Bill Bonner

We went around the world last week. We wish we could say we learned something. But modern travel has been standardized…and culture and technology have been “globalized”…so that the more you travel the more you feel you never left home.

“How was your trip around the world?” asked our assistant when we got back in the office in Baltimore.

“No problem. Nothing special,” we replied.

How could a trip around the world not be ‘special’? Well, the airports all look alike. The planes are all alike. The restaurants and hotels are all alike, usually international chains. So are the shops…and the products.

You can travel to the far side of the globe…and except for the fact that you can’t quite remember where you are…or what time it is…you might as well have stayed put…

Returning to the US…

We got the big news when we picked up a copy of USA Today in the LA airport.

“Light at the end of the debt tunnel?” asked the headline.

We thought we knew the answer before we started reading.

But the report in USA Today tells the results of a study by McKinsey Global Institute. As a percentage of GDP, the US cut its “private and public debt” by 16 points, since 2008, it says. That puts it tied with South Korea in the debt-cutting derby.

We were only a paragraph into this report when we began to suspect that neither the reporter nor the McKinsey researchers had any idea what was going on.

Sixteen percentage points is not bad. But, as we recall, total debt in the US was around 325% of GDP. Take off 16 points…it’s only a 5% reduction. Besides, US government debt alone INCREASED during this period. The feds are the largest debtors in the world. And they added 66% to their debt over the last three years. It was $9 trillion in ’08. Now it’s $15 trillion. An addition of $6 trillion.

The dots given in the USA Today report don’t connect with the dots we know. It maintains that total debt in the US was 279% of GDP in the second quarter of last year. And it says financial debt fell by less than $2 trillion and household debt by half a trillion. Huh? That doesn’t sound like $6 trillion.

We found a better report in The Financial Times. Gillian Tett explains that while the private sector is de-leveraging, the public sector is borrowing and spending more than ever. She goes on to take issue with McKinsey’s “light at the end of the tunnel” conclusion.

Yes, the private sector is de-leveraging — just as you’d expect. Most of the debt that is being eliminated is mortgage debt and most of it is eliminated by default and foreclosure. At this rate, McKinsey reasons, US consumers “could reach sustainable debt levels in two years or more.”

Hallelujah! We just have to wait until 2014 for a recovery.

But wait a minute. McKinsey’s conclusion was based on the experiences of two Scandinavian countries, Finland and Sweden, in the 1990s. The two countries spent too much. Then, they had to cut back. The private sector went into a slump and the public sector took up the slack. When, after a few years, the private sector had reduced its debt sufficiently, it could resume its former growth…while the government gradually paid down its debts. All was well that ended well. The researchers on the project argue that “today the United States most closely follows this debt-reduction path.”

We don’t think so. We think the US is on a very different path. Finland and Sweden could pull off this ‘rescue’ because conditions were completely different.

First, they have smallish populations with much social and political cohesion.

Second, they were able to get back on the growth path because there was a boom going on almost everywhere else; they exported their way back to financial health.

Third, they didn’t have that much debt in the first place. The Finns and Swedes could add debt without pushing themselves beyond the point of no return.

Not so the US…on all points. America has too much debt. It has no plausible path to recovery. And the feds are adding more debt than it can pay off.

You can do the math yourself, dear reader. With government debt-to-GDP at 100%…and rising…and the shift to short-term financing over the last few years…the feds are extremely vulnerable to an increase in interest rates. A chart in Sylla and Homer’s “A History of Interest Rates” suggests that investors want a real rate of return from government bonds in the 3% to 5% range. That’s what they’ve been getting, according to the chart, all the way back to 1850.

The current CPI-measured rate of inflation is about 2%. This suggests that nominal bond yields should be in the 5% to 7% range. But at 5% interest, the feds would have to pay out about $750 billion in annual interest charges, which is between a third and a quarter of all expected US tax revenues. It’s the equivalent of the military budget, for example.

At 5% interest, bond investors would probably be wondering how the feds could stay in business. Most likely, yields would spiral out of control quickly…forcing the feds to print more money to cover deficits. In a matter of days, the whole jig would be up.

Which is what makes the other big news so puzzling.

“Negative yield fails to deter investor appetite for Tips,” said one headline.

“30-year US loan rate hits nadir,” said another.

What both headlines are telling us is that either we’re wrong about how the world works…or the world isn’t working quite as well as it should be. The second explanation suits us best. The public sector is leveraging up. It is going deeper and deeper into debt. As it adds to the quantity of its debt outstanding, the quality should go down. And the price too. But it’s not. So, either the times are out of joint…or we are.

For now, the weaker US finances get, the more people seem to want to lend it money.

This has to end badly…

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • gman

    oh good grief. it’s simple. infestors buy u.s. debt because it’s the best deal around.

    ever seen the last rat of a dying rat colony? it’s covered with several thousand fleas. that’s what you’re about to see here.

  • Mircea

    Please compare US vs UK situation, Bill:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9031478/America-overcomes-the-debt-crisis-as-Britain-sinks-deeper-into-the-swamp.html

    … of course as gman said… this is the best deal around !! UK and the rest of EU are so much deeper in trouble.

  • kavik

    Forgive ALL debt..just numbers on a piece of paper..jubilee?Why all the unnecessary suffering?

  • Trans Fath

    You didn’t mention that the one thing about traveling around the world is that you meet tons of people who aren’t allowed to even think about coming HERE.

  • Mattress Stuffer

    Can’t say I ever saw a rat colony. Much less a dying one.

    Where the heck do you live, gman? I need to stay clear.

  • 2 funny

    @Mircea

    The US has overcome the debt crisis – at least until the November elections.

  • Andrew B.

    @Mircea: As an EU-basher, Ambrose will pick up on any story that tries to show his alternative Anglo-Saxon model/world is salvaged. Like every man, he needs to feel there’s some obvious pillar of security in his life (otherwise, he’d have to do the hard work that people like us have to do in order to find that security).

  • Rusty Fish

    Mounting debt keeps rising. Paper bonds stacking up to no sky in sight. Shippers are well aware of the likely imminent tumbling of the stack. Why exporting countries’ appetite for US bond still keenly contested? One possible reason could be they have no clue at all where to dispose their babies. And, they are dragged by the nose as their economies surge ahead.

  • gman

    “Can’t say I ever saw a rat colony. Much less a dying one.

    Where the heck do you live, gman? I need to stay clear.”

    stay clear? dude, you’re about to LIVE IT!

  • Bruce Walker

    Talked to a freind the other day who is involved with kiosk vending. No machines, just walk up and help yourself followed by depositing cash in the kitty. How do they keep the food from walking away? Cameras everywhere, so that if shrinkage is suspected, they can pin point which employee is snarfing down the cuisine without paying. Pretty much the whole of the US economy is now based on the idea that cameras will make people behave, not unlike Orwell’s 1984. But eventually, those hired to watch the cameras will come to a point where they don’t much care what they are seeing on their surveillance monitors, and when that point is reached the value of cash, bonds, exchange rates etc etc etc will matter not one iota.

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