Hidden cause of great recession and next financial crisis? Debt
Beware the Ides of March鈥nd the rest of the year too!
This is the day Caesar was assassinated. What鈥檚 it to us?
Well, it just reminds us that things go wrong. Even when you鈥檙e on top of the world. There are always countercurrents鈥ndercurrents, beneath the surface, where you don鈥檛 see them鈥lots鈥onspiracies鈥nd just bad luck.
On the surface, the US economy is recovering. Well, not even. It is stabilizing.
The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81.
The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January鈥hich boosted the figures for February. Had they not done so, the figures for February would have been negative!
Still, consumers are not as lifeless as they have been鈥nd on the surface, this is good news.
And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over鈥nd that we鈥檙e in a recovery. The lumpen consumer probably thinks he鈥檚 going to find a job soon鈥nd that his house is going up in price.
But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a 鈥渓iquidity crisis.鈥� In fact, they were signs of a debt crisis. The private sector had far too much debt.
Economists who never expected trouble, reacted to it in a predictably moronic way 鈥� they rushed to the rescue with more debt. Now, they think they鈥檝e triumphed鈥� They鈥檝e prevented another Great Depression. They鈥檝e saved the world!
We鈥檙e written so much about that; you surely don鈥檛 want to read any more on that subject.
But here鈥檚 the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous.
Instead of reducing the world economy鈥檚 reliance on debt, they increased it!
On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far.
Alas鈥et, the world鈥檚 debt is still increasing 鈥� by a huge margin. Over the next 3 years, the biggest 20 economies in the world 鈥� the G20 鈥� are expected to slip over the 100% mark, with more debt than GDP.
Now, let鈥檚 do a little math. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%鈥hat means you鈥檙e spending 20% of tax receipts on debt service. But suppose inflation rises鈥nd interest rates go back up to where they were in the late 鈥�70s. Back then, the feds had to pay 15% interest to borrow money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues 鈥� just for the interest.
Obviously, that鈥檚 not gone to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely鈥�
Of course, this doesn鈥檛 bother the feds. That story is still beneath the surface鈥� It鈥檚 a crisis that hasn鈥檛 happened yet. They couldn鈥檛 see the crisis in the public sector coming in 鈥�07. They can鈥檛 see the next one coming either.
Economists can鈥檛 tell a government job from a private sector job鈥nd can鈥檛 tell $1 of government spending from a dollar spent by the private sector鈥nd can鈥檛 tell a dollar鈥檚 worth of GDP from a dollar鈥檚 worth of real prosperity鈥�
鈥hich means, they can鈥檛 tell the difference between what鈥檚 happening on the surface to what鈥檚 happening underneath.
In a sense, this is just another manifestation of the same 鈥渂attle鈥� we wrote about years ago. On one side are the feds. On the other is Mr. Market.
The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand.
On the surface, the feds are winning. At least, that鈥檚 the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds鈥� way.
But deeper down鈥he debt is still there鈥nd it is growing bigger. And Mr. Market sharpens his dagger.
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