Saturday, September 10, 2016

We're Reaching the End of the Road

I'm afraid that we're reaching the end of a very long road.

Unsound money ("fiat" money not backed by gold) has led, in recent decades, to huge and unsustainable global imbalances in trade and debt. But because trade deficits REDUCE our nation's GDP, persistent trade deficits in our country have led to rising debt at every level as we try to maintain the "appearance" of a rising standard of living. This is partly why the US ran $9 Trillion in government deficits in the past 7 years alone. Can you imagine what our economy would have looked like without all that money? It would have been outright Depression. (I'm not even going to mention the $4T bank reserve creation by the Federal Reserve). All of that debt is masking depression. Even so, the number of jobs is barely back to 2007 levels and "good jobs" are still lower than the last peak.

Even with our still rising debt (deficit spending) in the last year, China has seen a 15% fall in exports. World trade is declining. Why? Because the US and Western consumers can't afford the imports! Trump is right about trade. Our economy is hollowed-out by the loss of manufacturing jobs and it has killed jobs and hurt our people. Now the US consumer is tapped-out. Furthermore, demographic trends have turned negative in most of the West and China just like Harry Dent predicted and has slowed the economy.

The persistent budget and trade imbalances over the past several decades could never have happened with "sound" money, as the deficit nation would have seen a loss of gold (money) that would have slowed the economy and reduced imports to a balance with exports. And debt creation would have been severely limited since new money would have to be backed by gold-- and gold is limited. Exchange rates would have been very stable too. That is the beauty of the gold standard. The gold standard will eventually make a return out of the ashes of the next financial/economic crisis.

Other reasons why we're reaching (or reached?) the end of the road financially and economically:

1) Rising debt in the West has hid the increasing poverty caused by the wealth transfer from US to China (and Japan before them) for awhile. But debt levels have risen everywhere and it's marginal utility to produce growth is nearly gone, even in China. In fact, with a no-growth economy, the world's debt levels are probably not sustainable. Zero interest rates have prolonged that game for awhile but zero rates are unsustainable. As growth falls off, corporate cash flows decline and debt defaults spike causing corporate interest rates to rise. Even sovereign debt implosions are a risk, first in commodity producing countries and peripheral EU countries like Greece and Italy. Interest rates will rise where there is debt distress/defaults.
2) Trump is right, the US economy is hollowed-out with the loss of manufacturing jobs and the loss of entire industries. The non-elite workers in the US are financially tapped-out with stagnate incomes and burdened with rapidly rising costs of healthcare, healthcare insurance, rents, food, drugs. Our imports are way down. China is feeling this as their exports are way down. World trade is declining. The manufacturing sector in this country has been in recession for 2 years now. General recession is likely just around the corner.
3) The economy is in near-recession despite rising debt bubbles. The US government has racked up $9 Trillion in debt in just 8 years.  A vast expansion of auto loans that some people say is reminiscent of another subprime bubble has propped-up the auto sector. A trillion dollars in student loans have been given to students in the past 8 years and 43% of these loans are now not being payed back.And the US is still making more of these loans! Hillary is expected to put all of that bad debt on the tax payer and the next generation.
4) The real money supply to the world, the "Eurodollar" and it's associated derivatives, has been in decay since the great financial crisis with a partial resurrection to 2011. Since 2012, banks have been exiting these shadow banking markets at an increasing rate. Just look at European bank stocks to see the decline in their trading and profits. Central bankers haven't noticed this most important development as they are willfully blind.
5) QE doesn't work. That's obvious. Even the educated idiots at central banks can see that! They just can't admit it and it's making them look like fools. They are starting to tip-toe away from it.
6) NIRP and the risk of depositor "bail-ins" is killing the EU banking system! And NIRP and ZIRP is killing pension funds, insurance companies and retirees everywhere. The situation is completely unsustainable. Never in history have interest rates been zero or negative. It's absurd and causing more harm than good. EU banks are a systemic risk to the world. What can't be sustained, won't!
7) 30 years of declining interest rates is over. So just steady rates is a trend change. US and world rates are now rising as front-running investors can "smell" that the EU and Japan are about to get out of the QE business. Interest rates are rising now; not falling.
8) EU banks are a royal mess. Chinese debt system is a royal mess. The risk of a sudden and substantial Chinese devaluation is increasing as they will surely nationalize huge amounts of bad corporate debt that they created since 2009. Already the Chinese currency is falling slowly this year and is back to 2010 levels. Even small devaluations have roiled markets.  A sudden and substantial devaluation would set off a world-wide crash. It's possible that civil unrest may lead to social disintegration if not outright revolution at some point in China.
9) The era of cheap energy is over. If the economy tries to recover, oil prices rise so high that it kills the economy/consumers. If we can't afford high oil prices, then we cannot have growth. (because growth causes unaffordably high oil prices!) And the price at which oil is affordable, ie., $30 to $50 per barrel, kills the oil producers and oil producing countries (and kills government revenues). So, energy production will continue to drop and all the oil and commodity producing countries will remain in recession or depression. What's needed to "save" us is $20 oil for an extended period or a miracle in cheap energy technology.
10) If growth is dead, then the mountain of debt, which continues to accumulate at an accelerating rate and much higher than nominal GDP worldwide, is unsustainable. The end of the road is defaults, crises, recession and depression. Debt defaults by companies and entire countries will cause a new round of banking troubles and trouble in global supply chains. It happened in 2008 after all. Collapse is a real possibility. When it happens is the $64 Trillion question.

So, we really are reaching the end of the road. We're all in for a rude awakening at some point.

4 comments:

Anonymous said...

Could the global economy stumble and bumble along for another decade or two? Look at Japan. How have they kept the wheels on that bus? I am surprised that there is not more of a collapse occurring - especially in the U.S. Somehow it keeps going. I have been at my latest employer for 8 years. We are still making stuff for our customers who must be selling product. The product sold is not essential but purchased by people with disposable income. Are real signs of collapse going to start later this fall or early next year? I would not be surprised by that, or surprised if I'm writing something similar to this a year from now.

Doug said...

I guess anything is possible and your example of Japan is the best example possible of the debt-carrying capacity of a developed country. So, it's possible to muddle through and I might look like a fool by sounding a premature alarm. I read a Bloomberg article this morning that said that rising LIBOR rates are hurting highly indebted companies. It's interesting that 3 month LIBOR rates have risen to 0.85% (a rise of about 0.40%)-- the highest since 2009. Just this little pinprick is causing problems?? Just think about how fragile our financial system must be if 0.85% interbank rates is already creating financial stress at companies!

Or get this, after just a 2.5% decline in the stock market last Friday, the Federal Reserve trots out speakers to calm everything down! Doesn't that speak to extreme fragility?? It's literally insane!

Check out a couple more of my blog posts like http://gulfcoastcommentary.blogspot.com/2015/08/fast-collapse-or-slow-i-think-fast.html which is similar to what you've just read.

The other thing is that is Europe is in far worse shape than US and China is an even worse centrally-planned accident waiting to happen. Bank distrust in the EU (rising Libor) or some large devaluation in China could easily be the pin that pricks a fragile bubble. Then there's unrest and rising military tension in S. China Sea, Mideast, Eastern Europe, etc. Collapsing commodity companies or even commodity countries could also roil banks in the EU kicking off some kind of crisis. It's literally a minefield out there. But you're right, it's basically a minefield out there at all times.

Just keep an eye on junk-rated debt as an indicator of financial stress. Add HYG, JNK and keep an eye on them. Also watch the EU bank stocks like DB, UBS, RBS, BCS to watch for financial stress to build up. I think you'll get advance warning if you watch those.

Thanks for commenting! Keep in touch!

Bigskyguy said...

This is excellent. In my gut I know that we will see a world wide $$$$$$ collapse. This time here in our Nation it will be bloody. My Grandparents told me many stories about living through the great depression and why, there was no wide scale rioting. No thugs breaking in your home. Back then there was a broad consensus of respect towards folks. Not anymore. We have far to many who have lived on generational social welfare. Not only black, but also white.

Ed

Bigskyguy said...

This is excellent. I feel in my gut that we will live to see a $$$$$ collapse and we will see an actual "Great Depression" But, this one will be bloody.

My grandparents told me so many stories about living through the great depression. Back then there was a broad consensus of respect for folks, and towards folks across our Nation. This is not the case anymore.

Look at how the far left youth "Brown Shirts" treated Trump Supporters at Trump Rallies. We are no longer a Nation of respect in so many areas.

This one will be bloody and dangerous. Just look at what all went on in Katrina. We have had to many white and black grow up on generational welfare. To many lower income white and black have a huge sense of entitlement. What we call here along the FL Panhandle, White Niggers.

In our Nation we do have good black and white folks. But we also have the true dregs of both races with us.

They will not hesitate to try and break in and take what belongs to you. Look how they have went on folks yards to steal, destroy Trump signs. Crossing some ones property like they have every right!

Good buddy of mine wired his signs with the speedrite 63000RS fence charger which is considered the worlds most powerful fence charger for cattle/horses etc. Check it out. It almost knocks the person down.

Yes, it worked and some thugs tried and failed, to take him to court. They failed. His land like ours is POSTED KEEP OUT PROPERTY IS ELECTRIC CHARGED YOU GUESS WHAT IS.

Sincerely, Ed