The debt dam is crumbling as central bankers and government officials frantically refill the escaping lake with eye droppers.
Guest post by Robert Gore at Straight Line Logic
As background to this article, it would be helpful to read an article I wrote in 2015, “Real Money.”
The foundation of the world financial system is debt. Every currency in the world is debt whose value is not tethered to any real value. In a rare display of official truth-in-packaging, right there on the instrument itself a US dollar bill tells you it’s debt: Federal Reserve Note. A note is a debt. What do holders of Federal Reserve Notes, officially creditors of the Federal Reserve, get for repayment of the debt they hold?
Federal Reserve Notes have no maturity date, pay no interest, and can never be redeemed. If you go to a Federal Reserve branch and try to redeem one, they will either not accept it or they will exchange it for an identical Federal Reserve Note. Why would anyone accept this peculiar instrument? Because you cannot refuse it. Also right there on the dollar bill it says: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE. For American transactions, it’s reject the dollar, go to jail. The American government even levies punitive measures on foreign governments that just say no.
Because central banks and governments can repay their debt with more of their own debt, they have been unconstrained in the amounts they produce. You and I would do the same thing if we were so empowered. Governments, central banks, and debt are a ménage à trois from hell. The US ménage has debased the currency’s value against real goods and services at least 95 percent since the establishment of the central bank in 1913. The ménage’s ill-gotten gains are someone else’s loss—gullible savers and creditors who believe promises by politicians and central bankers that they will not engage in the debasement they have every incentive to promote.
Promoting debt in the public sector, the ménage also seeds it in the private sector. It should surprise no one that central banks tend to favor the politically popular and fiscally friendly (to the government) course of suppressing interest rates below where purely market-determined rates would be.
They are also a ready market for their governments’ debt, a process often mistakenly called monetizing debt. It’s really just an exchange of central bank debt for government debt. If you read “Real Money” you know that no money and consequently, no monetization, is involved. It should be called debtizing debt, but debtize and debtizing are not words. We’ll use them anyway. By having the central bank debtize its debt, the government avoids pushing up interest rates and crowding out private borrowers in the credit market, thus encouraging more private borrowing.
Paying back creditors with a devalued currency benefits all debtors, not just governments and central banks. Forget those hoary old homilies about pennies saved being pennies earned. For older folks, pennies aren’t even worth the lower back pain of picking them up off the floor. Everything governments and central banks do make debtors winners and savers suckers.
If I borrow at 5 percent to fund an investment that returns 10 percent, it’s a productive use of debt. If I borrow at 5 percent to fund a vacation, its economic return is zero percent and I have to repay the debt and interest. Most of the world’s debt is not just unproductive, it’s counterproductive. At positive interest rates debt-funded consumption is always an economic loser, yet most of the world’s debt funds consumption.
There is a school of thought called Modern Monetary Theory (MMT) that essentially says that central banks can debtize their governments’ debt and the governments can then use the central banks’ debt to buy guns, butter, and anything else the populace desires without consequences. It’s like those one simple tricks on the Internet that eliminate fat, wrinkles, baldness, or impotence. It isn’t as if this one simple trick hasn’t been tried and found wanting—repeatedly. See, for instance, Chapter 1, “The Mississippi Scheme,” of Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds. Nevertheless, MMT is finding its rightful place in college curriculums along with Marxism, Keynesianism, and other economic and philosophical snake oil.
Central banks can swap their debt for governments’ debts until we’re all millionaires, billionaires, and then trillionaires, but there is a tether that eventually returns the whole daisy chain to earth: production. Here is a heretical idea that is nonetheless true: before something can be consumed, pledged as collateral for a loan, or its income stream used to repay debt, it must be produced. Debtors want to buy real goods and services with their debt, and creditors want to be repaid with either real goods or services, or with a debt they’re confident can be exchanged for real goods or services.
Ever-expanding debt can forestall consequences until debt saturation is reached: a unit of new debt buys less than a unit of production; debtors’ debt service burdens preclude incurring more debt, and creditors’ recognize that further extensions of credit are unlikely to be repaid. Once that point is reached, the process reverses and debt contracts. Debt contraction was gathering steam before the coranavirus outbreak and the official response has only accelerated it. Central bank novocaine masks it, but like real novocaine the central bank variety wears off and the patient must deal with the pain.
Central bank balance sheet expansion has been massive and unprecedented. The Federal Reserve’s has gone from just over $4 trillion at the beginning of March to just under $7 trillion, much of it debtizing the US government’s exploding debt. The Bank of England’s balance sheet has ballooned from £580 billion to about £780 billion, and the European Central Bank’s from €4.6 trillion to about €6.3 trillion. (The Chinese Central Bank’s has shrunk a bit.) Against what standard are these expansions to be measured? They’ve certainly put a spring in the step of financial assets and precious metals. However, they’re not going to stop a deflationary global debt contraction. This would be the case even if debt velocity—the rapidity with which debt turns over in the economy—were not pinned to the floor, which it is (see “Macro View: Fed Wants Inflation But Their Actions Are Deflationary,” by Lance Roberts.)
Compare magnitudes. Aggregated, the three central banks have expanded their assets—mostly with governments’ debt—about $5.25 trillion at current exchange rates. Nominal global debt is around $250 trillion, or over 47 times the expansion. Unfunded government pension and medical liabilities are multiples of governments’ stated debt (in the US they are $153 trillion versus stated federal debt of around $26.5 trillion, according to usdebtclock.org.), and the global derivatives market is so huge and opaque it can only be estimated—$1 to $2 quadrillion (one-thousand to two-thousand trillions). Derivatives are financial instruments whose prices are derived from other prices, generally those of another financial instrument, a commodity, or an index. They involve mutual promises of future payment or performance so they can be thought of as debt-like.
If you add all those debt and debt-like promises, let’s conservatively underestimate the global total at $2 quadrillion. That’s about 376 times the central bank balance sheet expansion. Say that only a wildly optimistic 10 percent of debt and debt-like promises go bad, that’s still 37.6 times the central bank balance sheet expansion.
You can argue that focusing on the debt side of the ledger ignores assets, which can be sold to pay off debts. That brings up a key point: at what prices can assets be sold? In our interconnected world, most financial assets are debt or equity claims whose prices have been lifted by the ongoing expansion of debt. If debt is contracting, what happens to prices? The nominal value of financial and other asset prices declines, but not the nominal value of debt. Which means more assets must be sold to meet an existing debt obligation, feeding into falling asset prices.
Credit extension and debt repayment are linked to production. As the debt daisy chain unwinds, both production and its income streams are subject to creditor claims. Bankruptcies reduce production and incomes, putting further stress on the system. In their wisdom the rulers of the world have addressed the threat of a germ by closing businesses and putting people out of work. These unquestionably (they’ve done their best to suppress questions) judicious and necessary policies have the unfortunate side effect of curtailing production, exacerbating the burgeoning debt crisis.
Central banks and accounting legerdemain (see “No Payment, No Problem: Bizarre New World of Consumer Debt,” Wolf Richter) allow limited extend and pretend, but it can’t last forever, or even much longer. Someone has to bear the loss of debts that won’t be repaid, those losses have to be recognized, and they will snowball throughout the financial system, intensifying the scramble for real production and income to cover them.
Debt contraction has initiated a global margin call. A speculator who is margined 10 to 1 borrows $10 for every $1 of his equity. A move of more than 10 percent against his speculation triggers a margin call that wipes him out unless he puts up more equity. If debt and debt-like promises are a conservatively underestimated $2 quadrillion, a global margin call will quickly overwhelm gross world product of around $100 trillion (5 percent of $2 quadrillion), debt supported asset prices (all of them), and the hyperactive swapping of central bank for government debt. Anything and everything will be for sale to meet the margin call and there will be few buyers. As more than one economist not currently taught in schools or universities has recognized, debt contractions are inherently and inevitably deflationary, regardless of what governments and central banks do to try and stop them (they usually create more debt).
The political impetus for debt jubilees—the mandated cancellation of debts—will be irresistible, and will find a sympathetic ear in governments, the world’s largest debtors. Already there is talk of debt forgiveness for certain classes of politically favored borrowers. That movement is still in its infancy, but in an age of increasing uncertainty and unpredictability, its explosive growth may be the easiest trend to predict over at the next ten years, at least.
De jure jubilees will be accompanied by de facto ones. Unable to pay, people, businesses, other private entities, and governments will walk away from their debts en masse without penalty other than a destroyed credit rating. Those defaults will ratchet up the financial food chain, especially as assets are marked to market while liabilities must remain on the books at their nominal values. Virtually all of today’s nominal net creditors—banks, insurance companies, pension funds, etc.—will become net debtors and then bankrupts as their liabilities increasingly exceed the realizable value of their assets. No one will be immune from the global margin call.
Pandemic default will be both a cause and effect of chaos, which is the other easy prediction for the next ten years, at least. If you think the George Floyd riots are bad, wait until millions of people face foreclosure of their homes and repossession of their vehicles. Moulon labe and good luck with that. Anyone desperate enough to take a job in bill collection, repo, foreclosure, or tax collection will be taking his life in his own hands. The violence and insurrection will make the recent riots look like a low-grade bar fight.
A cottage industry of preparation writers and proprietors provide advice, provisions, and services for what’s to come. It would be wise to pay attention and stock up. It’s an article of faith in these circles that you should stay out of debt, which is certainly good advice. However, the latter part of Polonius’s admonition—“Neither a borrower nor a lender be”—will be just as vital, if not more so. At today’s artificially low interest rates, you’re not even being paid, not by a long shot, to take that risk.
Increasingly suspect the REPO “fix” beginning about Sept of 2019 remains “UNfixed”, and in view of the virus PLANdemic “FIAT DEBT DELUGE” response, I smell the proverbial “fish rotting from the head down” now past the “inerds”. The Gates/Fauci-fraud the “mask” for the PTB/white-shoe boy’s final REAL asset consolidation/transfer via their PRIVATELY-held [NOT]Federal[NO]Reserve MOAP – ‘Mother of All Ponzis’?
5 trillion dollar eye dropper is a big one. Still it is not going to end well.
My assets are in my head and hands. Jubilee sounds good to me. The sooner the better for production to return. Many will suffer and probably many will die. But eventually the majority will benefit.
“Moulon labe and good luck with that.”
– R. Gore
Sums up the approaching gargantuan financial shit-fire storm nicely for us little people.
It’s an earthly Jubilee. Like a temple made by hand. Material, profane. Corresponding, there is another Jubilee, salvation by the sacrifice of Christ, a sin Jubilee.
Got a kick out of that, Robert. Of course, the word “governments” therein is synonymous to “corruption”.
Accordingly, that would make (just) law, liberty, and labor a blessed trinity of sorts, would it not?
And so it goes.
Nature’s first green is gold,
Her hardest hue to hold.
Her early leaf’s a flower;
But only so an hour.
Then leaf subsides to leaf.
So Eden sank to grief,
So dawn goes down to day.
Nothing gold can stay.
– Robert Frost
Things are getting a little Jubilee-ish for the proles, aren’t they? https://www.zerohedge.com/personal-finance/no-payment-no-problem-bizarre-new-world-consumer-debt. No telling how this is going to shake out. Robert, you know how outlandish this whole thing has gotten when you’re quantifying trillions as an eyedropper. It is that nuts.
I guess you’re not talking about a Mobile Bay Jubilee. There more to my liking.
Bob.
I lost the link I posted a week ago showing the 1913 buck being down to 1 cent now. The implosion from that collapse when it comes will put real meaning to Black Holes.
You said about derivatives”They involve mutual promises of future payment or performance so they can be thought of as debt-like.” The underlying asset has been pledged and repledged so of there will be no way to even find Mr. and Mrs. Mutual.
I remember reading in Barrons Weekly back in mid 99 about the Bubble in Japan.
Someone would form a group and buy a painting for $1.00. They would take it to a lender and use it as collateral for $10.00. They would then walk around the corner to another dealer and buy a $10.00 painting. This would be pledged to another storefront lender for $100.00. They would then buy a painting for $1,000.00.
This could continue until the price dropped. Once that happened the markets froze because nobody could afford to sell those pictures at a loss and nobody could afford to buy them in the face of future drops in price. As a result the trading became so thin any sale would have a disproportionate affect on the closing price.
I don’t think Quadrillion was in the everyday vocabuly back then so whatever their amounts may have been it was nothing compared to now.
Mid 99 should have read mid 91.
This is the part I cannot get my head around. What about the proles who have paid everything off and owe nothing to creditors? They don’t have liabilities past the ones the government has inflicted on them. As best I can figure, there will be one hell of a fire sale where government debt notes will be exchanged for physical assets.
Liquidity will be king.
Robert the Problem with liquidity is what you are trying to buy will cost a lot more. Because the liquid dollars are worth less. Unless people are in high need of cash and willing to let go of precious commodities like land or metals because they mortgaged it and have equity and need to get their equity. Otherwise, banks will foreclose and not sell like in 2008. They kept the foreclosed assets due to mark to market rules. They know the real assets, land, is much more valuable so the banks may not sell all their stolen properties they foreclosed on. Unless banks are in trouble then they will sell which is highly likely. But remember they can now legally do a forced bail in with your liquid dollars sitting in savings accounts essentially making you non liquid and themselves liquid.
That actually sounds like a viable plan. Anything that keeps our banking system functioning is worthwhile. And, if they can just keep running fair elections, everything will probably turn out OK.
Dirt, What indeed will the govt. do with the non-indebted, non-wealthy(read as politically favored) people? We already know that the favored class will be protected, but what about Joe, who owns his home and gear, and lives frugally? I don’t think it will be allowed. One way or another, old Joe is going to be broken to the debt wheel, or burned out of his paid off home. Only people in places (Detroit? Cleveland?) that the masters disdain will proles be allowed to live off the debt reservation.
People with no debt are liquid and have cash at banks. The banks will do a bail in stealing your cash and swapping it with shares of bank stock with a complicit govt allowing it.
The dirty secret of bail-ins is that government bonds are not subject to those provisions. 30 day T-bills are as bad of an investment as a bank account but when the hammer falls you “should” still own that money.
With a bank account you are technically a lender to the bank. That is how they can transform your debt into bank equity.
Straight out of texts read in graduate school.
The plagiarizing is toooo much
grade D+
Anonymous
If you can find one sentence in my article that’s plagiarized, show me. That’s not an accusation I take lightly. Put up or shut up.
Anons providing evidence? First time for everything I guess.
The article cited on deflation was wrong. I think most dont have advanced math, finance and econ degrees and misunderstand neoclassical LRAS curves. While velocity is rock bottom, so is Y… GDP output. To keep it simple M V = P Y … If V and Y crash, as they did then P is always the result of M. It will be inflation. The reason it isnt is because the Fed has removed all pricing mechanisms that would be accounting for inflation, namely all bonds and treasuries. The additional support that is preventing runaway inflation was the demand for current overseas, it always comes from outside the US over FX market. The dollar will begin to see weakness… There are no exports and our financial markets have become a joke. Like most currency with no asset backing and no associated productivity that could be considered credit backing it will be refused when the rest of the world realizes nothing is going to come out of the US for some time.
I often enjoy your articles and definitely this one on debt and the exponential growth of debt to support itself but this problem will be solved by the same means of a developmental secondary currency to bail out the first just like in Weimar. Lile so many topics this is often mentioned but few actually read the events after WWI and what actually lead to its scenario.
Thanks for the articles.
13 said “I think most dont have advanced math, finance and econ degrees and misunderstand neoclassical LRAS curves.”
Fleabaggs said “Thank God”.
I didn’t need a degree to determine we are in the midst of a devaluation and reset or to state 2 years ago they will replace the scrip with a new one. Very likely overnight too.
The new one will be digital and you will have great difficulty exchanging dollar bills that are not in a bank into the new digital dollar.
TN
Yes, I mentioned that at 1:16 below Daniel.
Yes digital allows a tax on every barter every transaction. Add massive inflation to that and you understand their game-plan. Inflation is the only way along with taxation unless we get to 50 trillion debt the neither can save us.
cuz you graj-jee-ated the sixth grade and it only took three years?
Show how you do ciphering with guz-in-tas
the deutsch mark was not a reserve currency. it also did not have anywhere near the financialized liability (as Mr. Gore states $2 quadrillion is very conservative) built up around it. jewish financialization (which includes ‘globalization’) now affects every economy and virtually all economic output down to an individual level. issuing a new ‘dollar’ won’t work at all. the SDR will find no love among the plebs. the resources have already been spent.
They won’t care if we like it. There will possibly be dual digital currencies as a replacement for the dollar. One fiat based for domestic use and one for cross border transactions. Ours will be funny and theirs will be money.
Flea i agree. One currency for us citizens to use here and one for govts and corps to use for imports and exports. Essentially halting international travel. Its a new berlin wall to keep citizens here, in debt, trapped in inflation while they force us to Pay for their shenanigans. This is their way of getting very wealthy. Congress and politicians will be exempt of course and allowed to use both currencys
Anon.
That’s about the size of it.
Not quite Mr. Gore.
While you have advanced the notion that debt is not money, you’ve missed the heart of the problem.While debt has been sold to us as money, the problem is not simply what is money and what is not. Money, being the life blood of any civilization, is a measure of our evolutionary progress toward becoming civilized human beings. That we have failed to date establishes that despite our many technologies, we remain savages.
We have left behind families, tribes and city states to form self-governing nations. It is a step in the right direction. We even have a constitution that lays out a framework whereby our nation state can evolve civilized human beings. Where do think that ideal came from? You will no doubt be surprised when you discover it’s universe origin. It’s not a simple thing, this idea of self-governing societies with laws to replace kings and emperors. We were given the tools, but fallible as we are, we’ve booted the opportunity. Some future generation will get it right.
We can be assured of that. He told us so. And when we embrace the religion OF Jesus rather than than our current religion ABOUT Jesus, well, that alone rights our ship of state.
I think this is very similar to how we’ve handled our opportunity. Socialism wins?
What concerns me most personally is how this “correction” affects our private property rights when the ripple/wave hits.
“The foundation of the world financial system is debt”
No shit “Sherlock”
Debt is not possible without the creation of “money”.
Old school thinking…
Debt will not be re-payable with currencies that will not be recognized in the future…………
mon·ey
/ˈmənē/
Learn to pronounce
noun
a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively
All of “money ” that now exists is FAKE. It is based on Debt and FAITH.
It is mathematically IMPOSSIBLE to pay off any current sovereign debt and you know it.
Nothing backs “money” up, except faith……faith that it will allow purchase of goods.
When the world figures out “money” has no base …..look out below.
And oh my GOD pleases don’t respond with the “Gold ” shit.
And by the way, don’t think a “jubilee” would not start a massive uprising from intelligent people, old but armed, that have lived their lives within their means, that are not sorry or apologetic that they were not born of colored skin. Don’t piss off the people that just want to be left alone….because when you’re old and don’t have much time left and you don’t give a fuck …………………..
Agreed. People with nothing to lose or everything to lose are fierce
After reading this and just for a lark I checked my credit score…
863…
Stacking silver and good to go for Jubilee..
You Idiot….credit score has 0.00% to do with jubilee…THAT’s the problem.
It was an attempt at sarcasm… THAT’s the point!
I made post as anon by mistake… for some reason I deleted credentials…. anyways I’ll leave to yer imagination which Old Dawg wrote it!
Gold silver will have its day until the gubbermint realizes some avg joes are getting rich and may run for office. They must make gold and silver illegal again at some point to control and maintain power. They always want to control who enters their little club
Yep..
10 years ago, very few people knew what came after a trillion. Now, we regularly see quadrillion used to describe the debt and unfunded liabilities of government. Sen. Dirksen would be aghast at the numbers.
I’m pretty sure ten’s of millions of this mostly illiterate planet of hairless apes knew what comes after a trillion, ten years ago . I’m also pretty sure way less than that knew how FUBAR everything was going to become now, including the vast majority of assholes that are in charge of everything (not the people who actually CONTROL everything)…..if that’s what you mean.
I often wonder if this whole shit show is on purpose
Nothing new that debt exploded beyond a reasonable amount for the Feds, many States, and Individuals. For example NJ, IL, and many other states will never get the debt back to acceptable levels.
Elected city and state leaders are not enforcing laws, or selective enforcement. Ordering police to stand down while standing with the rioters. Sheriffs not enforcing bad edits from state governors.
Excluding Trump, constant foreign wars – can you say 19 years in Afghanistan.
No same person would do all this, but here we are. Exploding debt, lawlessness, and attacking other nations.
I hearken back to Nancy Reagan, just say no (more)
Circuses in lieu of bread, Its all for show and distraction.
It’s been coming for a while:
“The consolidation of the States into one vast empire, sure to be despotic at home and aggressive abroad, will be the certain precursor of ruin which has overwhelmed all that preceded it.”
https://www.azquotes.com/author/8660-Robert_E_Lee