10 Years Later, a Debt Crisis Is Building Again
Wednesday, September 19, 2018 16:17
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by Brian Maher
“Guns. Butter. Bread. Circuses. And debt. To these the American people were treated in heaping doses yesterday… The United States Senate voted 93-7 in favor of a generous $854 billion spending bill. An “unprecedented government spending spree” is how one site styles it. The war hawks get $606 billion for guns… the sob-mongers get $178 billion for bread and butter.
The spectacle itself is the circus, offered up in half a dozen rings. In the absence of a deal, the government would have partially “shut down” Oct. 1. Next week the bill — and “bill” is just the word for it — goes to the House for the rubber stamp. From there it proceeds to the presidential desk, where it will acquire the looping signature of Donald John Trump.
“Who killed the deficit hawks?” wonders Nick Gillespie, editor of Reason. We noted last week that federal spending has increased 7% this fiscal year… while tax revenues have increased only 1%. The Congressional Budget Office (CBO) estimated earlier this year that the budget deficit would exceed $1 trillion in 2020. But merely last week it announced the deficit would exceed $1 trillion next year — one year ahead of schedule.
Meantime, federal debt is rising perhaps three times the rate of revenue coming in. U.S. public debt excels $21 trillion… and swells by the day. Who killed the deficit hawks, indeed… For the long-term consequences we turn to the Brookings Institute: “Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities or deal with the next recession or emergencies; and impose substantial burdens on future generations.”
To simply maintain current debt levels, CBO estimates Congress would have to increase revenues 11% each year… while simultaneously hacking the budget 10%. Will Congress spend 10% less each year? The pig in his sty will first sprout wings… and take to the aerial ways.
We furthermore have reason to believe America’s fiscal descent will accelerate this November. Online odds maker FiveThirtyEight currently allots the Democratic Party a 79.5% chance of seizing the House in the midterm elections. Assume for the moment it does. Perhaps you recall Trump’s campaign pledge to tackle America’s ancient infrastructure?
Former Trump economic adviser Gary Cohn predicts the president will join Congress to hatch a “massive debt-fueled infrastructure bill.” Cohn, telling Reuters: “If the Democrats win the House I will be shocked if the first thing they don’t do is infrastructure. I think they’ll do a trillion dollars, trillion and a half dollars of infrastructure, and the president will sign it.”
Why so willing to get down on all fours with the Democrats who are hot for his scalp? The president looks at these economic decisions in a very simple lens: “I want to grow the U.S. economy, I want to create jobs, I want to create wage growth.” If the federal government can do something that helps [him] accomplish those three things, he will be 100% inclined to do it. I mean, that’s literally how he looks at it.
We look at it and stagger, dizzied by the prospects of another trillion dollars of debt. “Another trillion in debt, here we come,” as Cohn concludes. Does America’s infrastructure require emergency surgery? Then let it have it. The bridge must not collapse… the pothole is a menace… the broken water main is a grand migraine.
But in a time of budgetary surplus these would be seen for what they are — necessary expenses. It is only when we cannot afford them, when the national strong box is empty… that they masquerade as “investments.” In the 1990s Japan undertook many similar “investments” to lift it from its economic wallows. Infrastructure projects proliferated nationwide. One end to the next, the Japanese islands were blanketed with concrete. The results? A “lost decade” — lost decades, in candor. The Japanese economy has scarcely improved an inch… and the Bank of Japan is still hard at the business of “stimulating” the economy.
Coming home, American GDP growth has averaged some 2.1% since 2010. Meantime, CBO currently projects growth to limp along at an average 1.9% per annum for the next decade. In contrast, average annual growth of 3% or more was common before the great gale of 2008.
One percentage point may not appear dramatic — and one year to the next it is not. But multiply it by five years, 10 years, 20 years… and you will acquire a grim lesson in the meaning of compounding interest — negative compounding interest. If America doesn’t lick its debt… it is a lesson its current generation of youth may learn good and hard…
Below, Nomi Prins shows you why 10 years after the last debt crisis, another is building again. What are the four conditions will lead to a financial crisis? And when might you expect it? Read on.”
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“10 Years Later, a Debt Crisis Is Building Again”
By Nomi Prins
“Though it seems like only yesterday, it’s been a decade since my former employer, Lehman Brothers went bankrupt, and in the process, helped instigate a massive global financial crisis. That collapse catapulted the Federal Reserve on a mission to, in its own narrative, save the economy from further collapse. In fact, its creation of $4.5 trillion to purchase U.S. treasury and mortgage related bonds from the big private banks in exchange for continued liquidity was the biggest subsidy in U.S. history.
In some ways, we seem much better off now. Employment is at record highs in most developed nations outside the Eurozone. Global economic growth has picked up overall and stock markets have recovered. Indeed, many stock markets around the world have regained or passed their former record highs. Asset prices are booming.
But that only tells half the story. That’s because the last financial crisis was about debt and debt levels have increased substantially since 2008. The entire “recovery” was built on debt. From 179% before the financial crisis, the global debt-to-GDP ratio has jumped to 217% today. Companies and governments have piled on more debt than before. Emerging-market debt, led by China, is also at a record. The big banks are even bigger, and remain “too big to fail.”
Eliminating all that debt is the ultimate solution for avoiding another crisis. That’s because if interest rates drift higher, it can lead to problems in debt repayment, followed by defaults, followed by crisis as defaults spread like a contagion. But there’s no magic bullet for doing that.
First, you should know that no two crises are exactly the same. The last one was met with huge debt on the back of the Fed’s quantitative easing policy. Central bank credit, or what I call dark money, tended to go to the wealthy and into financial assets.
“Dark money” comes from central banks. In essence, central banks “print” money or electronically fabricate money by buying bonds or stocks. They use other tools like adjusting interest rate policy and currency agreements with other central banks to pump liquidity into the financial system. That dark money goes to the biggest private banks and financial institutions first. From there, it spreads out in seemingly infinite directions affecting different financial assets in different ways. Dark money is the #1 secret life force of today’s rigged financial markets. It drives whole markets up and down. It’s the reason for today’s financial bubbles.
On Wall Street, knowledge of and access to dark money means trillions of dollars per year flowing in and around global stock, bond and derivatives markets. Now, ten years after the financial crisis, there are major complications building with the deluge of debt created on the back of quantitative easing policy.
When the next shoe drops from our inflated bubble markets, it will be the debt markets that lead the way. Whether the financial bubble begins to pop in emerging markets, over-leveraged corporate sectors or from over-stretched consumers — the reality is that a storm is brewing.
All of this is a recipe for another crisis. Meanwhile, a new article lists ten warning signs of a recession by 2020. Written by Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates and Brunello Rosa, co-founder and CEO at Rosa & Roubini Associates, shows why 2020 could be the year of the next financial crisis.
They range from the economic to the geopolitical triggers. They posit that the “current global expansion will likely continue into next year, given that the U.S. is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path.”
After that, however, they believe that conditions will lead to a financial crisis, and then a global recession. The main four reasons are:
1. By 2020, “a modest fiscal drag will pull growth from 3% to slightly below 2%.”
2. Trump’s trade wars “will almost certainly escalate, leading to slower growth and higher inflation” around the world.
3. Growth outside of the U.S. will likely slow down – especially, if more countries retaliate against U.S. protectionism. In addition, China would have to slow its growth to reduce its level of “excessive leverage” in order to avoid “a hard landing.” Plus, emerging markets can get hurt by a double whammy of trade wars and dollar-strengthening.
4. In the event of a correction, “the risk of illiquidity and fire sales/undershooting will become more severe.” That could result in high-frequency/algorithmic trading that produces “flash crashes” which could hurt exchange-traded and dedicated credit funds.
The main difference between 2008 and now is that central bank sheets are dramatically higher today. They just don’t have the room to accommodate nearly as much easing this time around. Now, J.P. Morgan Chase, another of my former employers, sees a problem. The next crisis may become so serious a recent JPM report suggests, “that the next financial crash may be so cataclysmic that the Federal Reserve may have to enter the market to buy up stocks…”
So let’s get this straight. JPM has spent tens of billions of dollars over the past several years buying back its own stock to boost the price. Now they want the Fed to directly bail out the stock market — and JP Morgan stock by implication. Call it whatever you want, just don’t call it the free market.
What all of this means that the Fed will either stop its current tightening program, re-invoke QE, or get its central bank allies to do the same when necessary. It means that further rounds of quantitative easing (through various dark money ploys), in addition to all the help they’ve received, will continue. The banks can see no other option.
All of those options could prop up the market through volatile periods ahead and drive the current bull market even further. In the long run, this is not sustainable. No one can say exactly when the next crisis will arrive, but there are lots of signs it may be getting close.
In the meantime, you can take steps to prepare yourself by taking profits and allocating money into cash or gold if signs of a crisis grow stronger. By staying diversified in your portfolio and watching stories like these you can be well prepared for market turmoil when it arrives. While we aren’t there yet, I’ll be watching for signs of risks and opportunities along the way.”
Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2018/09/who-killed-deficit-hawks-by-brian-maher.html
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