Guest Post by Jim Rickards
With debt levels reaching all-time highs in major developed and developing economies, and with debt-to-GDP ratios also in record territory (not including contingent liabilities such as Social Security, health care and other entitlements, which make matters worse), it seems time to consider just how nations will deal with this problem.
The debt crisis may not be imminent, but it is unavoidable. When it happens, it may present the greatest financial disaster of all time. It’s never too soon for investors to consider the fallout.
When you issue debt in a currency you print, there’s no need for default in the sense of non-payment.
You can just have the central bank buy the debt (by printing money). This is the situation today in the U.S., Japan, the U.K. and the European Monetary Union (the countries that use the euro). They all have huge debt burdens, but they all have central banks that can simply buy the debt by printing money to avoid default.
Non-Payment Is Not the Issue
There are many bad consequences to printing money and storing up debt on central bank balance sheets, but non-payment of debt is not one of them. This is the mantra of the Modern Monetary Theorists (MMT) and their thought leader Stephanie Kelton.
In my view, MMT is garbage as economic policy, but the no-default tenet is valid. George Soros says the same thing.
That said, we are well past the point where the debt can be managed with real growth. That threshold is about a 90% debt-to-GDP ratio. A 60% debt-to-GDP ratio is even more comfortable and can be managed.
Unfortunately, the major reserve currency economies are all well past the 90% ratio as are those of many smaller countries. The U.S. ratio is 134%, an all-time high. The U.K. ratio is 102%. France is 111%. Spain is 112%. Italy is 145%.
China reports a figure of 77% but this is highly misleading because it ignores provincial debt for which Beijing is ultimately responsible. China’s actual figure is over 200% when provisional debt is included.
The champion debtor is Japan at 261%. The only major economy with a halfway respectable ratio is Germany at 67%. It’s Germany’s misfortune that they are probably responsible for the rest of Europe through the ECB Target2 system.
All these countries are headed for default. But we must consider the different ways to conduct a default.
There are three basic ways to default: non-payment, inflation and debt restructuring. You can take non-payment off the table for the reason mentioned above — you can always just print the money.
The same goes for restructuring. Inflation is clearly the best way to default. You pay back the money in nominal terms, but it’s worth very little in real terms. The creditor loses and the debtor countries win.
Nice and Easy Does It
The key to inflating away the real value of debt is to go slowly. It’s like stealing money from your mother’s purse. If she has $50 and you take $40, she’ll notice. If you take one dollar, she won’t notice. But a dollar stolen every day adds up over time.
This is what the U.S. did from 1945–1980. At the end of World War II, the U.S. debt-to-GDP ratio was 120% (about where it is now). By 1980, the ratio was 30%, which is entirely manageable.
Of course, nominal debt and GDP soared, but nominal GDP went up faster than nominal debt, so the ratio fell. If you can keep inflation around 3% and interest rates around 2% and exert fiscal discipline (which we did under Eisenhower, Kennedy, Nixon and Ford), the nominal GDP will grow faster than nominal debt (due to the Fed capping rates).
If you improve the ratio by, say, 2% per year and keep it up for 35 years (1945–1980), you can cut the ratio by 70%. That’s what we did.
The key was to do it slowly (like stealing from your mom’s purse). Almost no one noticed the decline in the real value of money until we got to the blow-off stage (1978–1981). But by then it was mission accomplished.
So there are two ways to deal with excessive debt: fiscal discipline and inflation. From 1945–1980, the U.S. did just that. If you run inflation at 3% and interest rates are 2%, you melt the real value of debt. If you exert fiscal discipline relative to GDP, you decrease the nominal debt-to-GDP ratio.
We did both.
The reason the debt-to-GDP ratio is back up to 134% is that Bush45, Obama, Trump and Biden ignored the formula. Since 2000, fiscal policy has been reckless so the formula doesn’t work. The problem isn’t really “money printing” (most of the money the Fed prints just comes back to the Fed as excess reserves, so it doesn’t do anything in the real economy).
The problem is that nominal debt is going up faster than nominal GDP, so the debt-to-GDP ratio goes up. This dynamic will be made much worse by the huge increase in interest rates over the past 18 months.
You can’t borrow your way out of a debt crisis. We have also been unable to generate much inflation. Inflation ran below 2% for almost all of the 2009–2019 recovery.
Japan Writ Large
Looking at the global picture, it’s important to understand that Japan is just a bigger version of the U.S. They don’t have fiscal discipline and they can’t get inflation to save their lives. The only way out for Japan is hyperinflation, which will come but not yet.
Japan can probably keep the debt game going for a while. The crash will come when the currency collapses. When I started in banking, USD/JPY was 400. Those were the days!
A debt crisis is on the way. Something big and stupid (in the words of the brilliant analyst Stephanie Pomboy) is coming from policymakers to address the issue. But the solution won’t be a policy and it won’t be a plan. A crisis will just happen almost overnight and seem to come from nowhere.
But it will come.
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Our bottomless swamp of the regulatory capture. Pass a law for your scheme to get the government to fund it.
“In democracies, this sluicing of predatory gains to the state takes the form of campaign contributions to politicians and lavish legal lobbying via absurdly bloated speaking fees, private junkets on billionaire’s boats, seats on philanthro-capitalist foundations, and so on.”
https://charleshughsmith.substack.com/p/the-bottomless-swamp-of-regulatory?
Well, violent and stupid is already here.
more on the way.
CBDCs
The sooner YOU quit shoveling money to democrats……….the sooner this jackoof niggerhole collapses.
Lose the I-phone.
Lose the 26% CC.
Lose the income tax.
Lose the insurance.
Lots of things YOU can do to help the collapse along.
DO IT !!!!!!!!!!!!!!!!!!!!
they do not get their main funding from “you”. they get it from the banks who get it from the fed who simply prints it up.
Printing is long over…it’s just been the DEFAULT RISK inverted pyramid fiat counterfeiting key board bull shit…and that game is almost played out…real money musical chairs…no chairs for the inverted masses of asses – who don’t even know they are inverted…just the waiting ‘Greater Depression’ bankrupt floor.
Same old game…by the same old Banksters, same old masses of asses…only this time they are soft, spoiled, poisoned, and jammed up together in cities.
It will not go well for most.
The collapse? NO NEED to ‘Help’. Could NOT stop it if i was/were so inclined.
WHEN the phone becomes a liability? Gone/Done, EZPZ.
NO CC debt. Kinda hard to avoid the rest Ya mentioned, realistically. No need to pay more than required.
However, & it’s rampant speculation until push -comes-to-shove…when the iPhone goes, the rest will be moot.
“She served as an advisor to Bernie Sanders’s 2016 presidential campaign”
More than enough. INFO. Really.
While this plays out , and the average Joe gets squeezed and the free stuff given out in the forbidden zones becomes less and less ” Crime Inflation ” happens. Not just an across the board increase in all crime, but a growing sense of entitlement to TAKE anything or do anything and expect to do so without penalty or consequences.
Liberal DA’s / defund police measures and throwing good cops under the bus when they did everything ‘ by the book ‘ , only adds to crime inflation. Mad Max was a PREVIEW.
Case in point:
Seattle Thug Stunned When Judge Refuses to Release Him for Violent Robbery Charges: ‘I Can’t Get House Arrest?’
“You let people out who shoot at people – get house arrest.”
“Well I’m not letting you out,” the judge responds.”
slaynews.com/news/seattle-thug-stunned-judge-refuses-release-him-violent-robbery-house-arrest/
“Well I’m not letting you out.”
can’t let them stay.
j. fetterman on sick leave.? Again?
Ask Joseph how he and his family fleeced Egypt.
They are still running the exact same scams.
The Pandemic Show was a modern retelling of the Great Statue set up for the people to “worship” where Shadrack and pals were tested.
I can almost guarantee there was an inoculation component to the command. Those who submitted? Failed their test also.
“fleeced Egypt”
absolutely the case. exodus says “another pharoah arose who did not know joseph”, but it’s more likely that a pharoah arose who knew exactly who and what joseph was and what he did to egypt.
also note: “god put good will in the hearts of the egyptians towards israel. thus israel plundered the egyptians.” exactly how they work today.
The bible story of “father abraham” is a story of a man who used usury and deception to cheat and harm all comers.
Seriously, Abram, whose faith was so great TWICE SCAMMED foreigners out of wealth by lying about his wife/sister.
Or like when his sons made the deal after their sister played the whore, and then killed an entire tribe over sis whore lies.
We in the USSA are in for a real shock. The least we can expect is a gigantic reduction in our standard of living. I fear that it can be much much worse and it is not far off. Rickards may be right but Americans don’t hsave the stomach to take the cure.
“The debt crisis may not be imminent, but it is unavoidable.”
when I was in high school a congressman came and gave a lecture on how the impending debt load of $1 trillion was unsustainable and would precipitate a crisis.
90% of all dollars (physical and digital) are not in the united states or under united states control. the dollar is effectively a world currency and circumstances in the united states have only proportional effect on its value. the printing probably can go on for many years more.
I disagree. Depends on the meaning of “many”. The debt is going parabolic and the Fed only controls the short end. As old Treasury debt rolls over, the aggregate carrying cost will hit 5% or higher. Very soon, interest on the debt will exceed receipts from all federal individual income tax. The government has another couple trillion of income per year from other sources – tariffs, fees, excise taxes, but they can’t run the entire government on those. Our political system cannot produce a solution. We’re running out of runway.
Big and stupid can’t compare to the blackest evil imaginable , and Deep Shekels runs it all.
” Something BIG and stupid is coming ” …… even if we must create the problem ourselves.
Jellyfish.news
Have you heard about the agreement that global leaders adopted at the United Nations during the “2023 SDG Summit” that was held earlier this week?
17 Sustainable Development Goals, you can find them right here. They are essentially a blueprint for how the globalists want the world to be run.
“On that page the UN openly admits that one of the purposes of “the Summit of the Future” is to “put in place a stronger international response playbook for complex global shocks”
https://www.un.org/en/common-agenda/summit-of-the-future
Gee whiz Wally , what kind of ‘ Global Shocks ‘ could they mean ? SLAY news , today.
“The globalist World Health Organization (WHO) has started warning that the “meat supply” will trigger the “next pandemic” by causing deadly pathogens to jump from animals to humans.
The plan will allow the WHO to centralize power and make decisions relating to diet, agriculture and livestock farming, environmental pollution, movement of populations, healthcare, and much more, for the entire world, overriding the rights of citizens and the laws of sovereign nations.”
BTW – Its not just 17 goals , it is a much faster TIMELINE they want.
Gee whiz Wally? Does Beaver understand.
Sars-2-nCoV-19 was BIG & Stupid Pentagon Fort Detrick U.S. Army
incompetence run amok as leverage for BIG Stupid Pharma to get
rich off of the Wealth Effect applied to financialized gains of the elite
shareholders of stock.
Stock market largesse was predicatable since Clinton repealed Glass-Steagall
Act in 1999. Now, instead of betting large on oil reserves the elite bet larger
on BIG Stupid Pharma profits. The return is better than oil, too.
MOU
You forgot your usual full retard final paragraph.
The Federal Reserve Act was not possible until the People of the “several States” and the “several States” voted to dissolve the Constitution Contract at the passage of the 17th Amendment.
The term “several States” in in the Constitution.
The word”several” in lower case was omitted in the 17th Amendment.
This allowed the Government to change the meaning of the word/Term “State”.
YES!!! Once a Contract is dissolved, it is as if there never was a contract.
The FED Act was passed just a few months after the Repeal of the Constitution in 1913.
I do not care what you beLIEve. Those are the FACTS.
Remember, there is ALWAYS a LIE in the middle of BeLIEF and BeLIEve.