Michael Hudson:
The Coming Savings Writedowns
As
President Obama showed, banks and bondholders can be bailed out by new Federal
Reserve money creation. That is what the $4.6 trillion in Quantitative Easing
since 2008 was all about. The Fed has spent the last few years supporting stock
market prices (and holding down gold prices) by manipulating the forward option
markets
DYI: Trump administration continues gold price suppression.
But
this artificial life support to keep the debt overhead afloat is nearing the
reality of the debt wall. The European Central Bank has almost run out of
available euro-bonds to buy. The new fallback position to keep the increasingly
zombified U.S. and Eurozone financial markets afloat is to experiment with
negative interest rates.
DYI: Though not part of DYI’s model portfolio as
long term bonds have blasted past their historical low yields. However to be honest with my readers I do
hold for my speculative monies in long term U.S. Treasuries in anticipation of
lower if not negative rates!
Governments
have long followed a basic guideline when faced with a need to devalue their
currencies (for instance, as the dollar was devalued against gold in 1933).
Nothing is worse for a politician or central banker than to be overly shy when
it comes to devaluation. The motto is, “Always depreciate to access.” That
means at least 25 percent, often a third when a basic structural adjustment is
needed.
DYI: Depreciation will be over many years in an
attempt to stretch out the pain that our citizens will have to bear. Many of our countrymen have figured this out
which is why the U.S. Mint regularly runs out of U.S. Gold and Silver
Eagles. These well informed families are
prepared for years of elevated inflation.
Check into the Chapwood Index inflation (depending on personal cost) is
running from 7% to 11%.
To prevent this rising indebtedness from
tearing their realms apart, rulers started their first full year on the throne
by clearing away the overhang of arrears that had been accruing on personal and
agrarian debts. The aim was to restore an idealized “mother condition” in which
bondservants were liberated, able to start with a Clean Slate with their
self-support land returned to them, in balance with regard to their income and
outgo.
An analogy would be the idyllic condition
that the U.S. economy would achieve if we could restore the financial situation
that existed in 1945. The end of World War II left an economy in which most
families were almost debt-free. Families and businesses and were rife with
cash, as there had not been much opportunity to spend during the wartime years,
and the Great Depression had wiped out substantial debts. Returning soldiers
were able to start families and buy homes by committing to pay only 25 percent
of their income for 30 years. This era was as close as the United States came
to a Clean Slate. Today it seems an unrecoverable golden age – as the ancient
Near East seemed to be to debt-wracked imperial Rome.
Fast forward to today: Indebted students
graduate with an obligation to pay so much education debt that they cannot
qualify for mortgages to buy homes of their own. Marriage rates are down, U.S.
home ownership is plunging, and rents are rising. Automobile debt also has
soared, leading to rising default rates second only to student debt defaults.
The overhang of junk-mortgage debts that crashed the economy in 2008 remains on
the books; families who managed to survive the ten million foreclosures under
the Obama bailout of Wall Street remain heavily indebted. (His constituency
turned out to be his Donor Class, not the junk-mortgage victims among his
voters. He characterized them as “the mob with pitchforks” to the Banksters he
invited to the White House to celebrate his bailout.)
This QE policy has made financial engineering
much more enriching than industrial engineering. But it has painted the U.S.
and European economies into a corner. At some points interest rates will
inevitably begin to rise back up. Some countries will have to increase rates in
order to borrow to stabilize their exchange rates when their balance of trade
and payments falls into deficit.
Other countries will simply see that the game is over and will give
up the pretense that the personal, corporate and public-sector debt overhead
can be paid.
That ability is shrinking much more than at
any time since the 1920’s, which gave way to the Great Depression despite the
many debt writedowns of 1931-32. The exponential mathematics of compound
interest have created more and more claims on personal income and corporate
cash flow, leaving less and less to be spent on goods and services.
That ability is shrinking much more than at
any time since the 1920’s, which gave way to the Great Depression despite the
many debt writedowns of 1931-32. The exponential mathematics of compound
interest have created more and more claims on personal income and corporate
cash flow, leaving less and less to be spent on goods and services.
That
ability is shrinking much more than at any time since the 1920’s, which gave
way to the Great Depression despite the many debt writedowns of 1931-32. The
exponential mathematics of compound interest have created more and more claims
on personal income and corporate cash flow, leaving less and less to be spent
on goods and services.
Until a debt write downs occurs, storefronts will continue to close,
arrears will mount, students will continue to postpone marriage and family
formation, high-risk bonds will begin to give way and default.
DYI: Take a look below the U.S. fertility rate that is now decisively below replacement (2.1). This fertility rate does include immigrants. Even they have run into the wall of excessive
and impossible costs thus either limiting or postponing having children. If continued below replacement within a
couple of decades the U.S. population will begin declining as has happened
in Japan.
| Country | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2016 | 2017 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States | 2.06 | 2.06 | 2.07 | 2.07 | 2.07 | 2.08 | 2.09 | 2.09 | 2.1 | 2.05 | 2.06 | 2.06 | 2.06 | 2.06 | 2.01 | 1.87 | 1.87 |
If
there was an easy and constructive way to short junk bonds I would do so but alas
unless Wall Street creates a short product to buy I’m out of luck.
Updated Monthly
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