Debt Crisis

I recently wrote a piece on the world’s economy ... see: World Economic Growth ... in which I predicted that the continued stimulus of many countries’ economies through the generosity of their central banks would not work out well. And today I read that China has been propping up its economy with enormous debt ... see: CNBC Article ... with its total debt at 300% of its GDP.

Now, to me it is understandable that China has dug this hole for itself ... after all it’s new to this capitalism thing ... so it has a lesson to learn about debt. But, what about the rest of the world? It is not our first rodeo! Yet, central banks around the free world are encouraging enormous borrowing with effectively zero interest rates ... or below. What can be wrong with this if this stimulates a vibrant economy?  OK maybe “vibrant” is much too strong a word given that Germany is in an economic contraction with negative half-point interest rates.

So then what are the “dark days ahead” of what I have suggested? Well, it seems obvious to me that, if it costs nothing to borrow money, countries, corporations and people are going to borrow money ... lots of money ... money that they cannot possibly pay back.

This eventually spawns a “debt crisis” which will be a banner headline in the few newspapers that are still publishing when this event occurs. How soon will this occur and what will be the consequence? Boy, I have bitten into a big Pennsylvania hoagie on this question! Honestly, I don’t really know, but I suspect a bit of lunch-meat indigestion will be involved. These events, from the little I have gleaned are a social-psychological phenomena ... where lending logic and rational rules go out the window. ... like they did in the sub-prime mortgage crisis of 2008 ... which actually was the genesis of our current predicament. Somehow large amounts of debt gets erased by the courts and by fiat ... and the lenders generally end up the losers. So, be careful lending money ... but borrowing might not be a bad idea.

Many banks around the world will disappear as will some governments I suspect. Maybe the US will be forced back on the gold standard. But, after a great deal of dislocation and pain, things will normalize and we will start lending and borrowing again. Sorry, that’s all I got at the moment. I’ll muse on it some more later.

The Path Forward

It is becoming increasingly obvious that we are stuck in an ultra-low interest rate environment and into the foreseeable future. Central banks around the world are keeping rates very low ... even in negative territory ... to keep stimulating their economic growth and foreign trade. This almost universal strategy has forced the American Federal Reserve Bank to stop interest rate hikes ... and its monetary tightening by reducing its balance sheet.

The consequences of this development suggests three things:

1) The United States is losing its ability to lead world-wide economic policy. We started to ‘normalize’ interest rates and, when the rest of the world did not follow suit, we backed off. We thought we were the monetary pied piper ... but we have learned that this is not the case.

2) Being that interest rates should remain so very low, this means that world-wide debt will grow beyond reasonable bounds. This suggests that a debt crisis is baked into our future. And it also suggests that funds holders ... like banks and senior citizens ... will not be advantaged like in past business cycles.

3) When the next economic turndown does occur, the Fed has little or no room to play the dove. If interest rates are still essentially zero, there is not a lot of room to go lower ... even if they are taken into negative territory. And, if the Fed’s balance sheet is still so bloated, there is not a lot of room to inject more money into the economy.

Yes, the current tariff wars complicate these monetary decisions enormously. But, one hopes that today’s lopsided trade balances resolve themselves before the next recession hits ... or the next debt crisis rears it’s ugly head.

I’m holding my breath ...

Headlines

After trading barbs for a year, Trump and Newsom meet at California fire zone

Hit hard by trade war, automakers hoping Trump will hold off on next round of tariffs

Trump offers [Pelosi] help securing [speakership] votes ...

Michelle Obama memoire sells 725,00 copies on first da

Trump schedules Mississippi rallies to boost Hyde-Smith [candidancy]

Billionaire banker issues stark warning on brewing debt crisis: 'There's a lot of leverage out there'

Day 10: Stacey Abrams ends run foe [GA] governor ...

Dartmouth students sue three professors for sexual harassment, assault

House conservatives protest LGBT protection in Mexico-Canada trade deal

Fire-plagued California won't let insurers 'cram' through big rate rate hikes n 2019: state regulator

Foreigners dump U.S. treasuries, stocks ...

Another 3,000 caravan migrants arrive in Tijuana ... Mexican protestors grow violent

Baby Steps

There is a schism brewing in the Republican Party over the Paul Ryan-Patty Murray budget deal … just at the wrong time … see: Business Insider Article.  This revolt revolves around the fact that this “bipartisan” deal raises taxes (“fees”) and also increases spending (through sequester rollbacks).  The tea-party branch of the GOP rankles at this Democrat-lite solution … while the establishment Republicans believe that this deal will remove this budget issue from the table for the 2014 elections.  In other words, "take what we can get and move on (baby steps … or incrementalism) and we will have more leverage after the elections."

I am sympathetic to both positions. However, one argument that has caught my attention is that Democrats have used incrementalism for generations to get us into the dire predicament in which we find ourselves today … a debt abyss from which it is almost impossible to extract ouselves.  So, if the Republicans now try to adopt incrementalism as their solution, they are once again playing the Democrats’ game. Yes, I realize that not playing this game jeopardizes Republican chances in 2014, but then I strongly suspect that our Kardashian-obsessed American electorate will not wake up to our real fiscal peril until confronted with the cataclysm that awaits if we continue down the fiscal path blazed by the progressives among us.

Being babied is seldom an effective cure for self-indulgence.

A Cabal

Joe Biden

Employers added only 54,000 jobs in May, the lowest in many months  (see: Anemic Jobs Growth ).  This is obviously a right-wing conspiracy to embarrass The Barry and The Joe (our Jobs Czar) going into the 2012 elections.  Business's reticence to hire has nothing to do with Obamacare, the looming U.S. tax increases in 18 months, the inability of our feckless American politicians to deal with our debt crisis, and our growing government regulatory malevolence.  I think that The Barry needs to go on prime-time TV and tell the American public who the true culprits of this economic malaise are -- a cabal composed of our greedy oil companies, Israel, the Cambridge, MA police, FOX News, Dick Chaney, and global-warming deniers.  Then we will finally understand whom to blame.