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.
The debt problem is like watching the streams, levies, and rivers rising during a heavy flood. If it keeps raining, eventually the water overflows over the banks. Debt keeps rising, eventually it will overflow its banks. From Michael Snyder at theeconomiccollapseblog.com:
America, you officially have a debt problem, and I am not just talking about the national debt. Consumer bankruptcies are surging, corporate debt has doubled since the last financial crisis, state and local government debt loads have never been higher, and the federal government has been adding more than a trillion dollars a year to the federal debt ever since Barack Obama entered the White House. We have been on the greatest debt binge in human history, and it has enabled us to enjoy our ridiculously high standard of living for far longer than we deserved. Many of us have been sounding the alarm about our debt problem for a very long time, but now even the mainstream news is freaking out about it. I have a feeling that they just want something else to hammer President Trump over the head with, but they are actually speaking the truth when they say that we are facing an unprecedented debt crisis.
For example, the New York Times just published a piece that discussed the fact that the bankruptcy rate among retirees is about three times higher than it was in 1991…
For a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.
The signs of potential trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years. Now, new research sheds light on the scope of the problem: The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers.
Overall, Baby Boomers are doing a whole lot better financially than the generations coming after them, and so this is very troubling news.
Not only are more older people seeking relief through bankruptcy, but they also represent a widening slice of all filers: 12.2 percent of filers are now 65 or older, up from 2.1 percent in 1991.
The jump is so pronounced, the study says, that the aging of the baby boom generation cannot explain it.
Of course it isn’t just Baby Boomers that are drowning in debt.
Collectively, U.S. households are 13.15 trillion dollars in debt, which is the highest level in American history.
A good summary by John Mauldin of his work on global debt and his warnings about same, which someday will inevitably be called “prescient.” From Mauldin at mauldineconomics.com:
We are approaching the end of the debt Train Wreck series. I’ve spent several weeks explaining why I think excessive debt is dragging the world economy toward an epic crash. The tracks ahead are clear for now but will not remain so. The end probably won’t be pretty. But there’s good news, too: we have time to get our portfolios, our businesses, and our families prepared.
Today, we’ll look at some new numbers on just how big the problem is, then I’ll recap the various angles we’ve discussed. This problem is so big that we easily overlook key points. I hope that listing them all in one place will help you grasp their enormity. Next week, and possibly a few after that, I’ll describe some possible strategies to protect your assets and family.
Before we go on, let me give a quick plug for Over My Shoulder. We rejuvenated this service a few months ago and it’s working even better than expected. Having Patrick Watson co-edit with me has been a big help. We’ve worked together, on and off, for 30 years now so he knows how I think. Between us, we have sent subscribers tons of fascinating economic analysis from my best sources—most of which you would never see otherwise. You get both the original item and our quick-read summary.
Talking about global debt requires that we consider almost incomprehensibly large numbers. Our minds can’t process their enormity. How much is a trillion dollars, really? But understanding this peril forces us to try.
Earlier in this series, I shared a 2015 McKinsey chart that summed up global debt totals. They pegged it at $199 trillion as of Q2 2014. Note that the debt grew faster than global GDP. Everything I see suggests it will go higher at an ever-increasing rate.
SLL will keep posting debt stories until the damn bubble finally busts, then we’ll post stories about deflation and depression. From Tyler Durden at zerohedge.com:
Every quarter the Institute of International Finance publishes a new number of the total amount of global debt outstanding, and every quarter the result is the same: a new record high
Today was no exception: according to the IIF’s latest Global Debt Monitor, the amount of debt held in the world rose by the biggest amount in two years during the first quarter of 2018, when it grew by $8 trillion to hit a new all time high of $247 trillion, up from $238 trillion as of Dec. 31, 2017and up from by $30 trillion from the end of 2016.
In other words, there is now a quarter quadrillion dollars in global debt, and it represents 318% of global GDP. More concerning is that this was the first time since Q3 2016 that global debt to GDP increased, suggesting that the marginal utility of debt is once again below 1.
This is how the debt is broken down as of Q1 2018 and compared to Q1 2013:
Non-financial corporate debt: $74 trillion, up from $58 trillion in 5 years
Government debt: $67 trillion, up from $56 trillion
Financial debt: $61 trillion, up from $56 trillion
Household debt: $47 trillion, up from $40 trillion
And visually:
Some more details from the report, via Bloomberg:
The government debt-to-GDP ratio has surged to 101 percent in the U.S.
Non-financial corporate debt is now at record highs in Canada, France and Switzerland
Household indebtedness in China, Chile and Colombia grew over 3% since Q1 2017, topping 49%, 46% and 30%, respectively.
This is a very good survey of the diciest corners of the international credit markets, the ones most likely to start the global credit crisis that nobody will see coming. From Jonathan Rochford at narrowroadcapital.com:
When considering where the global credit cycle is at, it’s often easy to form a view based on a handful of recent articles, statistics and anecdotes. The most memorable of these tend to be either very positive or negative otherwise they wouldn’t be published or would be quickly forgotten. A better way to assess where the global credit cycle is at is to look for pockets of dodgy debt. If these pockets are few, credit is early in the cycle with good returns likely to lie ahead. If these pockets are numerous, that’s a clear indication that credit is late cycle. This article is a run through of sectors where I’m seeing lax credit standards and increasing risk levels, where the proverbial frog is well on the way to being boiled alive.
Global High Yield Debt
Last month I detailed how the US high yield debt market is larger and riskier than it was before the financial crisis. The same problematic characteristics, increasing leverage ratios and a high proportion of covenant lite debt, also apply to European and Asian high yield debt. Even in Australia, where lenders typically hold the whip hand over borrowers, covenants are slipping in leveraged loans. The nascent Australian high yield bond market includes quite a few turnaround stories where starting interest coverage ratios are close to or below 1.00.
Defined Benefit Plans and Entitlement Claims
For many governments, deficits in defined benefit plans and entitlement claims exceed their explicit debt obligations. The chart below from the seminal Citi GPS report uses somewhat dated statistics, but makes it easy to see that the liabilities accrued for promises to citizens outweigh the explicit debt across almost all of Europe.
In the US, S&P 500 companies are close to $400 billion underfunded on their pension plans. This doesn’t seem enormous compared to their annual earnings of just under $1 trillion, but the deficits aren’t evenly spread with older companies such as GE, Lockheed Martin, Boeing and GM carrying disproportionate burdens.
Latest forecasts have US Medicare on track to be insolvent in 2026. At the State government level Illinois ($236 billon) and New Jersey ($232 billion) both have enormous liabilities, mostly pension and healthcare obligations. If you want to understand how pension and entitlement liabilities have grown so large, my 2017 article on the Dallas Police and Fire Pension fiasco and John Mauldin’s recent article “the Pension Train has no Seatbelts” are both worth your time.
The clock is ticking and the hour is very late. From John Mauldin at mauldineconomics.com:
Rather go to bed without dinner than to rise in debt.
—Benjamin Franklin
What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?
—Adam Smith
There are no shortcuts when it comes to getting out of debt.
—Dave Ramsey
Modern slaves are not in chains, they are in debt.
—Anonymous
Debt isn’t always a form of slavery, but those old sayings didn’t come from nowhere. You can find hundreds of quotes on the Internet discussing the problems of debt. Debt traps borrowers, lenders, and innocent bystanders, too. If debt were a drug, we would demand it be outlawed.
The advantage of debt is it lets you bring the future into the present, buying things you couldn’t afford if you had to pay full price now. This can be good or bad, depending on what you buy. Going into debt for education that will raise your income, or for factory equipment that will increase your output, can be positive. Debt for a tropical vacation, probably not.
And that’s our core economic problem. The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist. So, in the time-honored tradition of lenders everywhere, we extend and pretend. But with our ability to pretend almost gone, we’re heading to the Great Reset.
I’ve been analogizing our fate to a train wreck you know is coming but are powerless to stop. You look away because watching the disaster hurts, but it happens anyway. That’s where we are, like it or not.
And we don’t even really like to talk about it in polite circles. In a private email conversation this week, which must remain anonymous, this pithy line jumped out at me:
The total of Federal (remember they do not use GAAP) debt, state debt, and city debt [unfunded liabilities included] exceeds $200 trillion dollars. There is no set of math that works to pay this off. Let me be sure it’s heard by repeating it: There is no set of math that works to pay this off. Therefore, there has to be some form of remediation. This conversation is uncomfortable, so it is avoided.
Today’s letter is chapter 5 in my Train Crash series. If you’re just joining us, here are links to help you catch up.
Last week, we discussed the Italian political crisis and potential eurozone breakdown. That is a dangerous possibility, but far from the only one. As we’ll see today, the world has so much debt that the cracks could happen anywhere.
The world is not even trying to address its ever-mounting debt. It won’t…until it has to. From John Rubino at dollarcollapse.com:
A recurring pattern of the past few decades involves governments promising to limit their borrowing, only to discover that hardly anyone cares. So target dates slip, bonds are issued, and the debts keep rising.
This time around the timing is especially notable, since eight years of global growth ought to be producing tax revenues sufficient to at least moderate the tide of red ink. But apparently not.
In Japan, for instance, government debt is now 250% of GDP, a figure which economists from, say, the 1990s, would have thought impossible.
Over the past decade the country’s leaders have proposed a series of plans for balancing the budget, and actually did manage to shrink debt/GDP slightly in 2016. But now they seem to have given up, and are looking for excuses to keep spending:
(Hellenic Shipping News) – Japan’s government is set to compile an extra budget worth around 2.7-2.9 trillion yen ($24-26 billion) for the fiscal year to March 2018, with additional bond issuance of around 1 trillion yen to help fund the spending, government sources told Reuters.Following October’s big election win, Prime Minister Shinzo Abe’s cabinet has made plans to beef up childcare support, boost productivity at small and medium-sized companies, and strengthen competitiveness of the farm, fishery and forestry industries.
In the UK, a balanced budget has been pushed back from 2025 to 2031:
(Daily Mail) – Philip Hammond’s ambition to get Britain’s finances back into the black receded further last night – as the Treasury watchdog said he would struggle to eliminate the deficit before 2031.The Chancellor had promised to balance the books by 2025. The target has been pushed back twice already, after George Osborne’s pledge in his 2010 Budget to balance the books ‘within five years’, before he revised the figure to 2020.
In its assessment to accompany the Budget, the Office for Budget Responsibility said it was now ‘unlikely’ that the Chancellor would balance the books by 2025 as he had hoped.
It said the Government was on course to wipe out the deficit in 2030-31, 30 years after the country was last in surplus.
That would be the longest period of consecutive deficits on record – eclipsing the 25-year borrowing binge between 1793 and 1817 that included the Napoleonic Wars.
If you add up all the money that national governments have borrowed, it tallies to a hefty $63 trillion.
In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, as Visual Capitalist’s Jeff Desjardins notes,around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.
In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, as Visual Capitalist’s Jeff Desjardins notes,around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.
The U.S. is a prime example of “debt creep” – the country hasn’t posted an annual budget surplus since 2001, when the federal debt was only $6.9 trillion (54% of GDP). Fast forward to today, and the debt has ballooned to roughly $20 trillion (107% of GDP), which is equal to 31.8% of the world’s sovereign debt nominally.
THE WORLD DEBT LEADERBOARD
In today’s infographic, we look at two major measures: (1) Share of global debt as a percentage, and (2) Debt-to-GDP.
Let’s look at the top five “leaders” in each category, starting with share of global debt on a nominal basis:
Together, just these five countries together hold 66% of the world’s debt in nominal terms – good for a total of $41.6 trillion.
That $217 trillion doesn’t included unfunded pension and medical liabilities, the kind that are putting Illinois and Connecticut in the poor house. From Michael Snyder at theeconomicollapseblog.com:
The borrower is the servant of the lender, and through the mechanism of government debt virtually the entire planet has become the servants of the global money changers. Politicians love to borrow money, but over time government debt slowly but surely impoverishes a nation. As the elite get governments around the globe in increasing amounts of debt, those governments must raise taxes in order to keep servicing those debts. In the end, it is all about taking money from us and transferring it into government pockets, and then taking money from government pockets and transferring it into the hands of the elite. It is a game that has been going on for generations, and it is time for humanity to say that enough is enough.
According to the Institute of International Finance, global debt has now reached a new all-time record high of 217 trillion dollars…
Global debt levels have surged to a record $217 trillion in the first quarter of the year. This is 327 percent of the world’s annual economic output (GDP), reports the Institute of International Finance (IIF).
The surging debt was driven by emerging economies, which have increased borrowing by $3 trillion to $56 trillion. This amounts to 218 percent of their combined economic output, five percentage points greater year on year.
Never before in human history has our world been so saturated with debt.
And what all of this debt does is that it funnels wealth to the very top of the global wealth pyramid. In other words, it makes global wealth inequality far worse because this system is designed to make the rich even richer and the poor even poorer.
Eight men own the same wealth as the 3.6 billion people who make up the poorest half of humanity, according to a new report published by Oxfam today to mark the annual meeting of political and business leaders in Davos.
This didn’t happen by accident. Sadly, most people don’t even understand that this is literally what our system was designed to do.
Sixteen trillion dollars is a lot of money. That is approximately the size of the combined balance sheets of the world’s major central banks: the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People’s Bank of China. It is 35 percent of their nations’ GDPs, up from only 14 percent in May 2006, when balance sheets summed to just shy of $6 trillion.
Here’s a larger number: $225 trillion. That’s the estimated global grand total of individuals’, businesses’, and governments’ nominal debt. It is over 14 times as large as major central bank balance sheets; the smaller figure is 6.23 percent of the larger figure. In the good old days when central bank balance sheets were larger relative to total debt, economics students were taught that when a central bank expanded its liabilities (currency and member bank deposits), the expansion had a multiplier effect as it worked its way through the banking system (those liabilities were sometimes called “high powered money”). In the good old days, a 166 percent increase in central bank liabilities in just ten years would have produced rip-roaring economic activity and galloping inflation. Pull out the end of the year polls of economists since 2006 and that has been the annual consensus, without the colorful adjectives: stronger growth and a pick up in inflation.
The economists have fixated on the smaller number and ignored the larger one. They rarely look at debt as an economic input that affects investment, production, and consumption. Like every other input, increasing debt leads to diminishing marginal returns. Debt’s return is automatically negative when it finances consumption, which yields no economic return versus debt’s interest and repayment burdens. Too much debt can lead to negative marginal returns for speculation, investment, and production as well, because as they increase, their expected returns decline below the costs of additional debt. It is safe to assume that with $225 trillion in global debt versus roughly $76 trillion in gross world product, the marginal return on debt, much of which has funded consumption, is negative. It is also safe to assume that most income streams are implicitly or explicitly servicing debt, and that most assets serve as either implicit or explicit security for one or more loans.
People are rational—sometimes—and when the real costs of debt outweigh the psychic` benefits of consumption, they usually seek to reduce debt. Enterprise does so as well when returns on speculation, investment, and production are below the hurdle rate implied by prevailing interest rates. Governments can temporarily exempt themselves, but even they eventually run into reality. As the marginal return on debt goes negative, debt is paid down or written off, liquidity is hoarded, and the velocity of money slows.
Central banks have been trying to foster credit expansion, but other than facilitating governments going deeper in debt and promoting speculation, their actions have had no discernible economic impact. Contrary to the textbooks, increases in their balance sheet liabilities, which are primarily reserves of the banking system, now has no multiplier effect at all. They either lie inert on banks’ balance sheets or, for the large money center banks, transmogrify into funding for their speculative activities.
Because what used to be high-powered money—fiat currencies plus banking system reserves with the central bank—is now no-powered money, in the inflation versus deflation battle, central bank units will be matched, unit for unit, against non-central bank debt. That’s $16 trillion against $225 trillion, which is why deflation has taken the lead and will win. If credit contracts a mere 6.23 percent, either through voluntary reduction, rescheduling, or repudiation, that offsets all central bank debt.
In response, central banks can theoretically issue an infinite amount of their own debt to exchange for an infinite amount of assets, but most central banks already have three digit debt-to-equity ratios (which would get them shut down if they were private banks). Every asset they purchase is subject to price risk, so it would require only a small price “correction” to wipe out their equity. Central banks don’t mark to market, and their governments make up losses and recapitalize them when necessary. That shifts the loss to those funding the government: taxpayers and creditors. However, from the standpoint of economic analysis, the most important point is the loss, not who bears it.
The more central banks have used their powers, the less powerful they have become. Negative interest rates, and proposals to ban cash and hand out fiat debt are last gasp confessions of complete impotence from a snow shovel brigade in front of an avalanche. The credit contraction underway will wipe out much more than 6.23 of the world’s debt, and it will wipe out the central banks, no matter how much government debt they monetize, savings and wealth they confiscate through negative rates and cash bans, and fiat debt units they paradrop. Most of what the world today reckons as wealth is simply someone’s debt (or worse, a residual after debt has been paid, i.e., equity), and as debt contracts, the world will come to a painful realization about its “wealth”: It’s Gone! At that point, pick your analogy: the avalanche buries the town, the dominoes fall, the skyscraper of cards collapses, the bubble bursts. The last analogy can be extended: no amount of central banks and government huffing and puffing will re-inflate the bubble.
Manias are a herd phenomenon; sanity restoration an individual project. Eventually, some, maybe enough, individuals will rediscover enduring truths. Deferred gratification, saving, investment, production, hard work, voluntary exchange, and honest capitalism are real. Fiat debt from central banks and governments, taxation, regulation, and crony capitalism are shell games designed to extract compliance and every last penny from the rubes. While waiting for sanity restoration to kick in, realize that if you can’t touch an asset or hold it your hand, it’s not an asset on which you can depend. Prepare accordingly.
