The subject is debt; it needs to go away.
Debt was the market’s bête noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue.
In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout…but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers’ demands.
Debt is underrated. For one thing, it is more reliable than asset values. The crisis of ’07-’09 wiped out about a third of the world’s equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact. In terms of the cash flow needed to support it, debt actually grew larger.
Central planners can make a recession appear to go away. With enough hot money, they might warm up asset prices or soothe the swelling unemployment rate. But debt doesn’t cooperate. Neither monetary policy nor fiscal policy will make it go away. Debt demands honesty. The debtor has to fess up, admitting that he is a fool or a knave. Either he owns up to his mistake and defaults…or he cheats.
“With all due respect, US policy is clueless,” said German Finance Minister Wolfgang Schauble. “It’s not that the Americans haven’t pumped enough liquidity into the market. Now to say let’s pump more into the market is not going to solve their problem.”
The English speakers conveniently misunderstand the debt problem. The authorities worked hard not to see the debt crisis coming. They made their careers and reputations by not understanding it. Thousands of them work for governments and central banks…if they caught on to the problem now, they’d probably have to resign.
They pretend that the problem is a lack of “liquidity.” Or a failure of capitalism. Or that the regulators dropped the ball. It is none of those things. Each of those problems can be “solved.” Short liquidity? The feds can add some; as much as you want. Did capitalism lose its way? No problem again, the authorities will apply more central planning. Not enough regulation? Are you kidding; adding regulation is what they do best.
The real problem is debt. In Ireland, for example, investors, householders and bankers all lost their heads in the bubble era. Your editor bought a house in Ireland in 2006. He knew perfectly well it was overpriced. He had walked the streets of Dublin. He had seen storefronts offering property, not just in Dublin…but in Dubrovnik. He had heard people say that “property never goes down.”
Now his house is worth about half what he paid for it – if he could find a buyer. There is no reason to expect that house to ever recover – at least in real terms – to the level it was 3 years ago. That wealth has disappeared. Along with it went the banks’ collateral and the value of the debt it backed. It is all dead. It is no more. It has ceased to be. It is past tense. But, rather than let the banks’ bondholders take the losses they deserved – in rushed the financial authorities with guarantees and more credit. Ireland’s deficit rose to a staggering 30% of GDP. Its national debt will rise from 100% of GDP to 120%.
Meanwhile, California is moving closer to bankruptcy – and borrowing more too. The state is $25 billion in the hole, with no plausible plan to get out. The Milken Institute says unfunded pension liabilities will rise to $10,000 per capita by 2013 – the equivalent of an extra $40,000 mortgage for every household. Like Ireland, California cannot pay the debts it has incurred. The federal government will offer a bailout…but with strings attached.
And soon, the bailers will be in trouble too. According to The Wall Street Journal, a combination of 15 major national governments will have to borrow a total of more than $10 trillion next year, to finance deficits and repay maturing bonds. That’s 27% of their total economic output. It also is equal to about twice the entire world’s annual savings.
The authorities warn about the risk of “contagion.” They sweat to “calm” the markets. But why bother? Debt of this magnitude cannot be repaid. It has gone bad. At least give it a decent burial.
Bill Bonnerfor The Daily Reckoning
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 Reckoning. Dice 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.
My fathers advice to me was, “Only borrow money to make money!” Sound, prudent advice. The government borrows, taxes and prints currency but makes nothing to make money. How-else can this possibly end?
The only remaining question at this point: Will the tsunami resulting from the simultaneous collapse of bonds all around the world, be of suffecient magnitude to destroy the entire concept of dual-entry book keeping? Since all the books are cooked to a crisp, what’s the point in keeping book cooking receipes around?
Bill, I ‘ve being following you for ages now and I was always wondering when you get arounbd to writing about Ireland. Well now we are here and you don’t disappoint as usual. One point though if you think US public sector workers are over piad fat cats they are nothing compared to Ireland’s. Our prime minister has a bigger salary than Barck Obama (Euro 220,000). The CEO of the nationalised electicity company pays himself (Euro 750,000). Teachers, nurses, police are paid far superior sums than workers in other European countries. Our current budget defecit is 20 billion and yet The Govt insists that public sector pay remains untouched!
To paraphrase star trek’s scotty
“I canna take anymore captain”
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You get soooo close at times, then you refuse to close the circle.
The reason the debt remains is that default is NOT permitted by the owners of the big banks, who also own the governments of the US and EU.
No…no way those precious few will ever
take a haircut.
Bill Bonner never seems to connect the logical dots. This is a political problem not an economic one.
The governments of these respective entities have been hijacked by a fairly
small group of ultra wealthy who own the banks…that own the governments.
Come on Bill… make that final conclusion and connect with reality.
An enlarged public sector is but a symptom of a skewed system. The preponderance of debt amoung
the masses merely stems from attempting to keep their heads above water these last 30-40 years as wealth got increasingly redistributed to that top 1/10 of one percent.
The accrued debt choking everything is the vampire squid et al doings as the fire economy rose to engulf the western world. Short term profits at any cost
became the religion of the times.
Yes, politicians buying votes account for much of the debt, but behind it, at the nexus of this evil…lie the big banks.
Far as I can tell, the big banks will let
fight tooth and nail to the bitter end
before relinquishing their role of skimming a cut off of every financial transaction in society.
THE PROBLEM LIES WITH THE EXISTENCE OF THE BIG BANKS/CENTRAL BANKS.
Seamus, very funny!
Just out of curiosity, why aren’t the PIIGS countries doing QE programs of their own to fund their shortfalls?
Is the US Fed the only central bank that can do this? Is the US special in this regard?
The PIIGS countries don’t control their currency, the Euro. The ECB controls the supply of Euro’s. Here in the US, it’s like asking why California can’t print/QE more USD to help the Californian economy. They don’t have that power any more.
This is very idealogical, and the process at work here seems to be: throw out a few frameworks, and believe in the one that makes you feel the best, or the most secure, or the most angry, or something. It’s not even structured as an argument. It’s a blob of carnie jibes and populist sophistry.
There’s another approach to mitigating unwanted market behaviour. We can study past events quantitatively (that means with numbers and graphs, not aphorisms), and build models that we test against their ability to predict past events. Then we can use these models to predict the outcomes of various policies, and choose a policy with a good outcome. This process is not idealogical, so it doesn’t revolve around words like “honesty” and “fess up” and “lost their heads” much less these weird strained analogies like “search party”.
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