Saturday, January 30, 2016

Epic Global Debt Defaults

by JASmius

It's funny how this subject makes so much no-brainer sense on an individual level but governments make such a conundrumical mystery out of it.  It's the simplest of the simple: If you live way beyond your means, you will go into debt, and if you don't start living well within your means and discharge that debt, but instead keep piling it up, the less likely it is that you ever will pay it off.  That is what is called a default.

When individuals do so, they go into some form of bankruptcy; when a government does so, and it's a penny-ante one like Greece, their creditors just roll over their debt and let it keep piling up.  When it is the entire First World, let's just say that the Sweet Meteor of Death can't get here fast enough:

A former central bank chief economist warns that a deluge of global debt defaults will endanger social and political stability. [emphasis added]

That's a sinus-clearing candor for a lede, isn't it?

"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," William White, chairman of the Organization for Economic Co-operation and Development's review committee, recently told the London Telegraph’s Ambrose Evans-Pritchard.

i.e. Print towering mountains of worthless currency and use them to monetize equally towering mountains of additional debt that no actual human being would buy because actual human beings expect risk and return to be directly proportional.  Don't solve the problem by cutting taxes and spending and drastically downsizing the size of government but simply cover it with an inflationary fever and another huge bubble that will inevitably burst like the last one did.  Kick the can down the road....until you run out of road and you have to mortgage your foot.

There is a term for what's coming: "day of reckoning".  And it's always worse in direct proportion to how long and far it's been kicked down the road.

"Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief," said White, the former chief economist of the Bank for International Settlements (BIS).

"It was always dangerous to rely on central banks to sort out a solvency problem ... It is a recipe for disorder, and now we are hitting the limit," he said.

"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something," he told the Telegraph just before the recent World Economic Forum in Davos.

Economic stimulus from quantitative easing and zero rates after the last recession inflated credit bubbles and sparked a surge in dollar borrowing that was hard to control, White said. [emphasis added]

If memory serves, it was global economic instability that led to the last global war.  Draconian Treaty of Versailles reparations imposed on Germany led to the Weimar hyperinflation, with the 1929 stock market crash only being held off by the laissez faire capitalist economic policies of U.S. President Calvin Coolidge.  But it was the statist/socialist "remedies" to that financial crisis that collapsed the global economy in what I have always referred to as The Great Trade War, and all of you know as The Great Depression.  First World countries raised protectionist trade barriers against each other, the global economy collapsed, it was "every country for itself," and some, like Germany and Japan, went in "unfortunate" directions.

The last decade hasn't matched that pattern completely, though it's about to if Donald "45% tariffs" Trump gets his way.  Instead of immediately going to economic war with each other, the First World....kicked the can down the road by making the problems that brought about the Panic of 2008 even worse.  And now when the defaults come, the outrage and anger of an already outraged and angry world will stimulate the madness logarithmically - The European Union is already perhaps weeks from collapse, the Sino-Russian Axis is girding and building up for war (and remember that with the collapse of oil prices, the Russians are down to a year and a half of foreign currency), and the United States is on the precipice of disaster economically, militarily, and jihadistically, with Barack Obama poised to exploit the crisis to complete his "fundamental transformation" mission.

Remember a month ago when I said that 2016 will be the most cataclysmic year in American history?  That piper is coming to be paid, and he's not going to take no for an answer.

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