If you’re only going to read two articles from SLL tonight, read this one and the next one. There’s only one inevitable “solution” to the global debt problem: a financial system crash and burn. From Alasdair Macleod at goldmoney.com:
It has been recently estimated that global debts stand at $284 trillion equivalent, representing 355% of global GDP. Estimates such as these must be treated with caution, and they probably underestimate financial sector debt. Furthermore, no allowance in these figures is made for OTC derivatives, which according to the Bank for International Settlements have a gross value of $15.48 quadrillion(!), netting out at $609 trillion.
This article comments on the different debt sectors: government, finance, non-financial corporate and consumer debt. It finds the dangers of excessive corporate debt have had the least attention, and that systemic risk in commercial banks is grossly underestimated.
The rapid growth of emerging market corporate debt is a recipe for a repeat of the Asian crisis in the late-1990s.
Ultimately, the whole debt burden will fall on government shoulders in their threefold attempt to protect the banks, stop a recession and to continue puffing up a wealth effect by inflating increasing amounts of currency into financial markets.
The trigger to end the debt crisis is almost certainly rising bond yields.
Times of monetary expansion generate a shift in wealth from bank depositors to borrowers. Given that this year is the fortieth anniversary of the Nixon shock, when the world’s currencies finally came out as fiat, it is hardly surprising that each successive crisis led to the easier path of increasing debt instead of letting failing businesses and banks go to the wall. Kicking the can down the road has been the way to deal with every economic or financial blip. After all, it is argued, inflation reduces debt obligations over time.
Maybe, but it increases the net present value of future obligations to the ultimate destruction of welfare-driven states. This is why, if for no other reason, kicking cans down the road just ends up at some point with a pile of cans that can no longer be kicked. But politicians aware of mounting obligations and still doing the can-kicking believe that will be their successors’ problem, and you never know, something might turn up. After all, optimists argue, we survived higher levels of debt following the Second World War.
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.
Egon von Greyerz is almost certain to be proved right when he says that what we have now amounts to the biggest financial swindle in history. From von Greyerz at goldswitzerland.com:
Zeus punished the hubristic King Sisyphus to roll a huge boulder up a very steep hill in Hades. Before Sisyphus reached the top, the stone rolled down and he had to start all over again.
Hubris is serious sin that seldom goes unpunished. The arrogance and uber-confidence which TPTB (the powers that be) have displayed in leading the world to ruin will clearly be severely punished. But sadly the punishment will affect the whole world and not just the Elite that caused it.
BANKERS AND GOVERNMENTS HAVE INFLICTED INCREDIBLE DAMAGE
It could be argued that blaming one group for the coming global collapse might be unfair. The world economy has always oscillated between boom and bust and is thus a natural phenomenon like the seasons. But the main difference this time is the incredible damage that governments, central bankers and bankers have inflicted on the world.
In 2006 when the Great Financial Crisis started, US Federal debt was $8.5 trillion and today it is $26.5t. In 14 years debt has more than trebled. GDP in 2006 was $14t and is now $21.5t. So debt to GDP has gone from 60% to 123%.
This is what is called running on empty. US debt creation has nothing to do with investing in productive assets. With the debt to GDP ratio doubling in 14 years it is clear evidence that all the printed money is not going into the real economy but is supporting a bankrupt financial system which has kept the money to prop up their own insolvent balance sheets and to remunerate the top executives with fantasy money.
Historians looking back on the decade now ending may well name it the decade of debt. From Michael Every at zerohedge.com:
Authored by Rabobank’s Michael Every
We are now close to the end of the year and the second decade of the 21st century
2010-19 saw a marked difference between growth in developed and emerging markets – but both may be about to slow together
World Total Factor Productivity growth was virtually zero – and China’s performance crucial
2010-19 was a decade of record high debt… following a global crisis created by too much debt
Absolute poverty levels continued to decline – yet there was increased in perceived insecurity and hardship in many developed markets
There was a major increase in global asset prices, especially of stocks and houses…
… and in inequality of wealth and income, even as gaps between states narrowed
Interest rates went up and then down again in developed markets, and bond yields fell to record lows; but emerging markets also saw rates and yields spike
The USD gained against most major FX crosses, and most so against struggling emerging markets
What do the 2020s hold for us if this was what the 2010s provided? China arguably holds the key on many fronts
A very mixed decade
We are now close to the end of the year and, given it is 2019, also of the second decade of the 21st century. That marks an opportune time to look backwards in order to then try to look forwards.
In many respects this has been a difficult decade – for example, what do we even refer to it as: “The twenty-tens” or “The twenty-teens”? Far more importantly, of course, the key developments seen over the last ten years present a very mixed picture. Some are certainly positive, and yet arguably more are deeply negative.
Central banks are worried that the mountain of debt they helped create might collapse, leading to bad things. From Tyler Durden at zerohedge.com:
Something happens to the world’s “really smart people” when the topic of debt is discussed: they become blabbering idiots.
Consider that last month we reported that according to the Institute of International Finance, global debt has now hit $250 trillion and is expected to rise to a record $255 trillion at the end of 2019, up $12 trillion from $243 trillion at the end of 2018, and nearly $32,500 for each of the 7.7 billion people on planet. “With few signs of slowdown in the pace of debt accumulation, we estimate that global debt will surpass $255 trillion this year,” the IIF said in the report.
Separately, Bank of America recently calculated that since the collapse of Lehman, government debt has increased by $30tn, corporates debt by $25tn, household by $9tn, and financial debt by $2tn; And with central banks expected to support government debt, BofA warns that “the biggest recession risk is disorderly rise in credit spreads & corporate deleveraging.”
The longer the world does not deal with debt, the more painful the eventual resolution will be. From Satyajit Das at bloomberg.com:
Inventive policymaking has only made the problem worse, guaranteeing that any eventual restructuring will be all the more painful.
Markets, to paraphrase Nobel prize-winning economist Thomas Schelling, often forget that they keep forgetting. That’s especially true when it comes to the intractable challenges posed by global debt.
Since 2008, governments around the world have looked for relatively painless ways to lower high debt levels, a central cause of the last crisis. Cutting interest rates to zero or below made borrowing easier to service. Quantitative easing and central bank support made it easier to buy debt. Engineered increases in asset prices raised collateral values, reducing pressure on distressed borrowers and banks.
All these policies, however, avoided the need to deleverage. In fact, they actually increased borrowing, especially demand for risky debt, as income-starved investors looked farther and farther afield for returns. Since 2007, global debt has increased from $167 trillion ($113 trillion excluding financial institutions) to $247 trillion ($187 trillion excluding financial institutions). Total debt levels are 320 percent of global GDP, an increase of around 40 percent over the last decade.
The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun… (and later) Don’t be fooled by bond prices holding up, because trading volumes are down. There are fewer bids in the market, and the dispersion of bids is wider. It is time to jog—not walk—to the exits of credit and liquidity risk.
– Scott Minerd, Guggenheim Partners Chief Investment Officer
From a 50,000-feet viewpoint, we’re probably in a global debt bubble…Global debt to GDP is at an all-time high…This is going to be a very challenging time for policymakers moving forward.
– Paul Tudor Jones at the Greenwich Economic Forum in Connecticut, November 15, 2018
Last week, I talked about Ray Dalio’s new book on debt cycles. He describes how debt is inherently cyclical, because it enables more spending now that must be offset by less spending later.
Ray’s book helped me refine my description of The Great Reset. It’s a critical refinement, too. After reading the book,I realized it is entirely possible we will have another debt crisis before what I think of as The Great Reset. I firmly believe the latter is still coming, but there may be another “mere” credit crisis beforehand.
It is quite possible the stock market has already put it a top that will stand for many years. From Simon Black at sovereignman.com:
October can be an unforgiving month.
The terrible stock market crash that signaled the beginning of the Great Depression was in October of 1929.
The stock market crash known as Black Monday was in October of 1987.
In 1997, the Asian financial crisis sparked another stock market crash in… you guessed it—October.
And back in 2007 at the height of the giant bubble that almost brought down the entire financial system, the stock market peaked once again in… October.
It’s not that October is particular cursed. Maybe it’s just a coincidence. But I do find it strangely ominous that asset prices seemed to have peaked last month (October) and have been in decline ever since.
Real estate prices are starting to show signs of strain; more than one-third of homes for sale had a large price cut in October– the most discounting in the past eight years.
Debt is future spending pulled forward in time. It lets you buy something now for which you otherwise don’t have cash available yet. Whether it’s wise or not depends on what you buy. Debt to educate yourself so you can get a better job may be a good idea. Borrowing money to finance your vacation? Probably not.
Unfortunately, many people, businesses, and governments borrow because they can, which for many is possible only because central banks made it so cheap in the last decade. It was rational in that respect but is growing less so as the central banks tighten their policies.
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