Saturday, November 17, 2018

Strongly Linked China And Japan Are The Storm's Center

China And Japan As Part Of Global GDP (click to enlarge)
The IMF, the World Bank, and the United Nations all rank China and Japan as the second and third largest economies on the planet, together they are responsible for around 21% of global GDP. Cutting to the chase, much of what is happening in the markets is all about China and Japan which are strongly linked economically. Just over a year ago as China ending its 19th National Congress where the theme was all about a "new era" for China and how the country was about to take "center stage in the world" some of us noted all was not well. Those seeing flaws in the Chinese economy found it difficult to ignore that China's central bank had warned extreme credit creation and trouble in the shadow banking system could lead to a full-blown financial crisis. Even with this warning the People's Bank Of China continued pumping out liquidity knowing that if they stopped the whole system might seize up and cease to function, on the other hand, such actions only create more problems going forward.

So much for the assumption that many people hold that this particular kind of crisis cannot develop in a state-run financial system like China's where the banks are under Communist Party control. Wake up folks, you are delusional if you think any financial system or banking system is not under similar control. Whether it is the Fed or the BOJ politics do matter and those in charge of such institutions do not put the general public first. As for the title of this piece. "Strongly Linked China And Japan Are The Storm's Center" it should be noted that Japan was added because they currently lead the way in a new central bank experiment to ignore debt and print their way to glory by using the money they print to purchase equities. By doing so Japan is in effect nationalizing companies and transferring ownership from the private to the public sector.

A matter that has not garnered enough attention is how economic problems that develop in China will spill over and directly impact Japan. The Japanese economy is very vulnerable to a negative feedback loop that could have strong ramifications on its economy. While a strong distrust possibly even a dislike between the people and cultures exists, years ago the two countries joined together in an effort to maximize profiting from exporting to America. Over the years this relationship has morphed into an almost full-blown interdependence. This has intensified as China and Japan became major trading partners with Japanese direct investments surging and Japanese technology playing a critical role in the development and competitiveness of China’s global supply chains. In some ways, the two have become joined at the hip.


China Plays A Corrupt Game That Will Not End Well
Returning to the subject of China, today China faces a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Asset speculation and property bubbles may have finally reached the point where they pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country. Corporate debt has reached disturbingly high levels and local governments are using tricks to evade credit curbs. This is why it may be appropriate to ask if China is about to follow in the footsteps of Japan and embark on a "lost decade" of its own.

With this being stated, we should not underestimate the strong bonds between China and Japan or the amount of corruption that runs through the Chinese economy. We should also remember it is not in the interest of Japan to see the yen strengthen because of the impact it has on their ability to export. In the same way that many people overestimated the strength of the Soviet Union prior to its fall in December of 1991 or the Japanese economy from 1986 to 1991, today people tend to exaggerate the strength of China. When Japan slipped from grace the real estate and stock market prices which were greatly inflated before its massive bubble burst in early 1992 crashed causing the "lost decades" and the problems that still haunt them today. I contend we do the same with China's economy, it seems Americans tend to supersize anything they can conjure up as a challenge to their supremacy.

While most Americans are familiar with the saying, "anything that happens in Vegas stays in Vegas" it has become very apparent that in our global economy things that happen in China do not stay in China and the same can be said of Japan.. This is obvious from the huge amount of wealth fleeing China over the last few years. While this has been downplayed by many economists that are busy with charts searching for what they call growth, the money flowing across porous borders has become very obvious to those of us that watched as house prices soared in Vancouver and most of Australia. Note both China and Japan have been busy supporting zombie companies and not allowing them to fail in an effort to convince the world all is well. These countries are strongly linked and both very big players in the global economy, also both have taken an unsustainable path forward, when either fails the other will be pressured so, look out below!


Footnote; Dept defaults can be quite ugly and have huge ramifications on the economy. Below is the link to first part of a three-part series that explores such an occurrence.
 https://A Minsky Moment Is When The Debt Pyramid Collapses .html

Wednesday, November 14, 2018

Robots Not Just For Industry - A Consumer Market Awaits

A Massive Consumer Market Exists For Robots
Occasionally it is fun and interesting to roll out a piece on an offbeat subject like artificial intelligence or robots. Just over five years ago an article that I stumbled across started me thinking about the implications of robots going mainstream. Yes, I'm looking down the road at a time in the future that is getting closer with each passing day. It will not be long before a person decides to walk down the street with his metal companion or worker beside him or in tow. Whether it is to carry things, do work, provide personal protection as a bodyguard, or because you just want to attract attention and turn heads this will happen. Questions immediately begin to surface and problems arise when you are told at the mall that you can't bring that "thing" in here.

The article I referred to was written by Arik Hesseldahl on Sept 21, 2013, and posted on the website, All Things D. It explores the idea of building your own robot, what would you have it do? If you're the type who’s into building stuff and coding, it told how you would soon get your chance to answer that question for real, courtesy of an interesting project coming from the labs of chip-maker Intel. The company’s futurist, Brian David Johnson was recently in New York at the Maker Faire to let folks get a look at Jimmy, an open source robot assembled from parts fabricated on a 3-D printer. He also showed off a non-working model of Jimmy on CBS’s Saturday Morning today.

Robots Will Have A Huge Impact On Our Culture
Once assembled, Jimmy — or whatever you choose to name it — would be as readily programmable as a smartphone. You could also download and install apps that other people develop as easily as you would install them on an iPhone or Android device. Johnson said the plan is to create a kit that would be available for purchase for less than $1,000 and that he hopes to get the whole cost down to under $500. He was also giving away copies of a book called “21st Century Robot” that contains the open source files for printing the robot parts.

Over the last five years, robots have come a long way and tremendous progress is being made to bring them to the point where they are more than an oddity or futuristic thing of science fiction. With all this in mind I predict that in a year or two a home robot will be the "go to" Christmas gift. This makes it very important we begin to consider and imagine some of the ways our culture will begin to change when robots start to appear on the streets of our cities in the same way wireless phones have, this is the only way we can begin to prepare ourselves for what is about to unfold. Most likely robot ownership will become a huge status symbol and people may soon choose to buy a robot and finance it the same way they purchase a car. When you begin to see how man has linked himself to machines and even given them personalities and gender traits we begin to move into the area of a robot companion. In the 1999 Austin Powers movie "The Spy Who Shagged Me" a humanoid fembot appears, this gives new meaning to the term sex doll and probably has been the source of more than a few fantasies.  

Depending on the price the most sophisticated robots may become a toy and tool only for the wealthy which could cause mass envy and resentment especially if it begins to displace a number of workers by eliminating or taking their jobs. A robot has the potential to assume the role of a servant or slave without many of the negative problems humans tend to bring to the job. Many of these issues will be sorted out and defined by new laws and regulations dealing with matters such as liability if a robot hurts someone or damages  property. Some of these issues are already surfacing when it comes to driverless cars recently being operated in different areas as accidents occur. We must remember robots can come in many sizes and forms with a variety of capabilities thus often making them hard to define.

Is It Really Possible To Totally Tame A Metal Beast?
At this point everyone expects more robots to appear in our factories, in public spaces, and even in our homes. Artist, coder, and designer Madeline Gannon has gone to great lengths to explore how to increase the bonds between humans and robots so they can better relate to each other. Gannon uses a lot of metaphors when thinking about how we might engage with non-humanoid autonomous machines and trying to understand body language as a means of communicating with robots. Gannon recognizes that we have a lot of one-sided relationships that add meaning to our lives such as our pets, for example, they don’t have great ways of communicating with us, yet they’ve transcended from being wild creatures in nature to being domesticated and able to add meaning to our lives.

She is not saying that animalistic robots are the way to this future but sees it’s a narrative and dimension to explore and finds that people tend to think about our relationships with robots as a unitary thing but recognizes that for different types of robots we may want more. While we don’t want robots to be our masters she argues we also don’t want them to be our slaves, right now those are the two dominant narratives. With this in mind, Gannon wants to interface with machines and robots having them augment our lives rather than replacing us. This is why Gannon wants an interface with machines that grants us access to their superhuman strength, abilities, and precision in a way that augments us rather than simply replaces us. She also sees a danger when there’s a disconnect between the behavior and personality the robot is projecting and its agenda or motivation. This means designing cute robots, which is a very effective way to win us over and gain our trust, could be used to spy on us or even turn into killing machines.

As we extend this idea of private robot ownership in the near future imagine how as the capabilities of robots increase they could become multi-functional and fill many needs. Think of the children's toy transformers and how a robot could extend limbs and thus change size. Imagine if a robot would have pegs on his legs and when it leaned over you could step on and ride it like a Segway, this could replace the car in many urban settings.  As robots take our jobs and displace our relationships society may transform in ways we never imagined, this has the potential to become very interesting with a variety of hybrid robots even displacing dogs as mans best friend. Yes, we are looking at the face of a strange new world.


Footnote; The article below expands on the idea of where robots entering our lives might take society.
http://brucewilds.blogspot.com/2015/10/sex-bots-could-make-spouse-obsolete.html

Saturday, November 10, 2018

Russia Driven Into China's Arms By Bad American Policy

China And Russia Now Hold Joint Military Exercises
It is difficult to understand why any country would adopt a foreign policy so stupid it results in driving its chief adversaries into each other's arms but that is exactly what America has done. The clowns directing such things could not have devised a more self-defeating pathway to take us down if they had made it their goal. While there is much blame to lay about we must place a great deal of it at the feet of the Obama administration.  Putin, when challenged, ran over Obama and showed the world who ran the show in both Syria and Ukraine. We can thank Obama's misguided policies and all the anti-Russian talk flowing out of America for this. Much of what we see today grows out of Putin's mid-2012 response to Obama. 

Simply put, Putin is a thorn in the side of America's deep state and the pro "New World Order" forces. He stands as a shield against the Western progressive vision of what mankind’s future ought to be and rejects the New World Order agenda established at the Cold War’s end by the United States. By putting "Russia first" he defies progressives and speaks for those millions of Europeans who wish to restore their national identities and recapture their lost sovereignty from the supranational European Union. When pressed Putin is non-apologetic in reminding the world Russia has a huge nuclear arsenal and will use it if necessary.

Our deep state's relentless effort to destroy Putin has failed and instead elevated his position as a power broker. Over the years we have seen Putin reach out and establish relationships and bonds with many countries in reaction to the constant barrage and attacks from the warmongers of the deep state, however, the biggest and most concerning should be the growing bond between China and Russia which is based on logic and reciprocity. Russia which borders China has vast natural resources and China has become a low-cost producer of consumer goods searching for a market so the potential for trade is massive and a big win-win for both the economy of China and Russia. 

The irony of what is happening should not be lost nor the cost America has incurred underestimated as a result of our poorly crafted policies. While many Americans cringe when they think about the billions of dollars of consumer goods we import from China every month what makes it even more bizarre is that China is an American made product. Decades ago America started down a perilous path to build China into a world power,  a  pathological fear of  Russia and the Kremlin’s atheism caused America to seek a counterbalance in the region. Central to the American effort was offering the prospect of economic incentives to China, we combined this with a hard-line military response to communist aggression.

China Is An American Created Export Machine
In America's arrogance and efforts to control the world, we greatly underestimated the Chinese leader's ability to bend our goals to fit their needs. We also did not consider how such an underdeveloped nation would be able to retain an anti-American or shall we call it a China first attitude as they took advantage of a system where they reinvested their profits and bought our debt thus giving them influence and sway over our future policies. Few Americans ever though China would rapidly to challenge America economically and worse yet gain massive influence across the world.

Back in the 1970s when MAD (mutually assured destruction) and the communists' stated goal of global domination defined much of international politics the US foreign policy initiative aimed at splitting China from the USSR was an obvious choice.  While China and the Soviet Union regarded one another as strategic adversaries during the Cold War, our main enemy was Russia, so increasing the divide by strengthening our ties with China by helping develop their economy made sense. For straightforward geopolitical reasons America went down this path, but the path became a slippery slope, a slide greased by greed and short-term self-interest. Those who let this nightmare get out of hand should have been forewarned, "be careful what you wish for."

To support China’s economic growth and over 1.3 billion people an export machine has developed with unintended consequences. Absorbing the products created by China's export agenda has resulted in a decline and stagnation in the output of many industrialized countries. Because of low production cost, and little regulation, jobs, and work began to be shifted and "outsourced" to China. Disloyal multinationals are now shipping their products great distances from China to the same infrastructure that they have abandoned and left with excess capacity. The point is many people underestimate or have simply forgotten just how much America has added to China's growth curve or how China's rapid growth mask many weaknesses within its system. Poorly built ghost cities are a monument to China's flawed rapid growth which when not subsidized by America is not sustainable and may end rather abruptly.

Russia's Big Bet On China's Demand For Natural Gas
Circling back to the crux of this article which centers on how we have caused Sino-Russian relations, the international relationship between China and Russia, which dramatically improved after the dissolution of the Soviet Union and the establishment of the Russian Federation in 1991, to grow cozy and warm. Not only are the two countries politically aligned but they also have complementary economies, China with its insatiable appetite for the raw materials which Russia has in abundance and is thrilled to exchange for badly needed consumer goods. Because of this bilateral trade, has soared, at the end of 2017, it stood at $80 billion, an increase of 30 percent year-on-year, with an aim to reach $200 billion by 2024,

Below is a list of some of the most obvious ways the relationship between China and Russia has been transformed in recent years:
  • China has now become Russia’s single biggest trade partner.
  • Since 2015 Russia has been China's top supplier of crude oil, displacing Saudi Arabia by almost doubling its capacity to pipe crude oil to China, to about 600,000 barrels per day.
  • China and Russia have increased coordination at the U.N. Security Council.
  • Regional coordination in Asia with Russia supplying the engines for Chinese-Pakistani fighter jets has resulted in worrying India which is seeing Russia move into the Chinese orbit and less neutral
  • What is viewed as The Shanghai Cooperation Organization has substantially increased
  • The relationship between Vladimir Putin and Xi Jinping, who meet each other with increased regularity has grown much closer.
  • Joint military exercises between the two have become routine and this year Russia supplied China with its most advanced S-400 air defense system as well as Sukhoi SU-35 fighter aircraft
  • Increased willingness on the part of Russia to thwart Washington's argument that China is a threat to Moscow's aims in the East.
Much of this trade will be based on energy for consumer goods with the Power of Siberia pipeline and other planned projects making natural gas a huge component. The new "Power of Siberia" natural gas pipeline set to start pumping 38 billion cubic meters (1.3 trillion cubic feet) of natural gas per year to northern China in December 2019. Chinese investment and energy purchases have made it easier for Russia to resist economic pressure over Ukraine and Crimea. To top this off Russian sales of oil, missile defense systems, and jets are changing U.S. calculations in the Pacific and raising the potential cost of any future showdown between America and China. The non-conflicting interests of Europe and China as two very independent destinations for gas and oil have given Russian Energy Minister Alexander Novak more freedom and power in plotting a course forward.

There is a bottom-line here and it is that those inside our government have and are continuing to poison the well. The policy Obama employed backfired only enhancing Putin's image while causing Putin to turn Eastward and expand economic ties with our enemies. This did not quiet his detractors but caused them to create even more outlandish narratives about Russian aggression including how they interfered in our election and pressuring Trump to go down the same path. Too many Americans who remember how Obama threatened the UK just before the Brexit vote by threatening that if passed America would send Britain to the end of the line when it came to trade such claims ring of hypocrisy but even acknowledging this has not caused America to alter its destructive path.


Footnote; Many Americans don't really know very much about Russia and most of what they have been told has been filtered through a national security apparatus entrenched in a cold war mindset. The fact is Russia's economy is rather small and while over the years they produce and export a lot of weapons their military is not well funded. More on Russia today in the article below.
 http://Russia Tod http://brucewilds.blogspot.com/2018/09/russia-today-country-not-television.html

Thursday, November 8, 2018

When Debts Collape In Default! - Part Three

World Debt Has Grown Faster Than Wealth
The surge in government debt in many ways has been a transfer of debt from the individual to the public where many people controlling such matters feel it is more benign and abstract. The focus of this final installment of three articles exploring how globally debt has become unsustainable and is poised to collapse in upon itself focuses on "debt to tangible wealth" and the relationship between the two. The chart to the right shows how debt has soared compared to total wealth over the decades, however, more important is what is revealed when we look closer at what exactly constitutes wealth and how much of it is tangible or real and not simply made up of a promise based on paper.

These so-called paper promises include holdings in currencies, bonds, future income based on a pension payout, and much, much more. A place that displays how debt has exploded and gives credence that a storm is coming is a visit to the National Debt Clock. For those who have never experienced its enlightening and sometimes ugly secrets, this is a site well worth taking the time to study and explore. Especially intriguing are the much-underused features across the top that allow a viewer to move around in time as well as from country to country which gives a viewer a great deal of insight as to just how rapidly the debt of countries has grown during the last few decades. 

American Debt Has Soared
Born in 1928, Allen Meltzer, recently passed away but while little known by the masses he was viewed by many economists as America’s foremost expert in monetary policy. For over 25 years he was the chair of the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve. Meltzer was a professor of political economy at Carnegie Mellon University and a visiting fellow at Stanford University's Hoover Institution recognized for his wisdom and achievements in economics and the author of the three-volume “A History of the Federal Reserve.” Before his death his mood was troubled “We’re in the biggest mess we’ve been in since the 1930s,” he was quoted as saying but also his view of our path forward was also grim, “We’ve never had a more problematic future.” In 2013, I wrote an article about Meltzer and why he stated "It Will All End Badly" based on the idea that debt was being used as an economic crutch.

This thought has been echoed many times by Peter Schiff a well known financial commentator. Schiff says printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run, it is much worse off. Schiff contends what was once the "long run" or "distant future" may be getting very near. Such warnings have been heard for decades, in his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry" sighting the growing national debt as a major problem and sounded the trumpet about how he saw that the country was heading down the wrong path.  Back then it was about billions of dollars of debt, today it is about trillions of dollars.

Looking back, it is hard to imagine how we have made it this long without addressing the concerns that Simon wrote about so many years ago. Had it not been for the sky-high interest rate environment ushered in by Fed chairman Paul Volcker at the start of 1980 that crushed inflation the story might have unfolded quite differently. The high interest rates acted as a reset of the global economic system that lasted for decades. That barrier to spending has now been brushed aside. By manipulating interest rates lower and expanding the money supply central banks have fostered an environment that has encouraged people to pursue riskier assets and investments while bringing forward future purchases. As interest rates rise, as they are, will, and must, the value of these risky investments will decline, and these investors will be hurt. Making things worse is the fact that interest payments on the public debt will rise increasing the already massive budget. This is already playing out in some sectors of the economy where prices have been rising rapidly and major distortions exist within the marketplace.

Growth In Tangible Assets Has Not Kept Pace
At some point collapsing debt and dropping faith in fiat currency will intersect creating an interesting place. History shows that when inflation begins to exceed the rate of interest paid, people start altering their buying habits which can create a self-driving feedback loop. I contend slow growth coupled with a lack of really good options as to where people can safely store their wealth will drive the value of real and tangible assets through the roof. During the next financial crisis we may not see a widespread domino effect in the banking system leading to contagion but massive losses in financial markets will result from defaults on debt. While it is difficult to predict the form a financial crisis will take a fall in the value of paper assets and global stagnation while the value of tangible assets rise in relative value will most likely result in a painful reality for many people.


Footnote; Below are the links to part one and two of this series.
 https://brucewilds.blogspot.com/2018/11/a-minsky-moment-is-when-debt-pyramid.html
 https://brucewilds.blogspot.com/2018/11/the-ramifications-of-massive-debt.html

Footnote #2; This post dovetails with many of my writings, for more on some of the subjects mentioned above see the articles below.
 http://brucewilds.blogspot.com/2018/03/pensions-are-financial-time-bomb.html
 http://brucewilds.blogspot.com/2018/03/how-much-wealth-will-escape-next.html
 http://brucewilds.blogspot.com/2016/12/economic-relativity-in-relationship-to.html
 http://brucewilds.blogspot.com/2017/09/the-allure-of-illusions-five-favorite.html

Monday, November 5, 2018

The Ramifications Of A Massive Debt Collapse

Debt Hangs Above Us Ready To Explode

In today's low interest rate easy money environment, it has become much easier to hide under-performing assets and the inability to repay debt. Low-Interest rates tend to foster an "extend and pretend" attitude that becomes apparent only after rates climb and put stress on the system. Several other bad things also happen in this kind of financial environment such as increased speculation that propels the creation of leverage or carry trades which multiple risks. It also tends to move demand forward and cause an increase in the improper allocation of capital, both of these activities have a way of causing problems that can linger for decades. Across the globe, since 2008 the central banks and governments of the world have played a giant game of hide the debt, much of it disguised by transferring obligations from the banks and people onto the backs of their populations in the form of public debt which they claim is more benign.

We should not underestimate the impact a massive debt collapse would inflict upon the economy. this type of event also known as a "Minsky Moment" refers to a period of time when a market fails or falls into crisis after an extended bullish period with highly inflated market speculation and unsustainable growth. Clever sounding terms like "transitory" are often used to mask growing problems and to inject a bit of sophistication to this problem while trying to brush reality aside. Sometimes a person presenting the case growing debt is under control will even go so far as to explain that some of it is good debt or boast how we are enjoying the positive effects of the loose lending standards. While it appears much of the financial community is relatively unfazed by the mountains of debt growing throughout the world we as individuals should be concerned as to the many ways it might spill over and affect our lives.

Danger Ahead - All Types Of Debt Have Surged
Artificially low interest rates tend to skew all markets especially the credit and debt markets creating an unsustainable debt explosion that extends into everything including consumer spending and the statistics surrounding their effects on the economy. A great deal of what is being seen as deflation flows from a loop being created from lower interest payments on things like autos and housing, sadly this is a one-off and only goes to mask deeper issues developing under the surface.  Even now we are hearing calls by many people to write off and forgive student debt without any real understanding of the implications such a policy would entail. We should remember debt takes many forms and shapes, it is not contained in auto and student loans. Not only have companies borrowed a great deal of money to buy back stock driving the market ever higher but debt also accumulates when a person falls behind in their rent because they used their money for other things.

Again, I caution those who think this writing off of debt will be an orderly and even process because not all debt is created equal. One major difference is whether it is backed by assets or collateral. Many other factors affect the strength or impact of defaults. One factor of this is how it matures or becomes payable, some debt is stretched over decades while other obligations are short-term and paid with a balloon payment or all at one time in a lump sum. Also, debt is computed at different interest rates and this can affect its long-term impact but another often forgotten issue is to whom the debt is owed to and the impact default will have on their ability to honor their current and long-term obligations, this is a huge issue for pension funds. I have seen several businesses forced into bankruptcy when a large customer defaults and cannot pay its bills.

The world of bankruptcy and unpaid debt has become a complicated place where protection for one party can leave another totally exposed. We have seen things like "clawbacks" or the government making an exception and changing the rules as in the case of shafting the bondholders of General Motors during the bailout. Yes, writing off debt can be a slippery slope because debt that is written off takes something with it when it leaves this world and that is the wealth of someone else! As stated earlier in this article, today's low-interest rate easy money environment allows us to hide and ignore under-performing assets and the inability to repay debt fostering a dangerous extend and pretend attitude that becomes apparent only after higher rates stress on the system. No matter how we go about justifying the surge in credit and debt the ugly fact is that it hangs above our heads as a Hindenburg in search of a spark.


Footnote; This is the second part of a three-part series exploring unsustainable debt. the next will take on conventional thinking and make the argument that such an event need not be deflationary but can result in a huge bout of inflation. the link to part one of the series can be found below.
       https://A Minsky Moment Is When The Debt Pyramid Collapses .html
Part three has now been published and the link to it can be found relow.
      https://brucewilds.blogspot.com/2018/11/when-debts-collape-in-default-part-three.html

Saturday, November 3, 2018

A "Minsky Moment" Is When The Debt Pyramid Collapses

https://steveblank.files.wordpress.com/2011/06/bubble-phases.jpg
A Valuation Spike Is Common During A Bubble
To many of us who view the economy under "old school rules," the economy become a glorified pyramid scheme. Super low and even negative interest rates have punished savers and encouraged them to spend money while forcing banks to lend money rather than hold it and bolster their reserves. It also allows people and companies to take on more debt than they can afford and invest it in poor quality investments. This creates a real quandary because as this continues we eventually arrive at a point where it becomes apparent the economic efficiency of credit is in collapse and that even additional money poured into the system coupled with lower rates can no longer drive the economy forward. 

The growth of debt moves us down the path towards a Minsky moment or what might be viewed as a "liquidity trap," a term that can be baffling and difficult to understand. This term has been used by Allen Greenspan and a few others, it represents a huge problem for the economy. It can take on several forms but sooner or later most of them tend to lead us into one of several possible self-feeding loops that disrupt the flow of credit and impacts the real economy. We should remember that in all honesty the economy is lubricated by faith. this means that when faith erodes in the ability of our institutions to govern at some point the return on loaning our wealth, in the form of money, to banks, governments, and others is simply not worth the risk!  

        A Minsky moment is a sudden major collapse of asset values which is part of the credit
        cycle or business cycle. Such moments occur because long periods of prosperity and
        increasing value of investments lead to increasing speculation using borrowed money.

The policy of rapid credit expansion while often viewed as the answer to moving forward a slowing economy brings with it negative consequences such as diminishing returns on investment with the extra GDP growth generated by each infusion of money dropping as the economy reaches economic exhaustion and overcapacity from continually priming the pump. At the point when the debt snowball continues getting bigger and bigger, without contributing to real activity, we are on the verge of a "Minsky Moment" where the debt pyramid collapses under its own weight. The problem is why does anyone want to loan money if most likely you will never be repaid or repaid with something that is totally worthless?  

When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. History shows that at some point when inflation begins to exceed the rate of interest paid people start altering their buying habits which can create a self-driving feedback loop. The collapse of credit poses major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. When this happens many of our economic policy options will vanish and we are at the end game or poised for a complete economic reset.

Bonds Are IOUs - Debt Has Surged Globally 
This brings us back to the reality that the amount of interest paid on debt does matter except in the current manipulated land of  Modern Monetary Theory (MMT). Believers in MMT see it as a way to remove much of the economic uncertainty ahead and guarantee the economy will always be able to muddle forward by altering and changing the procedures and consequences of how we use the government-issued tokens of fiat money.  Newly acquired tools like derivatives and currency swaps have allowed us to print and manipulate away problems or at least postpone the ramifications.  

Unfortunately at some point, we reach the place where debt comes due, however, the collection of a debt can be similar to a mirage that keeps moving away each time you approach it and the small print that governs most contracts often tells us rules can be changed causing many people and companies to become instantly insolvent. The bottom-line is that we have abused the large amount of wiggle room in our economic system and our ability to put off the day of reckoning. Modern society has become very good at kicking the can down the road and delaying the consequences of bad policy.

When the debt pyramid does collapse actually writing off bad debt will be a painful process for the person, business, or institution that holds the paper. It is important to consider how this will all play out or shakedown, this is yet to be determined but the ramifications remain powerful. Obviously not all IOU's are deemed as trustworthy, and as trust drains from this over-indebted system the value of subprime debt and that of "shaky" issuers will plummet in value fastest. Junk debt is thus a Hindenburg in search of a spark. Often unpaid debt shifts the pain or obligation to another party and acts as a wealth transfer, usually, this is not a voluntary act unless the note is being forgiven by the holder. The fact is some way or form the piper must be paid and we will be reminded that there is no such thing as a free lunch.

Debt defaults will result in pensions being cut, inflation edging higher, or simply lowering our overall standard of living. Part of this will play out in the world of bankruptcy and unpaid debt which has become a complicated place where protection for one party can leave another totally exposed. We have seen things like "clawbacks" or the government making an exception and changing the rules as in the case of shafting the bondholders of General Motors during the bailout. Yes, writing off debt can be a slippery slope. The debt that is written off takes something with it when it leaves this world and that is the wealth of someone else! It is important you make sure you are not that someone else.


Footnote; This is the first of a three-part series exploring the massive debt pyramid that has formed during the last decade as a result of central banks lowering interest rates and allowing credit to expand and what will happen when we are forced to finally deal with this unsustainable debt load. Below is the link to the next part of this series.
       https://The Ramifications Of A Massive Debt Collapse.html