PARIS – We’re having breakfast on the Île Saint-Louis in Paris… the first stop on a long trip.
First, it will take us to Normandy, then via the ferry to Ireland… thence to Argentina, Germany, and Bermuda… before returning to Ireland next month.
We’d rather stay in one place… and watch the world go around us.
And what a show!
“Crazytown”
Now, a new book by journalist Bob Woodward tells us that the White House chief of staff referred to America’s executive branch as “crazytown.”
Staffers say the president is hopelessly beyond his depth and is an “idiot”… The president says his attorney general is “mentally retarded.”
Fake news?
We don’t know.
But we’re sure our attorney general has one of the finest legal minds since King Solomon… and that the White House is running like a well-oiled machine.
Okay, maybe there are a few loose belts and rusty nuts, and maybe it needs some brake fluid, but that doesn’t stop it from getting the job done.
And its Numero Uno is far from being an “idiot.” Some of his off-the-cuff speeches, for example, are so complex that it would take a linguistic genius to parse them.
Besides, who cares? Even a moron could make a good POTUS – if he had common sense, good humor, and humility.
And as for “crazytown,” you ain’t seen nuthin’ yet.
Whimper and Bang
The big story we’re following, by the way – which will dominate the money world for the next 10 to 20 years – is how the U.S. goes broke.
Our guess: first, with a whimper… and then a bang. Today, we look at the whimper.
The U.S. was already on the road to ruin long before the 2016 presidential election…
George W. Bush abandoned fiscal conservatism in favor of activism, war, and deficits. Barack Obama continued the program. And the Fed misled the entire world with phony price signals – putting the real cost of money at less than zero.
There was some hope that The Great Disrupter, Donald J. Trump – with his army of fed-up patriots – would drain the swamp and change the course of history. But the general quickly revealed that 1) he had no idea where the real battle was taking place… and 2) he wanted no part of it anyway.
Instead, with its tax cut, defense-spending hike, and dozens of petty distractions, the Trump administration squandered what might have been the last chance of squaring things up.
Even if the Trump team is thrown out of office in the next general election, the replacements are not likely to be any more eager to take on the Deep State than their predecessors.
That leaves debt to run wild… with no plausible way of stopping it. The cronies want more money. The zombies (including 10,000 new retirees each day over the next 20 years) want more money. The feds and their Deep State managers want more money, too.
Who’s to stop them?
No one.
And here’s what will happen…
Debt Crisis
First, the whimper. The fake-dollar/EZ-money system has enabled borrowing on a scale never seen before. Student debt… Household debt… Corporate debt… Government debt… Worldwide debt of more than $250 trillion.
Remember, it’s the financial sector – central banks and lenders – that creates debt. But it’s the Main Street economy that has to pay it back. Traditionally, it can only support debt of about 1.5 times GDP.
With a global GDP of $90 trillion, that leaves $115 trillion as “excess” – beyond what the economy can support. And that’s why a debt crisis is inevitable.
The crisis of 2008–2009 was a warning. It was a “debt crisis,” caused by too many people who owed too much money they couldn’t pay.
Many businesses and households depended on borrowing just to stay afloat. And all of a sudden, the value of the collateral – houses, mainly – dropped, and the lending stopped.
Out of money and out of luck, Lehman Brothers crashed on September 15, 2008. More than 5 million houses were foreclosed in the resulting crunch.
This should have sent banks, families, and businesses – and the federal government, too – scurrying for safety. It was a time to “rebuild balance sheets,” save money, cast debt out like the devil, and vow to have nothing more to do with it.
By now, 10 years later, the whole system should have less debt… and strong finances in every sector.
But what ho! The Fed cut interest rates so deeply that it didn’t make any sense to save. So instead of rebuilding their balance sheets… consumers, businesses, and governments went even deeper into debt.
U.S. corporations owed about $6 trillion in 2007. Now, the total is about $9 trillion.
Household debt was about $12 trillion in 2007. It’s now headed for $14 trillion.
The federal government owed $10 trillion when Bush left office in 2009. U.S. debt is now $21 trillion… and will probably hit $40 trillion 10 years from now.
And look at emerging markets. From Bloomberg:
Total emerging-market borrowing increased from $21 trillion (or 145 percent of GDP) in 2007 to $63 trillion (210 percent of GDP) in 2017. Borrowings by non-financial corporations and households have jumped. Since 2007, the foreign-currency debt – in dollars, euros, and yen – of these countries doubled to around $9 trillion. China, India, Indonesia, Malaysia, South Africa, Mexico, Chile, Brazil, and some Eastern European countries have foreign-currency debt between 20 percent and 50 percent of GDP.
In all, EM borrowers need to repay or refinance around $1.5 trillion in debt in 2019 and again in 2020. Many are not earning enough to meet these commitments.
“Last Crisis”
Under the benign sun of worldwide EZ money sans fin, even the Argentines were able to get themselves into trouble once again.
It is now barely one year into the 100-year maturity of the remarkable bonds Argentina sold last year. Already, lenders are regretting buying them.
Argentina is in crisis. President Mauricio Macri says it will be the “last crisis” for the nation. He’s talking to voters who have had enough of crises.
But it is easier to get into a crisis than it is to get out of one.
Argentina is in one now. America will be in one sooner or later.
Then, prices will collapse. Jobs will disappear. Almost overnight, $10 trillion or more of wealth “on paper” will disappear from the U.S.
“Help us,” consumers will whimper. “Lower interest rates,” businesses will plead. “I’m not loving this,” the president will add.
And then, the whimper will turn into a bang… and Crazytown, here we come!
Stay tuned.
Regards,
Bill
Category: Economics