The cure for debt isn’t what you think

debt and deficits highlighted in pink on page

Today, we have bad news and good news.

The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.

The bad news: It will be much worse than that.

Yesterday, the Dow rose another 43 points. Gold seems to be working its way back to the $1200 level, where it feels most comfortable.

‘A long depression’ has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

Old people are dead wood

First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US.

As we’ve described many times, as people get older, they change. They stop producing and begin consuming. They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.

Nor are they the green and growing timber of a healthy economy; instead, they become dead wood.

There’s nothing wrong with growing old. There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes — except for the undertakers.

The cure for debt? More debt!

Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.

By 2007, US consumers reached what was probably ‘peak debt.’ That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.

The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.

Central banks created more money and credit — trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending. Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.

The cronies are in control

Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country — Canada — even makes the top 10.

Paperwork. Expenses. Regulation. High taxes. High labour rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.

Leading industries — heavily controlled and regulated, including defence, education, health and finance — are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.

Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.

The solution begins when markets crack

Typically, these problems — too much debt, too many zombies, and too many old people — lead to financial crises. Then, they are ‘solved’ by either inflation or depression. And the solution begins when markets crack.

Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:

‘When does our credit-based financial system sputter/break down?

‘When investable assets pose too much risk for too little return.

‘Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.’

When that happens, problems begin to take care of themselves, in one of two ways…

A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.

Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade.

Either way, the slate is wiped clean and a new cycle can begin.

But what rag will clean the slate now?

More tomorrow…

Regards,

Bill Bonner,
for the Markets and Money Australia

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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slewie the pi-rat
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maybe Bill is frustrated about his Mother, or something.

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