Debt Alert!



Posted by Ed 8 mths ago
“The true scale of global debts has been revealed in a study of borrowing around the world, showing a total burden of $243 trillion (£179 trillion).

“Governments rich and poor have piled up unprecedented mountains of borrowing, while companies and households have also been warned that they are dangerously indebted.

“The study from the International Monetary Fund has compiled what it believes to be the most comprehensive database of public and private debts with information going back to the Fifties.

“It shows debts have risen in an almost unbroken trend since the Second World War, as even when some parts of the world cut back a little, deleveraging barely made a dent in the loans built up in earlier years.

“And when the rich world cut borrowing after the financial crisis, emerging markets, and China in particular, ramped up borrowing…

“Running up debts now risks leaving the cupboard bare when a crisis strikes…

“Debt growth has spread far beyond governments, with families and small businesses in the US also a particular hazard.

““The bottom 50pc [of US households] have negative net worth, they are already in distress,” said Hung Tran, executive managing director at the IIF, describing families whose debts exceed their assets.

“He said small companies are also in distress. The median small-cap US firm has an interest coverage ratio of zero – which means its earnings only just cover its interest payments.

“That is a marked worsening in the past six years, and indicates half of small firms are struggling to service their debts even before interest rates rise back to more “normal” levels.”


Ed 8 mths ago
GLOBAL FINANCIAL BREAKDOWN CONTINUES: Economic Growth Chokes On Massive Debt Increases

The U.S. and global economies are choking on a massive amount of debt. While Wall Street and the Mainstream financial media continue to rationalize the skyrocketing debt as merely the cost of doing business, the disintegrating fundamentals point to an economic catastrophe in the making.

Of course, a full-blown economic meltdown may not occur this year or even next, but as time goes by, the situation continues to deteriorate in an exponential fashion. So, the cheerleaders for higher stock, bond, and real estate prices will continue to get their way until the economy is thrown into reverse as decades of increasing debt, leverage and margin finally destroy the engine for good.

Yes, I say for good. What seems to be missing from the analysis is this little thing called energy. The typical economist today looks at the global markets much the same way as a child who is waiting for the tooth fairy to exchange a tooth for a $20 bill. When I was a kid, it was $1 per tooth, but like with everything today, inflation is everywhere.

Mainstream economists just look at market forces, percentages, and values on a piece of paper or computer. When economic activity begins to fall, they try to find the cause and remedy it with a solution. Most of the time, the solutions are found by printing more money, increasing debt, changing interest rates or tax percentages. And… that’s about it.

There is no mention of what to do with energy in the economist’s playbook. For the typical economist, energy is always going to be there and if there are any future problems with supply, then, of course, the price will solve that issue. Due to the fundamental flaw in omitting energy in College economic courses; the entire profession is a complete farce.

Unfortunately, even the more enlightened pupils of the Austrian School of Economics fail to understand the Thermodynamics of value. Instead, we are only taught about SUPPLY & DEMAND to impact price. While supply and demand forces impact price, they only do so over a short period of time. However, the primary factor that determines price (for most goods, services, commodities, metals & energy) is the cost of production. Supply and demand only pull price above or push it below the cost of production trendline.

Regardless, you don’t have to take my word for it, just look at the following charts below.

U.S. Debt Per Dollar Of GDP Growth Goes Ballistic
The days of issuing a $1 of debt to get $1 or $2 of economic growth are long gone. Most may believe this was a grand conspiracy by the elite to control the masses. However, it was more a function of the Falling EROI – Energy Returned On Investment and the Thermodynamics of oil depletion. As the cost to produce oil consumed more energy, well, the best way to offset that was to issue more debt.

The following chart shows the relationship between total U.S. debt from all sectors (public and private) versus domestic GDP:

Total U.S. debt from all sectors is shown in BLUE while the U.S. GDP is in BROWN. You will notice that the total debt and GDP from 1950 to 1970 remained pretty even. It wasn’t until after 1970 did the debt increase more than the GDP. That was due to two reasons

The U.S. Peaked in conventional oil production in 1970
The U.S. EROI of oil fell considerably after 1970

Now, I did not include Nixon dropping the Gold-Dollar Peg in 1971, because that was a direct result of the two reasons listed above. We must understand that financial and economic policy is a direct reaction to the change in energy…. and not the other way around.

So, for the United States economy to offset falling oil production and the EROI, it was forced to add more debt per Dollar of GDP growth. In the 1970’s it took an average of $1.5 of new debt for each $1 of GDP growth but then doubled to $3 of debt per GDP growth in the 1980’s. However, debt really took off after 2000.

According to the data put out by FRED, the St. Louis Fed, the U.S. GDP increased from $10 trillion in 2000 to $19.7 trillion at the end of 2017. However, total U.S. debt (all sectors public and private) increased from $27.2 trillion to a staggering $68.6 trillion during the same period. Thus, total U.S. debt increased by $41 trillion versus approximately $10 trillion in GDP growth. That turns out to be $4 of debt for each $1 of GDP growth.

We also must consider the annual interest expense on the total U.S. debt of $68 trillion to be approximately $1.4 trillion based on a 2% interest rate. I have no idea what the average interest rate is on $68 trillion of debt and liabilities, but if the average interest rate rises to 5%, then the annual interest expense blows up to $3.4 trillion. As they say, a trillion here and a trillion there… adds up.

Unfortunately, the U.S. will not have the available cheap energy in the future to pay back this debt. Thus, as debt implodes, so will the GDP. Furthermore, if we were to adjust the GDP by the additional credit and debt, it would be a hell of a lot lower than its current value. But of course, the GDP figures are calculated by the very economists who are taught to disregard energy in their market studies in college.

Global Debt Per GDP Growth Hit A Record In 2017

According to the IIF, Institute of International Finance, total global debt reached a new record high of $237 trillion in 2017, up $21 trillion from the previous year. Now, compare that to the global GDP growth of $3.9 trillion in 2017, ($75.4 trillion in 2016 to $79.3 trillion last year). If we divide the $21 trillion of new global debt by the $3.9 trillion in global GDP growth, it equals an additional $5.4 for each new $1 of global GDP growth.

I arrived at the figures in the chart above the very same way as the U.S. Debt per GDP growth chart. Even though the values in the graph suggest that the debt per Dollar of GDP growth continues to move up at an ever-increase rate, the annual changes are more volatile. For example, the average global debt per Dollar of GDP increased more during the 2000-2009 period than from 2010-2017. This was also true for the United States.

However, the annual interest expense on global debt of $237 trillion has to be one hell of a lot. Again, I have no idea what the average interest rate is on that debt, but even if we assume a conservative 2%, that is $4.7 trillion. How could the world afford $4.7 trillion of an interest expense if the increase in global GDP was only $4 trillion last year???

Please understand, I am only making simple assumptions here. If the global debt is increasing, so must the interest expense to service this ever-increasing amount of debt. When the debt service starts to compete with global GDP growth, then we have a serious problem. And with the impact of the Falling EROI and Thermodynamics of oil depletion, global GDP growth will likely begin to stall over the next few years.

The notion put forth by some precious metals analysts that if the corrupt banking system would be allowed to go bankrupt (as it is bankrupt), then after the pain, the U.S. economy could grow once again. That will never happen. Why? Many in the alternative media and precious metals community still don’t understand the dire energy predicament. So, much like the college trained economists, they are making the same mistake by analyzing and forecasting the future of the markets without considering energy.

Unfortunately, when the massive amount of debt finally implodes, it will take down the values of most Stocks, Bonds, and Real Estate. This is not a matter of “IF,” it’s a matter of “WHEN.”

And it seems as if the WHEN is quickly approaching.

Ed 8 mths ago
The Next Recession Will Be Devastatingly Non-Linear

Linear correlations are intuitive: if GDP declines 2% in the next recession, and employment declines 2%, we get it: the scale and size of the decline aligns. In a linear correlation, we'd expect sales to drop by about 2%, businesses closing their doors to increase by about 2%, profits to notch down by about 2%, lending contracts by around 2% and so on.

But the effects of the next recession won't be linear - they will be non-linear, and far more devastating than whatever modest GDP decline is registered. To paraphrase William Gibson's insightful observation that "The future is already here - it's just not very evenly distributed": the recession is already here, it's just not evenly distributed - and its effects will be enormously asymmetric.

Non-linear effects can be extremely asymmetric. Thus an apparently mild decline of 2% in GDP might trigger a 50% rise in the number of small businesses closing, a 50% collapse in new mortgages issued and a 10% increase in unemployment.

Richard Bonugli of Financial Repression Authority alerted me to the non-linear dynamic of the coming slowdown. I recently recorded a podcast with Richard on one sector that will cascade in a series of non-linear avalanches once the current asset bubbles pop and the current central-bank-created "recovery" falters under its staggering weight of debt, malinvestment and speculative excess.

The Intensifying Pension Crisis (37-minute podcast)

The core dynamic of the next recession is the unwind of all the extremes:extremes in debt expansion, in leverage, in the explosion of debt taken on by marginal borrowers, in malinvestment, in debt-fueled speculation, in emerging market debt denominated in US dollars, in financial repression, in political corruption - the list of extremes that have stretched the system to the breaking point is almost endless.

Public-sector pensions are just the tip of the iceberg. What happens when the gains in equities and bonds that have nurtured the illusion that public-sector pension funds are solvent and can be funded by further tax increases reverse into losses?

Pushing taxes high enough to fund soaring public pension obligations will spark taxpayer revolts as the tax increases will be monumental once the delusion of solvency is stripped away in the upcoming recession.

The entire status quo rests on the marginal borrower/buyer. All the demand for pretty much anything has been brought forward by the central banks' repression of interest rates and the relentless goosing of liquidity: anyone who can fog a mirror can buy a vehicle on credit, get a mortgage guaranteed by a federal agency, or pile up credit card and student loan debts.

Those with stock portfolios can gamble with margin debt; those with access to central bank credit can borrow billions to fund stock buy-backs or the purchase of competitors, the better to establish a cartel or quasi-monopoly.

What's not visible in all the cheery statistics is how many enterprises and households are barely keeping their heads above water as inflation shreds the purchasing power of their net incomes. Inflation is supposedly tame, but once again, following Gibson's aphorism, inflation is already here, it's just not evenly distributed.

While employees with employer-paid health insurance are dumbstruck by $50 or $100 increases in their monthly co-pays, those of us who are paying the unsubsidized "real cost of health insurance" are being crushed by increases in the hundreds of dollars per month.

The number of cafes, restaurants and other small businesses with high fixed costs that will close as soon as sales falter is monumental. Add up soaring healthcare premiums, increases in minimum wages, higher taxes and junk fees and rising rents, and you have a steadily expanding burden that is absolutely toxic to small businesses.

The first things to go are marginal employees, overtime, bonuses, benefits, etc. - whatever can be jettisoned in a last-ditch effort to save the company from insolvency. The first bills cash-strapped households will stop paying are credit cards, auto loans and student loans; defaults won't notch higher by 2%; they're going to explode higher by 20% and accelerate from there.

Here are a few charts that reveal the extremes that have been reached to maintain the illusion of "recovery" and normalcy: total credit has exploded higher, after a slight decline very nearly brought down the global financial system in 2008-09:

The massive expansion of assets purchased by central banks will eventually be slowed or even unwound, removing the rocket fuel that's pushed stocks and bonds to the moon:

As governments/central banks borrow/print "money" in increasingly fantastic quantities to keep the illusion of "recovery" alive, the currencies being debauched lose purchasing power. Venezuela is not an outlier; it is the first of many canaries that will be keeling over in the coal mine.

Wide swaths of the economy won't even notice the recession devastating the rest of the economy, at least at first. Public employees will be immune until their city, county, state or agency runs out of money and can no longer fund its obligations; shareholders of Facebook (NASDAQ:FB), et al. who cashed out at the top will be doing just fine, booking their $18,000 a night island get-aways, and those few willing to bet on declines in the "everything bubbles" of real estate, stocks and bonds will eventually do well, though the Powers That Be will engineer massive short-covering rallies in a last-ditch effort to mask the systemic rot.

The acceleration of non-linear consequences will surprise some people. The number of small businesses that suddenly close will surprise them; the number of homeowners jingle-mailing their "ownership" (i.e. obligation to pay soaring property taxes) to lenders will surprise them; the number of employees being laid off will surprise them, and the collapse of new credit being issued will surprise them.

Don't be surprised; be prepared.

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