By Steve Saville
Most warnings about large increases in government indebtedness revolve around future repayment obligations. For example, there is the concern that greatly increasing the government debt in the present will necessitate much higher taxes in the future. For another example, there is the concern that if the debt load is cumbersome at a time of very low interest rates, then as interest rates rise the interest expense will come to dominate the budget and lead to an upward debt spiral as more money is borrowed to pay the interest on earlier debt. Although these concerns are valid they miss two critical points, including the main problem with government borrowing.
The first of the missed points is that there is no intention to repay the debt or even to reduce the total amount of debt. This is one way that government debt is very different to private debt. Nobody would ever lend money to a private organisation unless there was a good reason to believe that the debt eventually would be repaid, but when it comes to the government the plan is for the total debt to grow indefinitely. It will grow faster during some periods than other periods, but it will always grow. Therefore, it makes no sense to agonise over how the debt will be repaid. It simply won’t be repaid or even reduced.
Continue reading The Cost of Government Debt is Immediate
By Callum Thomas
One of my favorite data series is the Fed senior loan officer opinion survey. Hidden amongst the various questions and series of the report are some really useful signals and insights on both the US economy and financial markets. Today we look specifically at commercial and industrial lending standards (the red line in the chart), and most importantly, how it seems to line up with commercial and industrial loan growth.
It makes economic sense that the two would move in line with each other e.g. looser lending standards are likely to be followed by increased uptake of loans… also, loan growth is likely to be softer when the economy is softening and spurring credit officers to tighten up standards. So with lending standards easing further in the latest survey results, the outlook is for a surge in credit growth. This interestingly enough lines up with our scenario of a US investment boom.
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By Keith Weiner
Let’s return to our ongoing series on the destruction of capital, and how to identify the signs. Steve Saville posted a thoughtful article this week entitled The “Productivity of Debt” Myth. His article provides a good opportunity to add some additional thoughts.
We have written quite a lot on this topic. Indeed, we have a landing page for marginal productivity of debt (MPoD) with four articles so far. Few economists touch this topic, perhaps because MPoD shows that our monetary system is failing. We encourage you to do a Google search, and you will see scant mention other than articles by Keith and Monetary Metals. This is tragic. Every monetary economist should be bellowing from the rooftops about the falling marginal productivity of debt!
So when Lacy Hunt wrote in the Hoisington quarterly letter about Diminishing Returns – Consequences of Excess Debt (p. 4), several readers forwarded the link to us. And this week Steve Saville wrote a response to Lacy’s discussion.
We have our own concerns with Lacy’s approach. One is his statement:
Continue reading A Dire Warning, Report 29 July 2018
By Steve Saville
Page 4 in Hoisington Investment Management’s latest Quarterly Review and Outlook contains a discussion about the falling productivity of debt problem. According to Hoisington and many other analysts, the problem is encapsulated by the falling trend in the amount of GDP generated by each additional dollar of debt, or, looking from a different angle, by the rising trend in the amount of additional debt required to generate an additional unit of GDP. However, there are some serious flaws in the “Productivity of Debt” concept.
There are three big problems with the whole “it takes X$ of debt to generate Y$ of GDP” concept, the first being that GDP is not a good indicator of the economy’s size or progress.
Continue reading The “Productivity of Debt” Myth
By Anthony B. Sanders
Corporate Debt To GDP May Be At Credit Cycle High
One of the effects of The Federal Reserve’s zero interest policy (ZIRP) was the massive expansion of both consumer and corporate debt. The US may be at a credit cycle peak (Corporate Debt-to-GDP).
Which brings me to the UST 10Y-2Y slope, plummeting towards inversion (now at 24.5 BPS). The last time we saw the 10Y-2Y slope so flat was in early August 2007, 4 months before The Great Recession began.
Continue reading Inversion Alert! Treasury Slope Plummeting Towards 0 BPS
By Doug Noland
I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty “inside the beltway”. These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.
The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at (“Terminal Phase”) double-digit rates (11.1% y-o-y).
Global debt growth accelerated during the first quarter to $8.0 Trillion – and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It’s been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.
Continue reading $247 Trillion and (Rapidly) Counting
By Kevin Muir
[biiwii comment: not only is Keith my favorite git fiddler of all time, but he’s one of my favorite people. Bravo Macro Tourist; you’ve outdone yourself!]
I am going to break from regular market commentary to step back and think about the big picture as it relates to debt and inflation. Let’s call it philosophical Friday. But don’t worry, there will be no bearded left-wing rants. This will definitely be a market-based exploration of the bigger forces that affect our economy.
One of the greatest debates within the financial community centres around debt and its effect on inflation and economic prosperity. The common narrative is that government deficits (and the ensuing debt) are bad. It steals from future generations and merely brings forward future consumption. In the long run, it creates distortions, and the quicker we return to balancing our books, the better off we will all be.
Continue reading High Debt Levels Rant
By David Stockman
In Part 1 we made it clear that the Donald is right about the horrific results of US trade since the 1970s, and that the Keynesian “free traders” of both the saltwater (Harvard) and freshwater (Chicago) schools of monetary central planning have their heads buried far deeper in the sand than does even the orange comb-over with his bombastic affection for 17th century mercantilism.
The fact is, you do not get an $810 billion trade deficit and a 66% ratio of exports ($1.55 trillion) to imports ($2.36 trillion), as the US did in 2017, on a level playing field. And most especially, an honest free market would never generate an unbroken and deepening string of trade deficits over the last 43 years running, which cumulate to the staggering sum of $15 trillion.
Better than anything else, those baleful trade numbers explain why industrial America has been hollowed-out and off-shored, and why vast stretches of Flyover America have been left to flounder in economic malaise and decline.
But two things are absolutely clear about the “why” of this $15 trillion calamity. To wit, it was not caused by some mysterious loss of capitalist enterprise and energy on America’s main street economy since 1975. Nor was it caused—c0ntrary to the Donald’s simple-minded blather—by bad trade deals and stupid people at the USTR and Commerce Department.
Continue reading It’s Not Bad Trade Deals–It’s Bad Money, Part 2
By David Stockman
The heart of the Fed’s monetary central planning regime is the falsification of financial asset prices. At the end of the day, however, that extracts a huge price in terms of diminished main street prosperity and dangerous financial system instability.
Of course, they are pleased to describe this in more antiseptic terms such as financial accommodation or shifting risk and term premia. For example, when they employ QE to suppress the yield on the 10-year UST (i.e. reduce the term premium), the aim is to lower mortgage rates and thereby stimulate higher levels of housing construction.
Likewise, the Fed heads also claim that another reason for suppressing the risk free rate on US Treasuries via QE was to induce investors to move further out the risk curve into corporates and even junk, thereby purportedly boosting availability and reducing the carry cost of debt financed corporate investments in plant, equipment and technology.
Continue reading The Albatross Of Debt: Why The Fed’s Wall Street Based Steering Gear No Longer Drives The Main Street Jalopy, Part 6
By David Stockman
The Donald seems to think that the 37% gain in the stock market between election day and the January 26th high was all about him, and in one sense that’s true.
Donald Trump is all about delusional and so are the casino punters. They keep buying what the robo-machines are buying, which, in turn, persist in feasting on the dip because it’s there and because it’s worked like a charm for nine years running.
So doing, the punters have become downright reckless. After all, the market was already sky high last January—-trading at 23X earnings on the S&P 500 and resting precariously on a record $554 billion of margin debt . Yet in order to load up on even more of these ultra risky shares, punters have since added $112 billion to their already staggering margin accounts, thereby helping to propel the S&P index to a truly ludicrous 27X by the end of January 2o18.
Continue reading The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 4
By David Stockman
Here’s why our mountainous $67 trillion of public and private debt matters. To wit, it has caused the historic relationship between trends on main street and Wall Street to go absolutely haywire.
A week or so back, they reported January industrial production at 107.24, which was only a tad higher than it had been three years earlier in November 2014 (106.61), and just 1.8% above where it had been at the pre-crisis peak way back in November 2007 (105.33). If you cotton to CAGRs, that’s a microscopic 0.18% per annum growth rate over the course of a full decade, and during the third longest business cycle expansion in history, to boot.
By contrast, the S&P 500 at the January 26th peak (2873) was up by 84% from its November 2007 level (1560). And let us make haste to squeeze out the inflation component so as to conform on an apples-to-apples basis that sizzling gain with the volume-driven industrial production index. As it happened, the GDP deflator rose by 17% over the same period, so in real terms the S&P 500 is up by 58%.
And that’s not from the horrid March 2009 bottom, but from the tippy-top of the “goldilocks” stock market fantasy a year before the roof fell in. Accordingly, the question at hand already has the benefit of the doubt factored in: Namely, how can the stock market rise by 58% from the dubious pre-crisis high, while the industrial economy has only expanded by 1.8%?
Continue reading The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 3
By David Stockman
In Part 1 we postulated that the chart below embodies nothing less than the nightmare that will be coming to Wall Street right soon. It means, in effect, that you can climb the financial tiger’s back for an extended time, but when you reach the mane its generally impossible to get off alive.
Needless to say, we have reached the mane. What drove the US economy for the past three decades was debt expansion—-private and public— at rates far faster than GDP growth. But that entailed a steady ratcheting up of the national leverage ratio until we hit what amounts to the top of the tiger’s back—that is, Peak Debt at 3.5X national income.
Continue reading The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 2