GLOBAL DEBT series: PART I

Money Matters

GLOBAL DEBT: Truth and Consequences
(A Realistic Viewpoint)

By G. C. Seifrit

Austerity measures are unpopular and even suicidal for the body politic. [Moreover] austerity alone would not work at this point in the global debt saga.

 

In this first of our 3-part series on the irresolute global debt problem (crisis), we take a look at the truth (reality) behind the mainstream propaganda. Part 2, “Zombie Economy” focuses on perceived consequences for economic recovery and future growth. Finally, Part 3 will offer suggestions to assist the average investor in dealing with the “Brave New World.”

Our views may run against the grain of what you are being told by the body politic, central bankers, and many economists and market pundits. Nonetheless, the goal is to give you our realistic (common sense) viewpoint. The truth, as we see it, may be hard to accept. The consequences perhaps harder.

Note: The viewpoints expressed are solely those of the author and are not necessarily those of any institution or organization with which the author has an affiliation.

 

Part I: “It’s the Debt, stupid!”

There is an old political adage heard especially during US Presidential election seasons: “It’s the economy, stupid!”

On Election Day, history shows us that an incumbent US President who presides over a bad national economy is generally not reelected. Though the saying was not an accurate predictor in November 2012, the campaign adage does make logical sense. Today, however, we believe a more substantive phrase is required to encompass the economic reality we face, not just in the USA, but globally:

 

“It’s the debt, stupid!”

The world is sitting atop a mountain of debt – the ‘product’ of decades of fiscal profligacy. Debt and the complex issues surrounding how to deal with it have become the primary driving force of the global economy and the determining factor of our collective economic future.

The world economy remains massively over-levered. In short, there is TOO MUCH DEBT. Under current central bank policies, global debt and the resulting precarious leverage continue to grow at exponential rates.

Credit Market Debt graph

Source: IMF; BIS.

Global debt now exceeds a whopping $200 TRILLION. It continues to grow at an alarming pace. To put the debt numbers into better perspective, total global credit market debt today represents over 330% of total GDP for the entire world together!

This massive global credit bubble – larger today than the one created a Crisis 5 years ago – has become the focal point of financial markets. In addition, dealing with the world’s still-growing pile of IOU’s is now the determinant of, and driving force behind, virtually all regional, national, and international economic policy in one form or another.

 

What’s being done about the debt?

Austerity measures and fiscal consolidation have not been popular. Today they have all but been forgotten. There is a good deal of lip talk, but the action we have seen is little more than inconsequential gesture. The measures are unpopular and even suicidal for the body politic. In short, there is little will to do what is necessary to put our economic house in order. And even with unanimous support, we believe austerity alone would not work at this point in the global debt saga.

Taxation is not the solution either. Example at hand: if the USA were to tax its rich at a 100% rate for every dollar they earned above $1,000,000, the take would only bring in $616 Billion (Forbes, April 2012). This amount only covers one-third of the US deficit for one single year. It would do nothing to address the existing $16.5 Trillion debt pile! (Official estimates actually have the US debt pile at $86-$100 Trillion if we add in the nation’s huge unfunded entitlement liabilities.) The majority of developed nations are in a similar position.

It has become increasingly clear that the chosen response to the global debt problem and its intermittent, recurring financial crises has been and will continue to be the path of least resistance: more debt (money printing).

To us, it simply looks like a Ponzi-scheme of credit.

QE, LTRO, EFSF, ESM, OMT – the programs and acronyms continue to multiply in complexity and number – are nothing more than stop-gap efforts to hold the global financial structure together, at least for a while longer. And they all boil down to one thing: more and increasingly surreal new credit structures to support or maintain volumes of existing, problematic debt. “Kicking the can down the road” is a popular expression to describe this behavior, and we sadly agree.

This expanding debt spiral is insane (suicidal) and cannot continue ad infinitum. Central banks, governments, and ‘too-big-to-fail‘ financial institutions of the developed world are creating new IOU’s and credit facilities ‘out of thin air,’ using money that in reality does not exist to pay or artificially support existing loans that are impossible to ever pay off – yet alone service when interest payments become due.

Did we mention Ponzi-scheme?

Common sense alone tells us that the solution to over-indebtedness and fiscal deficit is simply not more debt. It does not solve the problem, but rather only aggravates it, creating an ultimate result that is even more problematic – perhaps devastating!

Nothing demonstrates this reality better than the graph showing the 3-fold expansion of central bank balance sheets since the Financial Crisis (2007-2009). Now bloated from desperate efforts to sustain the financial system and restart ailing recessionary economies, they have expanded 3-fold in the 5 years since the near meltdown of the global Crisis. Today, central bank assets equal 25% of total global GDP.

Global Central Banks graph

This exponential growth of central bank balance sheets is entirely due to all the new credit structures and ‘programs’ – referred to by acronyms like those we listed – that are ‘dreamed up’ every time we face another debt crisis situation. In layman’s terms, the graph bears witness to the massive amount of new debt being created to hopefully solve the problem of the un-payable old debt.

To the author, this is the very definition of insanity! More importantly, this type of ‘monetary policy’ cannot resolve the ongoing debt problem. It only increases it!

Does the term Ponzi-scheme seem familiar now?? You probably already know how it ends.

 

The End Game

Central bankers and the body politic are desperately trying to support a house of debt cards that has grown precariously towering and unstable. Their hopes (indeed, prayers) are to avoid the necessary large-scale debt restructurings (defaults) that are ultimately required to deal with the reality. We could then move forward and rebuild with meaningful substance.

At this stage of their ‘card game,’ our structurally challenged house of cards cannot be miraculously transformed into a more stable edifice. To us, their ‘fantasy’ outcome is simply not possible now, if it ever has been. More importantly, existing policies are actually increasing the dangers.

We believe the ‘difficult’ scenarios central banks have been feverishly trying to prevent are actually morphing into a probability of an ‘end game’ that will seem a nightmarish hell by comparison – when their ‘hopeful’ schemes stop working or, indeed, self-destruct.

Few global participants seem aware of the size and severity of the problems we face. Temporary fixes proliferate as do the ongoing series of nail-biting crisis situations, and there are certain to be more. The ‘solution’ to the global debt crisis, however, will remain elusive.

In our opinion, the debt programs will be frantically expanded with every uncertain new ‘development’ until the only course available is the one which should have been taken when the Financial Crisis first hit: a total restructuring (default) of a majority of the developed world’s sovereign debts.

Until that time, the world economy and hope for renewed, revitalized growth limp blindly along, like characters from an old B-movie about the ‘half-dead.’ You see, the Ponzi-scheme methodology of dealing with the debt problem is not only failing to resolve the issues, but it is stealing away important possibilities for our economic future. We are creating a virtual “Zombie Economy.” (More on that in Part 2.)

 

Top photo:  Demonstration in Madrid protesting austerity regime.  To the right: The Central Bank of Spain.