As Lewis Carroll wrote in Alice’s Adventures in Wonderland – which has turned out to be a handbook for central banks to devise monetary policy and the public to understand it – “If you drink much from a bottle marked ‘poison’ it is certain to disagree with you sooner or later.” Well, the nectar of death has caught up with us, and we are going to pay for it. Unfortunately, rather than take our medicine to eliminate the poison from our systems, we are continuing to consume greater volumes. Like Carroll further penned, “… it is uncommon sense.”
A Debt Bomb
Global debt surged $7.5 trillion in the first half of 2019 to a fresh record high of $250.9 trillion, according to a new report by the International Institute of Finance (IIF). The study authors warn that the planet is on track to exceed $255 trillion by the end of the year. Just two countries accounted for nearly two-thirds of the spike: the U.S. and China.
But that is not the worst thing about the report.
The Washington-based global association of financial institutions found that borrowing by governments, non-financial businesses, and households account for more than 240% of the world’s gross domestic product (GDP). In developed markets, governments represented a majority of the borrowing over the last decade. But in emerging markets, businesses have taken on debt, though it should be noted that many of these companies are state-owned.
What is causing the ocean-sized tsunami of red ink to swallow the planet whole? Low interest rates:
“With diminishing scope for further monetary easing in many parts of the world, countries with high levels of government debt (Italy, Lebanon) – as well as those where government debt is growing rapidly (Argentina, Brazil, South Africa, Greece) – may find it harder to turn to fiscal stimulus.”
The IIF concluded that global borrowing is growing faster than the international economy.
Borrow the Rumor, Sell the Debt
The spike in debt since the economic collapse – domestically and internationally – has been well documented. But it can never be overstated that central banks have enabled countries’ debt-fueled economic growth, from artificially low interest rates to monetary stimulus. Moreover, it cannot be overemphasized just how bad our debt situation is.
In September, Liberty Nation reported on a Bloomberg study that found the U.S. economy would crater if the public and private sectors ended their addiction to debt and the Federal Reserve exhausted its currency and gold reserves. Despite being the biggest and best economy in the world today, it would not crack the top 100 economies by GDP per capita in a borrowing-free market. U.S. per capita income would fall from today’s $67,000 to negative $4,857. But the U.S. is not alone, as 102 of the 114 countries on the list would see a drop in per capita wealth.
Sure, nobody is going to ban borrowing anytime soon, but the question is: How much longer can the charade go on? Federal Reserve Chair Jerome Powell recently testified before the House Budget Committee and said with a straight face that “there’s nothing that’s really booming now that would want to bust” and “it’s a pretty sustainable picture.”
Let’s take a look at some of the numbers over the last month or so.
According to the International Monetary Fund (IMF), approximately 40%, or $19 trillion, of corporate debt in major markets, like the U.S., China, Japan, the U.K., and Germany, was at risk of default should a recession strike. Perhaps IMF officials missed it, but the Chinese are already witnessing billions in corporate bonds defaulting. And the Fed sounded the alarm about leveraged lending (loans to companies with large amounts of debt) in the U.S., which is estimated to be $1.1 trillion.
Within the $7.8 trillion U.S. corporate debt monster lies the junk bond market, which accounts for about 15%. This has been one of the most riveting markets to monitor because of just how crazy it has become. It turns out that it is not only government bonds that are negative yielding, but junk bonds (debt instruments that carry a huge risk of default) have also slipped into a subzero territory, which defies the very reason traders buy these products in the first place. But investors have been scooping them up, though nearly $700 million in high-yield corporate debt was recently sold off due to trade uncertainty.
On a personal level, the Fed Bank of New York published its quarterly “Household Debt and Credit Report” for the July to September period. It was not pretty. U.S. households added $92 billion of debt in the third quarter to a total of $13.95 trillion, an all-time high. The surge was driven by mortgage debt ($31 billion), student loans ($20 billion), auto loans ($18 billion), and credit cards ($13 billion). While these numbers are terrifying, it is the aggregate delinquency rate that should be cause for concern: 4.8%, a jump of 0.4% from the second quarter. Student loan delinquencies stand at 10.5%.
NIRP or Nothin’
In the end, there is only one entity to blame for this topsy-turvy, debt-addicted global economy: the central bank. Around the world, these institutions have implemented zero-interest-rate-policies (ZIRPs) and even negative-interest-rate-policies (NIRPs) to spur growth and stimulate economies. Considering how many of these bodies have failed to achieve their objectives, they will likely double down on these interventionist policies, making debt cheaper. Right now, the conditions might be sustainable, but eventually, the house of cards will crumble, primarily from higher price inflation, which will prompt higher interest rates. For now, ZIRPs and NIRPs are the detours on the road to double-digit rates.
Read more from Andrew Moran.