We Are Drowning In debt
In the past decade, many nations have taken on debt just to get a few percent GDP growth or just above zero. The U.S. for example has not surpassed 2.9% GDP on a single year since the Global Financial Crisis (GFC). U.S. GDP got as low 1.6% in 2011 and 2016. U.S. GDP growth prior to the GFC was 4.8% in 1999 and 3.8% in 2004. The U.S. national debt grew 120% or from $10 trillion in 2009 to $22 trillion in 2019. China’s national debt is a horror show. When you include both public and private sector it is north of $34 TRILLION and that’s just the debt we can find, China is notorious for fudging numbers and it’s shadow banking network makes it hard to get all the figures. It is estimated that China’s shadow banking network is in the neighborhood of $10 trillion. Both U.S. and China’s debts are growing at a exponential rate, and it’s not stopping anytime soon. Some nations debt even surpasses or is equivalent to GDP. For instance Japan’s debt to GDP ratio is 253%. Here’s what happens when you print money and keep interest rates real low or negative:
As of writing, there are 486 companies registered to manufacture EVs(electric vehicles) in China. This is more than triple what it was two years ago. So what we are seeing is speculation at it’s finest and everyone and their mother is long Chinese EVs, hoping to hit it big. Free money (that’s what we’ve had for a decade) allows for this malinvestment as people go yield hunting in search of a decent return amidst a see of negative rates. The Eurozone has become one of the biggest abusers of savers in the past decade by suppressing interest rates below zero, which means people taking loans out are make money by owing money (doesn’t make any sense…) Most European’s holding money in banks are not only losing out in terms of inflation, but also in nominal terms because banks are taking money away because the rate of return is negative. European citizens would be better off holding cash than in the bank.
Basically what central banks and governments have proven is the economy never recovered from 2008–2009 and the only way to keep things propped up was credit creation. We see the diminishing role of savings with ultra low interest rates (negative rates are very common these days in Europe and Japan, among other nations) over the past decade. How do I know the economy hasn’t recovered? 69% of American’s don’t have $1,000 in a savings account. When they lose their job, they will begin to fall behind on payments and may even default on many, if not all of their loans. We are currently seeing this in auto loans, where more than 7 million American’s are 90 or more days late on there car payments.
Low and negative interest rates have lead to severe misallocation of capital. We see this evermore with unicorns “racing to the exit” because there is very little liquidity in private markets and many are pushing for IPOs as they see this cycle turnover. Lyft is the perfect example of malinvestment. Not that it isn’t a good concept, but it’s not a good business model (not profitable). But it has captured the hype as VCs and investors didn’t want to miss out on the next Facebook, so they poured money into numerous rounds of funding. It’s not uncommon these days to see series d rounds, as VCs and other investors go yield hunting. Snapchat is the another good illustration of malinvestment and it’s IPO was hyped like none other at the expense of retail investors. It hit a high of $29.42 on it’s IPO and hasn’t even came close since, with it currently sitting at $11.82 after it bounced off its $4.82 low in late December when Jerome Powell and the Federal Reserve (FED) caved after markets sold off more than 20% in Q4 2018.
Many companies have taken on enormous sums of debt due to a decade of suppressed interest rates. To add on top of that, we have many zombie companies out there, or companies that can’t even pay on the interest on their debt, let alone their principal. The zombification of the economy rewards the bad businesses and punishes the good businesses. Profitable, healthy businesses lose out to unprofitable firms that are able to sustain business models that wouldn’t function otherwise in a time where there wasn’t free money (i.e. low interest rates and quantitative easing.)
The inevitable flushing out of these companies from the economy will leave many jobless that will turn into a negative feed back loop as these people will stop spending money into the economy on goods and services. This will reinforce the loop as companies see lower revenue when there are less people buying goods and services and thus will have to fold up business or cut employees due to less money being brought in. Thus only making the negative feed back loop intensify.
The debt is not just in governments and corporations hands, it’s in the hands of the average citizen. With student loan debt in the U.S. now surpassing $1.5 trillion, many millennial's find themselves between a rock and a hard place. Many would like to start a family and buy a home, but they simply can’t because they have high 5-figure and 6-figure debt that they can barely put a dent in it. Many people get trapped simply because the job they were told they would get out of college with their degree didn’t exist. Instead they have $100,000 in student loan debt and a job that pays $40,000/year. How is anyone ever going to pay off the interest, let alone the principal on that loan?
This again will add to the negative feed back loop. As baby boomers begin to downsize housing and sell stocks, there is no bids from the younger generation as there were in previous years. This will only exacerbate the decline in current asset prices which are at record highs when the sell off comes in both stock and housing markets. Lots of supply, very little demand, economics 101.
Global debt is an unfathomable $244 TRILLION ($244,000,000,000,000). That number can’t even be reasoned with. All that debt has to get paid off eventually or it has to default which will have astounding effects on the global economy. We are talking worse than the Great Depression. This is the 21st centuries Great Depression. A systemic collapse is only inevitable at this point after a decade of massive credit creation. I will leave you with this quote from Ludwig Von Mises:
“ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Sources:
U.S. GDP by year
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