It’s the Debt, stupid ! (A play on Clinton’s phrase) by Mitch
BIS complete Policy Reversal
War Inevitable ?
Clinton’s famous successful 1992 presidential campaign phrase “It’s the economy, stupid” against sitting president George Bush Senior.
Actually to be more accurate, it really should be “It’s the debt, stupid”.
An economy cannot sustain a future of positive Economic Growth patterns and Employment opportunities for the newer generations if the economy is saddled with debt or to be slightly more explicit “totally insolvent”. The debt servicing makes any growth patterns or a normalization of the economy (contrasting to the last 30 to 40 years) basically impossible.
Speaking to many individuals over the last few years, they really do not appreciate the situation we find ourselves in looking at the bigger picture and taking into consideration historical precedents. When asked what caused this crisis they always state the housing crisis of the USA (CDS’s, MBS etc..). That is not strictly true ! The housing crisis was only a symptom of the disease and simply the first domino to fall; the disease itself is our Debt Insolvency and that is ongoing.
Have you ever wondered why this crisis has not dissipated at all, 6 years from when it exploded in our faces in 2007 ? This was never a liquidity problem or a productivity problem ; it was always a Solvency issue. Look at the percentages on the right side of this chart, these are historical records. This debt simply cannot be carried with higher interest rates – period.
The fantastic “Great Credit Expansion Cycle” that started around 1951 a few years after the 2nd World War and commenced it’s parabolic rise after 1971 when the USA reneged upon it’s Gold backed currency debt obligations to the World. The scene was set for a massive expansion of Credit throughout the World and an unlimited expansion of FIAT Currency (Currency in our present 42 year old Monetary System is actually debt).
There is always an eventual natural cap on this credit velocity expansion (due to debt servicing requirements – see the flat line since 2009 on chart above) and the immediate effects of this is a de-leveraging event to reduce / pay-down / default on this debt load until we reach an equilibrium that is sustainable mathematically. We can then continue our growth patterns (limited or expanded by resources and energy of course – but that’s another story for another day).
Well let’s look at where we are now and then cover the BIS recent report and statements which cover its complete policy reversal.
Actual Global Sovereign Debt (solely Debt issued by our Governments in the form of Sovereign Bonds) as of 2013 is near 56 Trillion – growing nicely. Up 24% since 2011 estimated number and 311% since 2001 actual number. Completely sustainable you may say !!!
Well let’s look at this in more detail.
From 2001 to 2007, Sovereign Debt rose by 67% or a Yearly Compound Growth of 9%.
From 2007 to 2013, Sovereign Debt rose by 87% or a Yearly Compound Growth of 11%.
Do you see the problem here ???
The World was supposed to enter a Depression like De-leveraging event in 2007 to actually reduce our debt loads, instead due to insane policies by our respective Governments and Central Bankers we have actually increased the velocity of our debt increases on a yearly compound rate of growth – haha !!!
Our World GDP growth in comparison (Note: This is actually not Real GDP as a manipulated Inflation Deflator was used)
A global GDP Picture below from The World Bank
World GDP in 2012 was 2.2 %
And reported at 2.75% in the 1st Quarter of 2013
As you can clearly see our debt growth situation against our GDP income growth (GDP – Market Value of overall output / production of good and services in a given period) is completely out of control. Rather than correct our historical debt insolvency; beginning in 2007, we have actually gone in the opposite direction due to massive manipulation by the “Powers that Be” to keep the party going.
We are now in an even larger crisis of truly unprecedented proportions than we were in 2007/8.
If anyone thinks we are on the road to normality and growth patterns due to the rising Stock Markets the last few years (recently passed the historical debt leverage peak of 2007 in the stock market) and an improving housing situation (debt leverage in the UK property market for instance again at new all time record highs), then you really do not understand mother nature and simple mathematics.
But that’s not the whole Debt Picture, it’s actually much worse…
Total World Debt recently hit US$ 223.3 Trillion according to a research piece put out by ING. Debt in the developed economies amounted to US$ 157 Trillion or 376% of GDP (440 % in G7 Economies) or US$ 170,000 per man, woman and child in the developed World. Wow, no problem there then ?
This insurmountable debt mountain will collapse and bring down the World Financial System, as we know it.
Over the past five years in the developed world, it took $18 dollars of debt (of which 28% was provided by central banks) to generate $1 of growth.
Kyle Bass comments…
Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.
The Emerging economies of the World is 224% of GDP, bringing the overall World Debt load down to an average of 313% and growing, but still 130 % above mathematical sustainable levels (according to the World Bank, OECD and IMF) – which requires a de-leveraging / default of near 100 Trillion US$ World wide !!!
This does not include China’s Shadow Banking System Debt, World Unfunded Liabilities or War costs and reparations – see a problem here ??
Then you have the BIS (Bank for International Settlements – The Central bank of Central Banks) issuing a chart below of Japanese debt loads based of effective interest rates they will have to pay going forward (via zerohedge).
As you can see below, mathematics simply take over !!
BIS recent announcement on complete policy reversal
BIS warns Monetary Kool-Aid part is over…
Central Banks’ Central Bank, aka the Bank of International Settlements (or BIS) in Basel where the MIT central-planning braintrust meets every few months to decide the fate of the world, warned that the Fed-induced collateral shortage is distorting the markets.
Bank for International Settlements (BIS) warns about the dangers of re-hypothecation
They have now come to the conclusion that I and may others (obviously including the Austrian School of Economics and Zerohedge) have been re-iterating time and time again that the only conclusion to all of this is a complete collapse of our present Monetary System itself.
Rather than type myself, I will copy & paste some of their direct comments from their report, with my conclusion at the end…
Since the beginning of the financial crisis almost six years ago, central banks and fiscal authorities have supported the global economy with unprecedented measures. Policy rates have been kept near zero in the largest advanced economies. Central bank balance sheets have doubled from $10 trillion to more than $20 trillion. And fiscal authorities almost everywhere have been piling up debt, which has risen by $23 trillion since 2007. In emerging market economies, public debt has grown more slowly than GDP; but in advanced economies, it has grown much faster, so that it now exceeds one year’s GDP.
Consider what would happen to holders of US Treasury securities (excluding the Federal Reserve) if yields were to rise by 3 percentage points across the maturity spectrum: they would lose more than $1 trillion, or almost 8% of US GDP (Graph I.3, right-hand panel). The losses for holders of debt issued by France, Italy, Japan and the United Kingdom would range from about 15 to 35% of GDP of the respective countries. Yields are not likely to jump by 300 basis points overnight; but the experience from 1994, when long-term bond yields in a number of advanced economies rose by around 200 basis points in the course of a year, shows that a big upward move can happen relatively fast.
And while sophisticated hedging strategies can protect individual investors, someone must ultimately hold the interest rate risk. Indeed, the potential loss in relation to GDP is at a record high in most advanced economies. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.
Easy financial conditions can do only so much to revitalise long-term growth when balance sheets are impaired and resources are misallocated on a large scale. In many advanced economies, household debt remains very high, as does non-financial corporate debt. With households and firms focused on reducing their debt, a low price for new credit is not terribly relevant for spending. Indeed, many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity. It does not matter how attractive the authorities make it to lend and borrow – households and firms focused on balance sheet repair will not add to their debt, nor should they.
And, most of all, more stimulus cannot revive productivity growth or remove the impediments that block a worker from shifting into a promising sector. Debt-financed growth masked the downward trend in labour productivity and the large-scale distortion of resource allocation in many economies. Adding more debt will not strengthen the financial sector nor will it reallocate resources needed to return economies to the real growth that authorities and the public both want and expect.
* * *
Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment.
Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances. Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks. Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery. But, in the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth.
Ultimately, outsize public debt reduces sovereign creditworthiness and erodes confidence. By putting their fiscal house in order, governments can help restore the virtuous cycle between the financial system and the real economy. And, with low levels of debt, governments will again have the capacity to respond when the next financial or economic crisis inevitably hits.
My Conclusion to BIS Statement
This is absolutely huge news, one which is completely obvious but nonetheless very big news. The BIS who fully supported the policy response of negative real interest rates around the World and massive money printing have come to the conclusion that it just is not working, duh!
Rather than the World using this emergency policy response to de-leverage it’s extreme debt load in an orderly fashion it has actually increased it’s debt leverage.
The BIS have come to the only possible conclusion, this will end and it will end very shortly (months to a few short years ?) in an enormous disaster for the Financial Industry and the Monetary System itself.
Even though the FED have not reduced it’s Money Printing of 85 Billion US$ a month to buy it’s own debt to hold interest rates at World historical lows, the move in rates in the last few months alone has been spectacular.
10 Year US Treasuries (Sovereign Debt) has moved from 1.6% to just over 3% (5/9/13) in the last 4 months alone. You may say that’s only 1.4%, but that is an increase of 87% !!
In less than a year the rate has increased from 1.4% to 3% or a 114% increase.
This is with the Central Bank (FED) money printing and buying their own debt to force rates lower. If they were to stop or taper purchases where do you think rates are going to go to with an unprecedented amount of debt floating about out there with record low savings ratios ???
Remember the BIS statement above, in the USA alone a 3% move in rates would be equal to a loss of over 1 Trillion US$ on holders of this debt (banks being a big part of that).
And if rates go up what happens to Stock Markets and Housing Markets that are presently massively overpriced using any historical metric you care to look at ???
UK 10 Year Gilt Yield – Chart below
My Conclusion and comments concerning Silver / Precious metals & War.
The World’s markets have never been so manipulated as a whole in recorded modern history. The World is totally addicted to easy money and extreme low negative interest rates.
This financial repression has decimated savers and forced Corporations, Hedge funds, Pension funds and investors into ever more risky asset classes as they continually search out yield wherever it may be. Junk Bonds and very risky investment classes have never dealt or had the availability of such low funding interest rates in modern history.
We have already seen the ramifications of this in the Emerging Markets rout in the last month or so.
Even the BIS have stated that just looking at USA Treasury market alone a move of 300 basis points would cause a 1 Trillion US$ loss, never mind what the moves in Corporate Debt and Junk Bond Debt market moves would cost on the back of a move in the US Treasuries. You are talking Trillions of US$ of losses here in the USA alone.
On the back of that we have a situation where the World has the highest Debt leverage in History.
The FED are an independent bank with the sole reason for existing in the first place is of protecting the banking cartel who are immediate shareholders of this institution. Think about that !
We are talking of a massive Deflationary event (which we have felt the immediate effects off in the last 12 to 18 months, through Commodity markets & Precious Metals under extreme pressure to the downside, unemployment levels rising World wide, manufacturing slowdowns and low to non-existent growth etc.) mixed with extreme unemployment and debt leverage and overvalued asset paper markets. A halt to money printing and a slow move to normalization of interest rates, which the BIS are talking about here, would cause an economic Depression of unparallel size. It’s a correct policy response, which should have taken place 5 years ago (and in actual fact in 2005/6), now the hangover / cure will most probably kill the patient outright - so now a different policy response is required.
I do believe the Bond markets and hence interest rates are now at a critical juncture purely based of the sheer size of debt outstanding. Interest rates will see-saw up and down in the short term but the 33-year Super Cycle in Bond markets is over with (ended in late 2012) and rates will be moving ever higher.
These repercussions always have a lag effect (like ripples in a pond) and do not tend to hit until the market actually starts discounting them.
The Governments of the World will not allow a Depression of enormous proportions to hit their respective economies. The Central Bank panics of 2008 will be a precursor of what will be met this time around, with even more aggressive action (i.e. Massive money printing). I do believe though in this environment rates will actually move higher due to the sheer size of debt out there (remember the Japanese debt chart above from the BIS, who would lend them money at 1% or 2% when their debt is exploding so exponentially ?)
Which brings me to this chart…
This chart paints a picture that is really beyond what I can put in words. This is a super inflationary time bomb waiting to go off. The excess Reserves that the banks hold at the FED and not presently being utilized.
Which brings me onto Precious Metals and especially Silver. This sell off that has lasted 2 years has obviously been amazingly predictive of the enormous Depression type event that is unraveling and which we are presently in the throes off.
This was not something I predicted, I simply examine the supply / demand numbers and effects of insane policy decisions.
But these sell off’s have actually pushed Silver 60% below full production costs of prime Silver miners around the World as an average (full production costs are reported at an average cost of 29US$ in recent in-depth research of each individual mining groups (1,350 to 1,400US$ in Gold), that is actually rising at 7 to 10 % a year due to falling ore grades and hence more material has to be processed).
Not only that but base mining groups are winding down production levels due to the economic slowdown around the World but especially in China – Silver is also produced as a by product of base metals.
Then we have had major mine collapses and 2 major Precious metal mine operations that were at early stages of development mothballed, due to environmental issues.
Silver production is about to slow down dramatically (already happening now, Mexico production is off 10% in 2013); mines cannot stay in operation producing metal at massive losses.
Silver industrial demand is not reversing and is qualified in the industry as a wonder metal, what with it being the most reflective element on the planet, the best conductor, used in batteries for its cathode or negative side, but its most exciting industrial demand comes from its biocide qualities that no other metal on the periodical table can lay claim.
The USGS re-asserts its claim that Silver will be extinct in industrial quantities within 6 to 7 years (2020), due to its price structure (massively undervalued) and complete lack of re-cycling of industrial usage (due to it being completely uneconomical due to price) and the fact that ore-degradation is reaching complete exhaustion stage.
Silver is finite resource trading at levels that is massively below production costs and is reported by the World recognized authority United States Geologist Society (USGS) of becoming extinct and miners are presently being pushed out of business and hence destruction of supply !!
Along with this we are about to experience a massive destruction in paper assets (going forward) along with a huge Stagflationary event (High Inflation with no growth) to help de-leverage the World from the largest debt bubble in history.
I see with absolute clarity that Silver is one of the best medium term investments in a generation.
I could of course be wrong and the World debt bubble dissipates itself quietly with no harm done whatsoever, higher interest rates not harming the Housing market / Bond bubble or Stock markets and they continue to rally to even more extreme unworldly valuations forever and ever. Demographics become suspended in a time warp and hence all unfunded liabilities are no longer required.
Even though the mining industry is losing money producing said product and hence can no longer exist, a long lost Inca pyramid is proven to be made of solid Silver and hence all industrial demand is fully catered for.
Deutsche Bank points at below in a couple of new pieces what is largely taboo in the Financial Industry – The Truth !!
18 Dollars of Debt For every Dollar of Growth – Total G7 Debt / GDP = 440%
I wish you luck