Bill Bonner

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 Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

Recent Articles

Don’t Blame Obama (He Has No Power)

Chris Campbell

The Americans who voted for Obama were expecting some big changes. But, six years later, the government he acquired has only spied harder, the drones have flown lower, and the weapons have gotten bigger. But don’t blame Obama. Read on…


Your Personal Gold Standard

James Rickards

All paper currency has a shelf life. It could be 5 years or 500 years, but at some point, the value of any paper currency eventually reaches zero. That's why, for centuries, people have turned to one shiny metal to safeguard their personal store of wealth. And, as Jim Rickards explains, you still have that option. Read on...


October Plays Another Dirty Trick – Here’s What You Do Now

Greg Guenthner

Bad things have a funny way of happening in October. Remember October 1929? It raised the curtain on the Great Depression. Or maybe you recall the infamous Black Monday crash in 1987. The Dow tumbled 22%— the largest single day loss ever. Guess what? That was in October, too. The 19th to be exact. Notice a trend here? Fast forward to this October... You know what happened this month. And if all that wild market action kneeds you in the gut, here’s what you should do now. Greg Guenthner explains…


In the Downdraft of Hormegeddon

Bill Bonner

The economist Milton Friedman didn’t go far enough when he said, “Concentrated power is not rendered harmless by the good intentions of those who create it.” Oftentimes, that power is rendered more harmful -- to the point of Hormegeddon -- the better the intentions behind it. In today's essay, Bill Bonner highlights the conditions necessary for popular delusions and the disasters they lead to. Read on...


Addison Wiggin
Health Care Costs: Still the Pig in the Federal Python

Addison Wiggin

Right now, health care makes up about 25% of the federal budget. A scary statistic to be sure... But here's an even scarier one: health care's portion of the federal budget doubles roughly every 20 years. Yikes! Addison Wiggin explains why this is and what needs to change to prevent health care from taking up half the federal budget. Read on...