|World-Wide Debt Higher Than Ever|
We're on the verge of the 3rd financial crisis in 15 years and here's why there is no way out now:
- The China story is finished. Some estimate that China's economy is contracting now (despite what they say). They have spent enormous sums since 2009 and have an enormous overhang of bad debt, empty cities and malls, bridges and roads to nowhere. Excessive pollution has also been a factor in China reaching it's limit of growth. Chinese debt has soared to levels normally associated with crises in the 5 years leading up to 2015. Because of high debt levels, China recently slowed down it's debt spending and that's caused a world-wide commodity bust and stock market swoon this autumn.
- If the China story is finished, then the emerging market story is finished.
- The limits to borrowed fiscal stimulus have been reached. The marginal utility of debt is approaching zero in most countries including China. Deficit spending won't buy much growth anymore.
- Quantitative Easing (money printing) has been proven a failure. Even the US Federal Reserve said it didn't work.
- The 33 year period of steadily falling interest rates is over interest rates at near zero. Even when interest rates stop falling, this represents a trend change that removes the "wind at our back." Interest rates may actually start to rise even in the government sector. Financial distress is already causing corporate interest rates to rise. High yield corporate bonds are slowly sinking (and yields rising). Expect this to continue.
We saw that previous QEs did not create inflation. But if we have a "sudden stop" of international trade including a shut-down of global supply chains, then we have a big problem (like 2008). This time I don't see a way out. China (or any other country) will not be able to spend like they did in 2009 to 2010 since their debt levels are already high. No other government will be able to offset the 2008 shock like China did. The US will not build ghost cities and high speed railroads to nowhere. They can't. Despite all the disingenuous rhetoric, there are no infrastructure projects ready to go (just like in 2008). If we need infrastructure projects, those projects should have commenced (planning, budgeting and engineering) about 5 years ago. But nothing has happened. Nothing is ready. The US won't have the shale fracking boom either.
Because of this situation, stocks will crack-up, pensions will crater, unemployment will rise. Almost certainly the world economy will crack-up. Derivatives will blow-up. Banks will fail. Adding to the downward pressure will come defaults in commodity producing countries (including countries like Russia, Venezuela and Nigeria). Resource companies will go bankrupt. Hedge funds and financial entities will fail dramatically. World trade will stop.
Yields will rise for any company not rated AA and above. Meanwhile Treasuries will go to Japanese levels (0.3% on long end) -- forced there by Central Banks. Corporate and Sovereign defaults and financial distress will reinforce the downward spiral. Investors will still panic. Stock markets will be closed. Banks will be closed and nationalized.
I can see a situation where government receipts collapse but government spending increases. US deficits could rise to $3 or $4 Trillion per yr or so. I could see prolonged income tax holidays -- meaning that government revenues drop to nothing and all government debt is bought by the government itself (the Federal Reserve). The rub comes when people that are receiving income support find that there is little to buy due to the global trade collapse and prices begin to rise. Then you might see a burst of hyperinflation and then a final collapse.
I guess we might see nationalizations of banks all over the world to restart trade. But this entire scenario is about as akin to the end of the world as ever imagined.
Modern civilization is likely entirely at risk.