In October 2019, the International Monetary Fund downgraded its global growth forecast with a stark warning for 2020 that “Global growth will fall to the lowest levels since 2008’s great financial crisis.” Markets rejoiced and rocketed to new record highs because bad news is good news. Bad news signals more Federal Reserve interest rate cuts are on the way. On Wall Street, corks were popping, and Cristal champagne was flowing like water as the band played Milton Ager’s 1929 classic ‘Happy Days Are Here Again’. Today, I realized the tune was foreshadowing a brutal beginning to 2020.
US Congress recently approved the Coronavirus Aid, Relief and Economic Security, or CARES, legislation, which will provide $2 trillion for bailouts (called direct assistance) and loan guarantees as well as for the purchase of securities and/or stocks either directly from the companies or in the secondary markets. Besides CARES, the Federal Reserve Bank has committed to providing unlimited bailouts.
That’s right, unlimited! And the Feds balance sheet reflects that — it’s surging well over $5 trillion and headed to infinity. Over the past twelve years, policies such as “unlimited bailouts” from our omnipotent global central bankers have destroyed markets’ natural ability to properly value and price every investment product. All these products, across the board, are mispriced. Interest rates are a function of credit risk or how likely a company is to default on its loan obligations. Today, many corporate bond yields are near zero, implying a zero percent chance of default when the chances are much higher.
Interest rates and debt matter. Why? Because, the mandarins’ easy money policies, Zero Interest Rate Policy (ZIRP) and Negative Interest Rate Policy (NIRP), have led to either the misallocation or a dangerous malinvestment of capital, causing productivity growth to plummet. Malinvestment gave birth to a litter of billion-dollar market-capitalization “zombies.” These companies never have and never will make profits. Born in Silicon Valley, they will be buried in Death Valley.
The “official” US Treasury debt is over $23.5 trillion dollars. This debt calculation was before Congress served up the six-trillion-dollar US Treasury/US Federal Reserve Bank pork-barrel spending spree.
It is impossible to pay your way out of debt with borrowed money forever; there are real limits. Debt has real consequences. The more total public and private debt grow, the faster overall liabilities increase, making it likely an unexpected event will accelerate the tipping point, after which economies collapse. Need an example? Just look at what’s happening now. First, we have forty years of fiscal profligacy followed by a currency war and then a trade war. Finally, Covid-19 provided a spark that ignited a petrol-soaked tinder box, which triggered a collapse in asset prices that will kick-start a waterfall of credit defaults across various markets ending with bank failures.
I hate to be a party-pooper, but we are in denial about our “debt problem.” Fiscal gap calculations are the only way to accurately calculate the total debt. For that, one needs to include Congressional Budget Office data points to determine the current present value of the USA’s unfunded liabilities. The use of that data is the only way to model the exact level of the country’s indebtedness. This number is likely to be higher than two hundred and fifty trillion dollars. Shocked? You better be. Let’s face it — the US is bankrupt!
How can the fiscal gap be so HUGE? It’s simple. There are nearly 80 million baby boomers who, when retired, will collect benefits from Social Security, Medicare and Medicaid programs that will, on average, exceed per capita GDP. That money has been spent; it’s all gone. Uncle Sam is running the biggest Ponzi scheme in the world, which will one day stop — but it will stop too late. For now, the printing presses are set on ludicrous speed; bailouts are flowing as the central bank’s mandarins scramble to purchase everything that’s not nailed down. For now, the ride seems smooth as silk, but when, not if, this debt tsunami hits, it’s going to be ugly, really ugly, with massive cuts in boomers’ “guaranteed entitlements,” a dramatic increase in poverty, obscene interest rates and tax hikes followed by a staggering rise in consumer prices.
This is the trajectory the USA is on, and it will happen sooner than most believe. Oh no, is that Sarah Flower Adams’s hymn, ‘Nearer my God to Thee’, I hear playing in the background as our politicians and central banks’ mandarins wildly scramble to “fix” markets?
When policy failure occurs, control of markets is lost, and chaos is the result. It looks more like they are rearranging the deck chairs on the Titanic than rigging markets! Do not wonder what this tune is foreshadowing, quickly get to safety and shelter in place.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.