owning financial assets such as government bonds, or savings in the bank, or corporate bonds, and increasingly European junk bonds, no longer produces income but a financial burden – because you have to pay the negative interest in one form or another. And so these quote unquote “assets” are not only a financial burden on you that you would want to get rid of normally, but by extension, they’re burden on the economy as a whole.

Look how economies and stocks have fared in countries with negative interest rates – such as Japan and the countries of the Eurozone: Their stocks have gotten crushed. Their bank stocks have gotten annihilated. Japanese bank stocks are down 92% from the peak 30 years ago, and European bank stocks are down 76% from 12 years ago. European bank stocks are now back where they’d first been in 1993.

The European and Japanese economies have been mired in microscopic growth interspersed with declines. In Japan, this has been going on for over two decades. In Europe it’s been a dozen years.

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Posted in Debt, Economy, Financial markets, Governments

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