Tag Archives: debt

Suffering a sea-change, by Alasdair Macleod

When interest rates really start to reflect the ongoing monetary inflation, it will blow the prices of most financial assets out of the water. From Alasdair Macleod at goldmoney.com:

here is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.

Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.

Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.

Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values — following cryptocurrencies into substantial bear markets.


There is an old stock market adage that you should sell in May and go away. It has already proved its worth in the case of cryptocurrencies, with Bitcoin more than halving at one point, and Ethereum losing 57% between 10—19 May. A sea-change in cryptocurrencies’ market sentiment has taken place.

As for equities, it could also turn out that 10 May, which so far has marked the S&P 500 Index’s high point, will mark the beginning of their decline. But it’s too soon to tell. However, we do know that following the unprecedented dilution of the major currencies’ purchasing power since March 2020 commodity prices have increased substantially, global logistics are fouled up and consumer prices are rapidly rising everywhere, a combination of events which is bound to lead to higher interest rates. But as is usually the case in times like these, central bankers and market bulls are wishing this reality away.

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Billionaire hedge fund manager urges diversification out of the dollar, by Simon Black

Why would you want to stay in a currency its sponsors are hell-bent on debasing? From Simon Black at sovereignman.com:

Ray Dalio is the founder of one of the largest investment firms in the world and has amassed a personal fortune nearing $20 billion from his business and investment acumen.

In short, he understands money and finance in way that most people never will. And it’s for this reason that his latest insights are so noteworthy.

In a recent, self-published article entitled “Why in the World Would You Own Bonds When. . .”, Dalio makes some blunt assertions about the alarming US national debt, the decline of the dollar, and other negative trends in the Land of the Free.

Here’s a summary of the major points:

1) Interest rates are now so low that “investing in bonds (and most financial assets) has become stupid.”

Dalio points out that bond yields are so low today that investors would essentially have to wait more than 500 years to break even on their bond investments after adjusting for inflation.

That’s why sensible people are already ditching the bond market.

JP Morgan’s CEO Jamie Dimon recently said he wouldn’t touch a US government 10-year Treasury Note “with a ten foot pole.” Neither would Dalio, as he told Bloomberg this month.

2) This is a big problem for Uncle Sam. Investors are ditching US government bonds at a time when the US is “overspending and overborrowing”.

They just passed a $1.9 trillion stimulus, and they have another $3 trillion spending package ready to go, plus plenty of momentum for Universal Basic Income, health care, Green New Deal, and just about everything else.

In short, the government is going to have to sell a LOT of bonds (i.e. increase the debt) at a time when investing in bonds has become stupid.

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No. More Debt Is Not The Answer, by Daniel Lacalle

No nation ever borrowed its way to prosperity. From Daniel Lacalle at dlacalle.com:

In an article published in the Frankfurter Allgemeine Zeitung, Isabel Schnabel, Member of the Executive Board of the ECB states that governments taking more debt now should not be a concern, and would strengthen the central bank independence in the future.

She claims that “the decisive fiscal policy intervention in the coronavirus (COVID-19) crisis strengthens the effectiveness of monetary policy and mitigates the long-term costs of the pandemic. With targeted, forward-looking investment, not least under the umbrella of the EU Recovery Fund, governments can foster sustainable growth, increase long-term competitiveness and facilitate the necessary reduction of the debt ratio once the crisis has been overcome”.

The problem of Ms Schnabel’s article is that it ignores the facts and bets the future of the central bank independence on a rigorous, profitable and successful level of government investment that has never happened and is even more less likely to occur now.

Ms Schnabel should be, in fact, warning about the enormous risk of malinvestment and excessive debt that may arise from the European Recovery Fund implementation and the massive deficit spending arising throughout the Eurozone. Why? Because she has the empirical evidence of the failure to achieve the virtuous growth and debt reduction she expects with the examples of the Growth and Jobs Plan of 2009, the Juncker plan and the enormous rise in deficit spending between 2009 and 2011 among many European nations. Once growth recovered, three things were evident:

  1. Most Eurozone countries maintained a level of deficit spending that elevated the debt to GDP in growth and recession periods because governments get used to spending more in boom times and even more in recession times.  Ms Schnabel expects of the Eurozone governments a level of discipline and fiscal prudence that only Germany and Holland implemented.  With the budgets of Spain and Italy soaring without control, the idea that governments will spend money wisely and productively is not just wishful thinking, it is negated by the evidence of the past.

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Forbearance Chickens, Roosting, by Eric Peters

Forebearance on collecting contractual obligations is ending, which means people whose businesses have been closed or who are unemployed have to come up with the money. From Eric Peters at ericpetersautos.com:

Life has been put on chokehold for most of this year – perhaps permanently – but the payments are coming due.

Many people can’t afford to keep making them, however – due to their jobs being cancelled by decree of the Gesundheitsfuhrers. While some of the cancelled jobs have come back many never will. It’s hard to keep your doors open when you’re only allowed to operate at 50 percent capacity – assuming you’re allowed to open them at all.

Or forced to close them, again.

For awhile, there was “forbearance” – which means you still owe, just not right now. The payments don’t go away, though. And in some cases, they compound.

Interest on the growing principle.

In a kind of psychological reverse withholding, people (who didn’t read the fine print) were gulled into believing they had more rather than less money because they weren’t expected to spend it on things like car (and home) payments.

For now.

But that was then.

Forbearance is ending, even though the chokehold has only been partially relaxed and many businesses – and thus, jobs – have been choked out, for good.

But he bills are coming due – plus interest.

Meanwhile the weekly stipend from the government offered up as a palliative measure has been dialed back, resulting in payments (plus interest) on car loans not being made.

TransUnion – one of the major credit reporting bureaus – reports that the number of “cases” of delinquent loans is hot-spotting. It’s now over 3 percent – which is about three times as high as the percentage of the population supposedly slumber-roomed by the WuFlu.

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Trump – Master of the Seen – Vandalizes U.S. Economy, by Tom Luongo

Trump’s emergency economic measures ignore both causes and consequences. From Tom Luongo at tomluongo.me:

Government intervention into the market is always, and without fail, the wrong response to an economic problem. Politicians justify their intervention with ‘saving jobs,’ ‘dealing with a crisis’ or simply, ‘because I can.’

They only focus on the ‘seen’ and ignore the ‘unseen’ effects of their policies, selling them to voters on that basis alone. This is the first rule of economic analysis.

The great Frederick Bastiat described this in his seminal work of 1850, ‘That Which is Seen, and That Which is Unseen”

No discussion of the secondary or tertiary effects is allowed.

Even though those effects are often far worse. But because they are harder to predict and more pernicious and diffuse they are ultimately ignored.

President Trump is no different in this than any other politician. In fact, he may be one of the worst examples of a politician doing too much in history. To Trump nothing cannot be fixed without his direct application of the weight and force of the U.S. government.

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OK Boomer, OK Fed, by Charles Hugh Smith

We might not have a central bank after the younger generations discover what the Fed has done to them. From Charles Hugh Smith at oftwominds.com:

Eventually the younger generations will connect all the economic injustices implicit in ‘OK Boomer’ with the Fed.

Much of the cluelessness and economic inequality behind the OK Boomermeme is the result of Federal Reserve policies that have favored those who already own the assets (Boomers) that the Fed has relentlessly pumped higher, to the extreme disadvantage of younger generations who were not given the opportunity to buy assets cheap and ride the Fed wave higher.

OK Fed: you’ve destroyed price discovery, driven housing out of reach of all but the wealthy and hollowed out the economy, all the while patting yourselves on the back for being so smart and fabulous.

OK Fed: you’ve waged generational war without even acknowledging how disastrous your policies have been for younger generations. You’ve bloated the paper wealth of everyone old enough to have bought a home 20, 30 or 40 years ago and who’s had a Corporate America or government job who’s seen their 401K or pension soar because “the Fed has our back” and Fed policies have inflated one bubble in stocks and bonds after another for 25 years.

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He Said That? 1/13/16

From Steve Keen (born 1953), Australian-born, Britain-based economist and author:

“…If you look at mainstream economics there are three things you will not find in a mainstream economic model – Banks, Debt, and Money.

How anybody can think they can analyze capital while leaving out Banks, Debt, and Money is a bit to me like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings…”

A Skyscraper of Cards by Robert Gore

Every now and then the world is visited by one of these delusive seasons, when “the credit system,” as it is called, expands to full luxuriance, everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly, from the facility of borrowing….Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums made at every transfer….Speculation is the romance of trade, and casts contempt upon all its sober realities….a panic succeeds, and the whole superstructure, built upon credit and reared by speculation, crumbles to the ground, leaving scarce a wreck behind: ‘It is such stuff as dreams are made of.’

Washington Irving, The Great Mississippi Bubble, 1820

Had the Nobel Prize for economics existed back in 1820, Mr. Irving would have been a worthy candidate. He certainly had a better grasp of the subject than many who have won it. As Deacon Bainbridge, a character in The Golden Pinnacle, noted: “Historically, you’ve been able to tell everything you need to know about a government by the quality of its money.” Money has become the “stuff as dreams are made of”: ephemeral, evanescent, lighter than air…vanishing when eyes are opened. As chaos engulfs the world, governments stand revealed; they’re of the same quality as their currencies.

Money reduces the transaction costs and inefficiencies associated with barter and is a store of value, the standard of accounting, and the medium of exchange. Debt allows those who produce more than they consume to lend and earn a return from those who use that surplus to consume or invest. A system whereby money and debt are created at the whim of either a government or its central bank will not work, in that long run Keynes infamously dismissed, because it cannot work. When money and credit are divorced from the underlying economy, they become agents of destruction rather than production and growth.

The mathematics of debt growth in excess of underlying economic growth are inescapable. Taken to its logical extreme, every asset would be collateralized and debt service would stifle economic activity. Before that point is reached, however, debt becomes an unbearable economic burden—its costs exceed its benefits—which throws debt formation into reverse. The reversal in a system whereby fiat money, governmental borrowing, and central banking have divorced debt growth from the real economy is swift, dramatic, and inevitably contractive and deflationary.

The global government- and central bank-promoted expansion of debt the last five years has been sold as a means of restoring aggregate demand, combatting perceived threats of deflation, raising the prices of financial assets and real estate, and creating economically beneficial wealth effects. It actually marks the end game of many decades in which debt and the price of debt have been completely untethered from the real economy.

A skyscraper of cards has been built on a superabundance of debt priced at interest rates that offer creditors no compensation for credit or market risk, much less a real return on their capital. The purported justifications for the debt explosion are specious. It is actually a last-gasp attempt by governments to reduce their debt service costs and devalue their staggering levels of debt through currency devaluation and inflation. Central banks have been willing accomplices; buyers of government debt whose interest-rate-insensitive demand has driven rates far lower than what would have prevailed if the market were not subject to their manipulation.

Much of the global economy is a mirage. An appreciable percentage of malls, auto dealerships, restaurants, real estate developments, office towers and other hallmarks of the developed countries’ way of life would not exist but for debt promotion and below-market interest rates. Many of the assets listed on individual and corporate balance sheets are debt, somebody else’s liability. The borrower expects the return on investment or speculation will be higher than the interest rate he or she must pay. The majority of lenders lend, notwithstanding low rates, because they are either interest-rate-insensitive central banks or must generate some sort of return to fund future liabilities (pension funds) or present lifestyles (retirees).

Once debt starts contracting, speculative flows reverse first, because speculation is the most leveraged economic activity. Contracting credit is a margin call, and assets whose prices had been bid up as credit expanded must be sold to meet the claims of creditors. Because it is impossible to satisfy all claims (especially when many financial assets are collateral for multiple loans, our present situation), debt must be written off and losses realized, threatening creditor solvency. They sell assets and the cycle turns vicious. While it is unclear how much rising wealth promotes economic activity on the way up—the much ballyhooed wealth effect—wealth destruction accompanies economic contraction on the way down. People cannot spend paper wealth they no longer have and against which they can no longer borrow.

Expanding debt cannot “solve” the economic problem of too much debt any more than another drink can solve alcoholism. Additional debt became an unbearable burden before 2008—costs exceeded benefits, as the housing bust and financial crisis made clear—and the world has added almost $30 trillion since then. What was obvious to Washington Irving in 1820 remains obvious. The remedies pursued the last five years have been blind to the consequences and counterproductive. Governments and central banks’ debt expansion has only delayed and ultimately will amplify the economic and social pain. The end of quantitative easing this month will take the blame for recent global equity weakness. It shouldn’t; at most it hastens by a few months the collapse of a skyscraper of cards as the “superstructure, built upon credit and reared by speculation, crumbles to the ground, leaving scarce a wreck behind.

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Entomology 101, A Review of David Stockman’s The Great Deformation by Robert Gore

by Robert Gore

David Stockman tells the truth and knows what he is talking about. Either virtue disqualifies him for Washington or the major media, so he blogs (davidstockmanscontracorner.com) and writes books. An insider as President Reagan’s budget director and then a partner in private equity powerhouse Blackstone Group, Stockman now loses friends and influences malcontents from his chosen perch on the outside. Ignore his book, The Great Deformation, The Corruption of Capitalism in America, at your peril. It chronicles the deterioration of the welfare-warfare state and reveals the economic, financial, social, and political horror show America has become. This polemic perforates the media’s stock-market fueled happy talk, war propaganda, and endless trivia that divert attention from our dysfunctional economy and corrupt, bankrupt government. Continue reading