Thursday, March 2, 2017

When Will Atlas Shrug? The Burden Of Global Debt!

When Will The Burden Become To Great?
These are most interesting times for the economy and many people are failing to take note at just how unusual they are. With the markets sporting a glow from all-time record highs that are being made week after week it might be a good time to revisit the concept of irrational exuberance. Just over two decades ago Allen Greenspan who was then chairman of the Federal Reserve coined the term irrational exuberance, however, greed might have been just appropriate. This leaves us with the question, when will Atlas shrug under the burden of global debt and simply say, enough is enough?

We must consider the possibility we may be nearing the end of a 37-year run that will completely upend everything most people have come to believe about the economy. To make matters worse when this becomes apparent it may occur so rapidly and without warning that most people will have no time to react or shift their savings and wealth out of risky investments and into safer assets less vulnerable to downside potential. Gone will be the "buy the dip mantra" that has dominated this market since 2009, it will be replaced by the question of just how low can the market really go as it sinks away.

Timing a major market shift is impossible and many of us who never expected the current market run to extend to where it is today have been battered and bludgeoned. Many of us have either stood aside missing the massive up move or worse yet aggressively shorted this market time and time again only to suffer huge losses. Being wrong up until now does not mean you are wrong about the outcome only that you have missed timed and misjudged how far those in power will go to prolong the illusion of stability. Watershed events can occur in the blink of an eye or be spread out over weeks or even months. It is important to recognize that the base on which our economy sits is comprised on ever growing debt that is unsustainable. Because this system has been able to exist and muddle through does not mean it can continue but just as important is the fact that it does not guarantee that we will not suffer financial harm as individuals.

MMT Has Sent Debt Up Up And Away
Over the years the entitlements and promises that have piled up have become overwhelming and in order to cope the world has latched onto and embraced Modern Monetary Theory (MMT) as the answer to its woes. Debt is often nothing more that the promise of future payment and is affected by interest rates. It appears debt does not matter in our current manipulated environment of MMT where what you pay in interest can overnight change everything by redefining the obligations outstanding and coming due. For example, In Europe, the ECB has stepped in to halt the economic collapse of Spain, Italy and several other countries that were on the brink of failure because of mounting debt. The ECB did this by artificiality lowering and altering interest rates paid on risky debt.

While altering the rate paid in interest completely changes how budgets play out going forward and also where people invest it has also caused the amount of debt here in America and across the world to soar. Many of the monetary theories being applied today have not been proven over time but reflect an attitude that we can control economic cycles better than in the past. We must remember the policies being put forth by central bankers have massive implications for both investors and society, this is more than a game and it directly affects the lives of people everywhere. An economist that I have a great deal of respect for, Allan H. Meltzer wrote a piece that appeared in the Wall Street Journal in 2014 where he stated, "Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation." 

Global Credit Growth May Lead To Inflation 
I contend that never before has mankind diverted such a large percentage of wealth into intangible products or goods and this is the primary reason that inflation has not raised its ugly head or become a major economic issue in recent years, it also creates an environment where debt defaults have the potential to rob millions of their wealth. Like many of those who study the economy, my misgivings with current economic policies are many, of chief concern is the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.  If a great deal of this money would suddenly shift into tangible goods seeking a safe haven inflation would soar even as debts go unpaid and promises are left unfilled.

While they may tell you otherwise the average person only begins to care about "the economy" when they are directly affected or financially slapped in the face. To navigate the treacherous terrain of investing without a road-map or knowledge means you travel at your own peril. This does not mean that even a person totally ignorant of basic economics will not have an opinion. Sometimes these people advocate weakening our currency to help exports but that would be a big mistake. The one thing Americans don't need is a weak dollar if the world economy goes into a tailspin and crashes to the ground. A strong dollar assures American's the power to buy assets across the world. If a collapse in global markets does occur we will be much better off if the dollar remains king.

It is important to understand the nature of debt and that some old debts will never be paid but get written off over time but the bulk of existing debt forms the foundation to pay for future obligations and as a building base for growth. If all debt is treated the same and diminished the value of both savings and future payments will be devalued. This leaves the bulk of society extremely vulnerable when a shift does occur and you do not want to be in this group. I fear many people are being lulled into complacency as to the real economic risk that surrounds us. A glaring example of this is how people just assume the bank will honor their credit lines or they will be given access to their savings in the case of an economic crisis. During a crisis as everyone rushes to the exit, it is naive to think you will be served in an orderly fashion or even fairly. Mind the "small print" and remember the bank is not your friend.

When will the next financial crisis hit and how deep will it be? That is a hard and complicated thing to predict or answer, just as difficult is speculating the form it will take, however, it is important to recognize several catalysts exist that could usher in a crisis scenario. Only in hindsight does it become clear. Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. Central banks have gone far beyond trying to stimulate the economy they have completely reshaped it by altering the rules and papering over its flaws with a massive transfer of wealth that can only occur by creating a false paradigm or reality. The fact is debt is a heavy burden and at some point, Atlas will shrug.

Footnote;  Allen Meltzer who has stated, "This will not end well" speaks out exactly one hour into the discussion linked below. There Meltzer gives his take on the direction and policy central bankers have persuaded. 


  1. Nice metaphor with 'Atlas will shrug.'
    Part of the 'shrugging' is already occurring.

  2. Thanks for the interesting post. Into my opinion, the thing is that American economy is based on getting in debt. For example, take a look around and think how many people use quick and easy loans online service or put their expenses on credit cards. Many Americans lack financial literacy despite all the information available today. People don’t choose to save money and wait to make a desired purchase, instead of that they choose to borrow money and to get in debt. On one hand I understand Occupy Wall Street movement but on the other hand, people choose to get in debt themselves, they are not forced to do it.

  3. I would revise your statement to say, "Some people choose to get in debt themselves by living a lifestyle they really cannot afford. They must have the a large, expensive house, or expensive TV, car, etc. Others are forced into debt simply by trying to keep their head above water due to various life events like medical expenses, death, loss of a job, high rent, the list goes on."