A Jubilee is Coming

The greatest debt expansion in history draws to a close.

Guest post by Robert Gore at Straight Line Logic

Conventionally measured economic growth is related to two aspects of debt: its growth rate and its marginal effectiveness. In terms of economic growth, debt should be thought of as a factor affecting production, like the supply and cost of labor, capital goods, and land. A business can increase the supply of whatever goods or services it produces by borrowing money. Whether it does so depends on the cost of debt service versus the expected return from the expansion. As long as the latter is greater than the former, the business should add debt and expand. This analysis applies to an economy as a whole: debt should increase as long as the return from debt is greater than its cost.

The more debt an entity incurs, the less productive each additional unit of debt becomes—diminishing marginal returns. For the global economy, the point has been reached where the benefit of an additional unit of debt is less than its cost. That point was probably reached years ago, but debt-funded consumption, and governments and central banks machinations, have obscured this reality. In GDP accounting, an increase in consumption is treated as an increase in GDP, regardless of where the money came from to pay for it. Increasing debt to fund consumption increases GDP. However, such debt, because it does not fund investment, does not increase production. There is no economic return to offset its costs; it’s economically counterproductive.

For at least the last seventy years, debt in the US has grown faster than GDP. The same is true for most of the developed world, including, since the turn of the century, China. The increasing absolute level of debt relative to GDP has only been partially offset by generally falling interest rates. The debt service burden has increased, debt is increasingly funding consumption, and that which is funding production has run into minimal or negative returns.

DEBT THAT PAYS FOR WAR IS THE STUPIDEST DEBT OF ALL

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If this were happening in a strictly market economy, debt would be reduced, either paid off, rescheduled, or repudiated and written off. However, government and central bank fiat debt—debt that can be incurred in unlimited quantities by governments and central banks—stifles these adjustments. The central bank can use its fiat debt to purchase the government’s fiat debt (debt monetization) and in so doing set the price, or interest rate, for the government debt, influencing the configuration of interest rates throughout the economy.

Some who despair at these machinations conclude that there are no longer any adjustment mechanisms and that the machinations can continue in perpetuity, the tree of some asset prices (equities and real estate) growing to the sky. Perhaps they are right; the global expansion of central bank balance sheets since the last financial crisis is unprecedented; it’s at least a theoretical possibility that it will never end. However, this game of central banks conjuring fiat debt and monetizing governments’ debt (and other financial assets) doesn’t operate in a vacuum, rather it has promoted debt growth in the overall economy. There, signs that the marginal return on debt is now negative, that the burden of debt service outweighs the benefits of debt, are abundant, and debt contraction will happen regardless of the desires of central bankers and government officials. There are only so many private income streams that can pay debt service, only so many private assets that can be collateralized.

Global debt stands at a record 325 percent of global GDP. That number includes government and private debt, but not unfunded pension and medical liabilities. Their inclusion would significantly raise that percentage. As a greater proportion of income is devoted to debt service, a smaller proportion is left for saving and investment, which funds future growth, and consumption.

The long downtrend in global growth confirms the increasing toll of interest and principle repayment. In the most heavily indebted nations—Japan, Greece, Italy, Spain, Portugal, Puerto Rico, Brazil—GDP has been in multiyear contractions. In much of the rest of the developed world’s welfare states—the US and Western Europe—growth has been in long-term decline, and suspect price index calculations and seasonal adjustments cast doubt as to whether those economies are growing at all. In the US, annual growth never reached 3 percent during President Obama’s tenure, a first for a US president. Debt-fueled economic growth in China is slowing, probably more than suspect Chinese statistics are allowed to show.

US household debt has surpassed its 2008 peak and corporate and US government debt are at all time highs. Puerto Rico and Detroit have sought relief from creditors and Illinois and Chicago will soon join them. The municipal insolvency parade is just starting. Mounting unfunded pension liabilities are swallowing an ever-increasing share of municipal budgets.

Banco Popular in Spain was sold earlier this month for one euro after it exhausted its credit lines in a vain effort to contain depositor withdrawals. Equity and bond owners bore the brunt of the bank’s losses. Last Friday, two banks in Italy were shut down by the European Central Bank after repeated rescue attempts failed. More Italian banks will fall; their entire system is essentially insolvent and the economy hasn’t grown in years. Europe is holding its breath hoping that Italy’s depositors don’t panic, but they will

The last financial crisis started in the housing, mortgage, and mortgage-backed security sector, but was not, contrary to numerous official assurances, “contained” there. A debtor’s debt is a creditor’s asset. When the credit creation process reverses and a debtor’s debt is either rescheduled or repudiated, its creditor’s assets are impaired. That can impair the creditor’s ability to pay its own debt and curtail its extension of new debt. The 2008 crisis demonstrated how this chain reaction quickly spreads beyond the sector in which it began. Now there are multiple sectors that are as inflated as housing was back then and some are already unraveling.

According to Citibank, the growth in total global credit has just gone negative after eight years of the greatest expansion of government debt and central bank balance sheet expansion the world has ever seen. Their fiat debt can expand without limit, but not so the debt of individuals, businesses, and smaller governments bound by legal restrictions on debt issuance and without recourse to central bank monetization. Declining long-term growth trends and outright contraction, increasing outbreaks of fiscal stress around the globe, huge and growing unfunded pension and medical fund liabilities and aging populations that will draw on them are all indications that debt expansion by every class of entities but central banks and governments has hit a wall and is reversing.

There are proposals for central banks to simply hand out their fiat debt to everyone—helicopter money—and for partial or complete debt jubilees—legally mandated debt forgiveness. Helicopter money would be hyperinflation, which would devalue all debt and amount to a partial jubilee. One shouldn’t underestimate the political potency of such proposals. There are always more debtors than creditors and governments themselves are the biggest debtors. In the US there have been calls for student loan forgiveness, which are, not surprisingly, popular with millennials.

Whether or not governments enforce debt forgiveness, a de facto jubilee is coming. The world has far more debts and pension and medical liabilities than it can support and they will not be repaid, regardless of how much fiat debt governments and central banks crank out. There has never been a worse time to be a creditor: maximum risk, minimum yield. That serial defaulter Argentina was able to issue 100-year bonds at 8 percent interest is emblematic of the credit market’s thirst for yield and disregard of risk. The next ten years will a lender’s nightmare.

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Anonymous
Anonymous

Our money is debt, get rid of our debt and get rid of our money.

There isn’t any quick, easy, or painless solution to this.

Anon
Anon

Nope, there is no way out. We have reached the point where the EROEI (Energy Received on Energy Invested) is 0. The next steps are -1 -2 and on. Excellent analysis by the author of a very large math problem, of course us commoners are supposed to believe that our betters can change the laws of mathematics, hence all of these idiotic “debates” about healthcare, student loans, pensions etc. The facts are: they are all based on mathematical assumptions that are unsustainable. They were unsustainable when they were devised, we are just the unlucky souls that are around to see the point at which the hill reaches its top. We the citizens now are similar to the last guy involved in one of these ponzi scheme network marketing scams. We have to try and eeke a profit, while supporting everyone else’s “upline”. Not possible.

TampaRed
TampaRed

what’s the best way out?repudiation?inflation?

A. R. (Rich) Wasem
A. R. (Rich) Wasem

See my response to RG. You can ignore reality if you wish – BUT – you cannot ignore the CONSEQUENCES of your ignoring reality.

David
David

Reality is akin to the crazy girlfriend, she will not be ignored.

A. R. (Rich) Wasem
A. R. (Rich) Wasem

Just like a crazy girlfriend in fact – you can ignore her but she makes certain you sure as hell can’t ignore her response.

anotherdoug
anotherdoug

Some of us have expected this to come down since the turn of the century but as they say the market can stay irrational longer than you can stay solvent. Might be a great time to get a new mortgage. Or not.

Mario8282
Mario8282

“The last financial crisis started in the housing…” I disagree.
The true financial crisis started the day the actual money system was incepted.

No debt can be fully repaid as long as monetarism will last.
Monetarism is the system where a private entity issues public currency as a debt. If all this debt would be paid back, the monetarist money would be fased out the economy, leaving it without any currency, nor cash nor electronic. And there would be no other money to pay the interest because the currency quantity for interest coverage has never been created. This is the design of the current money system. It is called monetarism, is the actual money system of the West and is mathematically impossible to sustain.
The system itself cannot survive the very numbers is generating.
Thus the problem is the system.
By design this system is crushing the physical economy just like a tumor is killing a living body. The economy is collapsing and is taking the monetarism with it. Just like a tumor killing it’s victim: victim dead, cancer dead.
-read more-
Monetarism vs Sovereign Currency

A. R. (Rich) Wasem
A. R. (Rich) Wasem

Statement should have read that “the most recent MANIFESTATION of the permanent financial crisis started in the housing market”.

i forget
i forget

Perpwalk treadmills only seem like they are perpetual motion machines. Look at how incompetently long it took the holed block to finally dispose of chip off the holed block Madoff. If it’s too good to be true, too many people will queue. If you build it, they will come in droves. Dishonesty prevails, until it cannibalizes itself past the point of no return. After a bit of respite, “new” cannibals will slide in & start it all over again. It’s major Kongs, kings of the jungle, barebacking the bomb, all the way up & all the way down, over & over again. Stupid. Learning disabled.

https://en.wikipedia.org/wiki/Survivor_Type

http://www.georgetownisd.org/cms/lib/tx01001838/centricity/domain/594/survivor_type.pdf

Ed
Ed

“However, this game of central banks conjuring fiat debt and monetizing governments’ debt (and other financial assets) doesn’t operate in a vacuum, rather it has promoted debt growth in the overall economy”

The way I see it, the “conjuring of fiat debt and monetizing governments’ debt” is not the same as a business borrowing to expand. When I borrow to increase production, I’m doing so deliberately and I’m taking on debt for which I am personally responsible, expecting to repay the debt with increased earnings.

When a central bank loans money into existence, handing the proceeds of the loan to a government, that bank is not using its own funds and the government has no intention of ever actually repaying the debt. The central bank doesn’t have the money it loans to its government, so that money is taken from the current value of the existing money in the economy at large.

Having the value of my money reduced puts me in the position of having to borrow just to maintain my current level of production. When I decide against doing that, my production output is reduced, my earnings fall, along with the tax revenues the government gets from me, while my reduced production lowers the true GDP (if there is such a thing), and my little business is only one small ripple in the pond. The money loaned into existence is affecting every other business in the economy as mine is being affected by the reduction in value of the money we are forced to use.

Holding that thought in my mind makes it a little hard for me follow along with any scenario that includes seeing government and central banking as participants in the economy. I don’t see their fraud “promoting ” debt growth. I see it forcing debt growth on people who are not party to the creation of unpayable government debt.

i forget
i forget

“Holding that thought in my mind makes it a little hard for me follow along with any scenario that includes seeing government and central banking as participants in the economy.”

Because there is nothing to follow: that hand in chain mailled glove is a parasite that siphons blood out of the people-economy.

Ed
Ed

Yep, my point exactly. Those two entities are not participants in the economy, they are entirely parasitical.

A. R. (Rich) Wasem
A. R. (Rich) Wasem

Exactly – a good description of the pernicious fraud of modern central “banking”.

starfcker
starfcker

“All the dreams of the future based on the trends of the recent past will come to nothing. mark my words:

-There will be no self-driving cars.
-There will be no widespread automation and millions of workers replaced by robots.
-There will be no Bezos bases on the Moon and Mars.
-There will be no drone delivery of Amazon packages.
-Crypto-currencies will not replace nationally issued banknotes.
-There will be no great strides made in life extension technology.

In fact, we will be lucky if we can even keep 75% of what we have now up and running over the next ten years. The combined forces of debt and demographics are sounding the death knell for globalism, and without globalism these companies have no value and these Utopian fantasies have no substance. Reality is about to reassert itself in a big way.” GooseShteppingMoron, over on ZH

i forget
i forget

Can I add one? There will be no no prognostication. That trend has no beginning, or end. Kinda’ like Henrietta Lacks’s cells. Except that those did have a beginning.

Your last one. I read Mr. Gore’s novel on the subject. Mr. Crichton’s, too. You may be right. But I’d still put some money on strides being made. And a larger bet on those strides not being allowed to trickle down much. Self-driving cartels rule the roosts & roadways, most times\places. And the worst having already been consistently floated to the top by the wurst, will likely continue their seizing ways, put on those rings, become fully the Dark Lord Saurons they’ve been playing at all this time. Is that a prognostication, or just the omnipresent now?

starfcker
starfcker

Getting most municipal finances back in check will be easier than most think. Pensions and salaries can (and will be) scaled back. Municipalities can stop borrowing for bullshit like stadiums and parking garages and new courthouses. They’re going to have to. Trump is starting the long ponzi unwind already. He renewed the TPS of Haitians only until January 22nd. Hondurans and Salvadorians are next. South Florida is going to lose a couple hundred thousand people. Sounds defationary to me. What if 100,000 low end houses with their $2000. a month rents currently subsidized by the federal government have to compete for actual people with jobs? Bout to happen here. What if the owners, now getting $900 bucks a month for that house now find their tax bill unreasonable? Bout to happen here. The free money is about to get a little more scarce. Bonds are where your money goes to die.

Fleabaggs
Fleabaggs

Forced Jubilee is the right term.
There is now way of really knowing the full extent of the built in inflation in the world until it finally finishes imploding. The life forms in the outer galaxies will thing it’s a new black hole forming.

i forget
i forget

Long black hole road. Hadn’t heard this tune until I saw “American Hustle.” Flick was inspired by “abscam.” How many synonyms ?

BB

Do you realize the Satan is probably flapping his wings in sadist joy as he reads your comments. The anti-Christ is probably laughing at all us silly humans with all our speculations about a future He knows is already written.The False prophet has got addicted to the Holly ( the tree with talesmanic qualities ) and Wood ( the wand which has been used since antiquity as a tool to direct the will of the user ).Thus Hollywood and tv using its magic go teach us how to think ,how to respond ,how to dress and what to worship.I n other words they got us by the throat and balls.

BB

Robert ,I’m not putting down your post or anyone’s opinion.I just think The unholy trinity has a wicked sense of humor. That’s all .I believe I mentioned before I got that ESP stuff .So I know better about what the future holds.

Ed
Ed

No need to remind me about how your ass is ate up with the ESP. I keep that in mind when you make one of your comments.

digitalpennmedia
digitalpennmedia

There has been talk of debt collapse for decades… a new generation, more talk however no one seems to get that the game gets to continue until the creditor nations want to pull the plug. Its OBVIOUSLY NOT the debt that is the problem, because if it was there wouldve been a collapse years ago. As long as a country runs the show, they can print as much money as needed ; as long as other countries can do the same they can purchase that debt and balance the books. This is especially true given that none of the other countries in the world could support the world economy the way the US does in it s enormous capacity for purchasing that the US has in comparison to the world as a whole.

More and more can be sucked up from the masses and an economy can still struggle on. I am sure everyone thought the crash of ’29 was the end of the world too but it wasnt. It was rough, but nothing happened. Currently, Venezuela is a perfect example as it struggles on with very limited resources and money in a country with all the resources of wealth one could ask for, but there is still a fully operable government in complete control. Sure there are protests and violence, but on the scope of what has happened there it is actually much less than what should probably happened and financially they struggle on (without having the power of the US). AND note… the US can, has and will continue to push land and resources as collateral.

Until the major nations with the largest populations (India, China) adopt financial policies that allow for a purchasing power of their own people there will be little pressure to actually change the current economic structure… until they desire to collaect on their payments of the purchased debt… we may yet see $30T in debt and borrowing more to pay our interest payments….

Regardless, once in power… one doesnt relinquish power.

Montefrio

Would that you were wrong, but I fear you’re not. And I don’t see the creditor nations deciding to “pull the plug” considering the possible consequences if the genie gets out of the bottle when the plug is pulled. It could happen, of course, because nothing is written in stone, but plug-pulling doesn’t rate high on my probability scale.

The desire for relatively secure passive income is understandable, but passivity isn’t personally productive. A relatively secure stream of passive income is something of a comfort so long as it’s not one’s only source of income. Productive tangibles that generate personal income under favorable conditions make for a better investment think I; at least if the investment goes south, one has presumably given it one’s best shot assuming the responsibility rather than leaving it to others.

Hondo
Hondo

What you say is true…except the States cannot print their own money…and when they go broke and cannot pay the government employees their oversized pension plans and other goodies, then what. With the Land of Lincoln going down the tubes with no way out, what will happen when other broken states follow suit….just askn

Guy
Guy

Except.. the US is a debtor nation beholden to creditors (holders of “our” debt). Countries like China, who are making moves to establish the renmibi as the reserve currency.

And Geopolitics isn’t controlled on the national level. Nations are controlled by international groups. The US economic and banking system is controlled by the federal (sic) reserve, which is controlled by the bank of international settlements, which are international organizations not subject to any national law.

They have ordered the death of the US economy, so likely it will be so, as they’ve got the ammo and the guns. Just like they did to Japan and their trading partners in 1997. They’ll be there to profit off and consolidate power through the crisis.

http://www.zerohedge.com/news/2017-04-12/brandon-smith-warns-next-world-war-will-be-economic-not-nuclear

Boat Guy
Boat Guy

For decades the United States had a man in congress that continually pushed for our “LAW OF THE LAND” to be upheld by the very people charged with the responsibility and sworn duty to do so ! Ron Paul of Texas was laughed at ignored and treated like the nice old gentlemen everyone is polite to but don’t let him drive or play with the cable remote !
Now it’s too late , the party is over . To bad we can’t go back and hold our so called representatives accountable for the fraud perpetrated on the nation as a whole creating a “DEBT HOLE” that cannot be filled .
People holding officies of responsibility today conviently are not held to account for their predecessors misdoings , how convienant !
I keep getting the smell of tar and feathers in the air , we could put it on pay for view $$$$$

Ignatious J Reilly
Ignatious J Reilly

I’ve been picturing it as a giant debt snowball being pushed uphill. You just know eventually it cannot go any further before it rolls back and crushes everything in its path. I didn’t think it would go as far as it has. Though the happenings in Illinois look to be a sign that the top is near, and the ground is getting shaky.

I think it is likely they, as in TPTB, try to melt that snowball away with a war thinking that will be less destructive than facing the consequences of their bad decision making.

DurangoDan
DurangoDan

Thanks RG. Made my day.

Iconoclast421
Iconoclast421

I’m not sure Jubilee is the right term. The Fed will end up owning all the debt. But the Fed only bails out banksters. So you have to find a mechanism to get all that debt into a form that the Fed can buy, such as student loan bonds. That is what the Fed will buy. Those student debt bonds will be valued at 20 cents on the dollar before the Fed buys them, and of course they will pay 100 cents on the dollar for them. But it wont be students who get that 80 cents. Students and former students will do what they have been doing these last 8 years: pay more and more for everything because of all this Fed funny money floating around pumping the ever loving crap out of all asset prices.

Ned2
Ned2

This may sound counterintuitive to some, but I would implore everyone to get out of debt as soon as you can.
When the creditors, or government (but I repeat myself), decide to seize your assets instead of allowing you to pay them off (yes, this has already happened in other countries), there’s going to be a lot of perplexed down and out people roaming around.

Hondo
Hondo

Ned, that is great advice, but the average Joe or Jane can’t even pay the monthly bills let alone get out of debt. It’s catch 22 with no pay due, by you know who.

Bob
Bob

Consolidation, Settlement, Default, Bankruptcy, Jubilee — the future of debt.

Go back and look one more time at all those charts showing the long, steady decline in the value of the dollar — about 95% since the Federal Reserve was created. Perhaps it is time for a correction? Perhaps fewer dollars available after a lot of debt is extinguished would lead to an increase in the value of the remaining dollars? If so, that would be deflation — a nasty prospect indeed!

More likely, we have reached escape velocity from the black hole of deflation, but probably still have to endure another near-death-level recession before gaining traction. All the many excesses have to wrung completely out before the coiled spring of money creation can finally launch any sort of meaningful expansion. Wholesale debt destruction might provide that impetus, if assets by-and-large are spared.

And the drama continues to unfold with the pace of glacier…

overthecliff
overthecliff

PTB are trapped. They have to print and follow what every socialist communist regime has always done. We will follow the examples of Weimar Republic, Hungary, Brazil,Zimbabwe and Venezuela. It is coming as sure as the sun comes up in the morning. Timing ? I don’t know. If I knew that, I wouldn’t tell and would be a very very rich man.

BUCKHED
BUCKHED

All this gloom makes me want to bury a bottle of good bourbon and a fine cigar. When the whole thing falls off the cliff I’ll dig up the stored goods,pour three fingers in a glass,light the cigar and wait for the 4th turning to explode.

flash
flash

Debt can go on as long as there are digits enough to record the transactions . Who cares if there’s nothing to back it? Assets purchased with digital cash are tangible enough. Soon the problem of printing and tracking cash will be past tense , to be replaced with digital currency stored on our smart phones. It’s a brave new world, boy and girls. Past rules of finance need not apply.

Blockchain technology is moving into the financial mainstream with …
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ssgconway
ssgconway

We’ve seen this movie before. Whether it’s all who were in debt, etc., fleeing to Ziklag to join up with David or any other historical example you care to think of, the paper-money/debt-trap/consumers vs. producers story ends in one of a few predictable ways: Revolution, collapse or some combination of the two. Imagine Bernie 2020 campaigning on a ‘jubilee’ for all student loans and underwater mortgages. Forget the finer points of economics or whether those debts weren’t piled up, in many cases, through outright chicanery mating with gullibility to produce the children of debt: The lure would be irresistible, and to some degree, justified. If the Establishment stops such a movement, another future beckons:
https://www.youtube.com/watch?v=AiBCRQL58_k

It is not as though we haven’t been warned, but the ‘this time it’s different’ cum-‘defecitsdon’t-matter’ chatter drowns out the wisdom of the ages:
https://www.youtube.com/watch?v=hqemdFvCFgg

The story is so common in human affairs that one can count the exceptions up pretty easily:
1.) Can anyone name a nation besides 19th century England that paid off a (post-Napoleonic Wars) national debt of 200% of GDP, or anything even close to that, without defaulting?
2.) Is there another example besides the Byzantine Empire, ca. 486-1204, of a large nation-state managing centuries of monetary stability?
Maye there are other examples, but if we can list them without too much effort, the exceptions prove the rule that ‘buy now/pay later’ and other forms of ‘something for nothing’ are so hard-wired into human nature that every rise seems to sew the seeds, in the midst of the fruits of success, for future downfall.
Thanks for the fine article, and thanks to my fellow TBP-ers for their comments.

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