John Mauldin has an interesting piece out that pretty much is inline with my thoughts on how the global economy is heading for the tank. This GFC will be worse than the first although different in its form.
We are drowning in more debt than we were at the time of GFC. It is chronically bad. Mauldin mentioned.
“So, China has problems. Their debt has just ballooned. Depending on whom you want to listen to, 40% to 80% of the last $6 trillion the Chinese borrowed went to pay interest on the debt they already had. In less polite circles we would call that a Ponzi scheme….Now, they do have a lot of money. Yes. Can they print more? Yes. Do they want to have a New Silk Road? Do they want to be the world’s reserve currency? Do they want to be the most powerful country in the world? Of course they do…The Chinese see themselves rebuilding their own ancient empire. You don’t do that on the back of a weak currency – but then we come to the problem of a strong Chinese currency. Oh, by the way, their debt service is up to 30% of GDP, but that’s a detail that is mostly overlooked.”
Emerging markets is a massive elephant in the room and we will see their currencies get sold off heavily.
“Emerging markets are the fourth weak link. How do they dig out? They borrowed $10 trillion in dollars that they have to pay back from income earned in their local currencies. Dollar valuation can create serious problems for their debt. And it happens at the worst possible time, during a crisis or global recession when the US dollar is the cleanest dirty shirt in the closet. The value of the dollar will rise at precisely the time when the profits and tax revenues of the emerging-market corporations and countries will fall.”
The US is heading toward $30 trillion of debt and you can bet the Fed has to move to negative rates too.
The folly of negative rates is simple. The retiring population are now finding it harder to get stable income products without going further up the risk chain both in term and product. Obviously the longer the term of the bond, the worse it will be for duration. People talk of debt monetisation and writing it all off but the confidence of the financial system cannot stay alive if those that hold the debt get wiped out. It may still happen but anyone thinking it would be a good thing invite moral hazard of the worst kind.
I completely agree that savers are being buried. Any inflation has been in asset markets and this comment backs up what I have been saying about the person on the street is still being crushed. 47% of Americans, according to the Fed, can’t raise $400 in emergency cash without selling something. I believe Brexit was also a function of the sharp rise in poverty. The rise of Trump is also a function of the anti-establishment movement.
“I am afraid that the one thing we can count on is that whatever policy the Fed chooses will be the wrong policy. They believe they can set the price of money and thereby balance demand and supply. Can anybody name me one instance where fixed prices worked in the real world, creating a paradise where supply and demand were balanced? They have manipulated [I keep making this claim] the system and set the wrong price of money. They have created a world where savers are penalized, companies are paid to buy their competition rather than compete, and only the participants on Wall Street are rewarded with appreciation of their assets. My Austrian and monetarist economics school friends, who predicted inflation from all the QE that we saw, have actually seen inflation – it has just been in asset prices that benefited Wall Street and not Main Street…And it’s not just a US problem. It’s Europe and Japan and anywhere in the world where interest rates and savers have been repressed.”