A warning from The Economist

ByMike Treen
This article from The Economist is a bit difficult to extract the central facts from or understand their significance.
So, here are the highlights in italics and I will try and explain the significance afterward:

NEVER BEFORE has the world economy been so indebted. The stock of global debt has gone from $83trn in 2000 to around $295trn in 2021—a rate nearly double the pace of world GDP growth. Debt rose from 230% of GDP in 2000 to 320% on the eve of the pandemic, before covid-19 propelled it to the even greater height of 355% last year.

Part of the reason for this explosion has been the steady decline in borrowing costs over the past two decades.

As a result, even though global debt has rocketed over the years, the world’s interest costs, as a share of GDP, are well below their peak in the 1980s.

All this could soon change. The era of super-cheap money is ending. Central banks are battling a surge in inflation.

The scale of the global interest bill is vast. The Economist estimates that households, companies, financial firms and governments worldwide paid around $10.5trn in interest costs in 2021, equivalent to 12% of GDP.

To illustrate the potential scale of the increase, we consider a scenario where the interest rates faced by firms, households and governments rise by a percentage point over the next three years.

In such a scenario, the interest bill would exceed $16trn by 2026, equivalent to 15% of projected GDP in that year. And if rates were to rise twice as quickly, say because inflation persists and forces central banks to take drastic action, the interest bill could rise to about $20trn by 2026, nearly a fifth of GDP.

This percentage increase is a very likely development. The inevitable result will be a domino of crashes – beginning with the most indebted countries and companies.

Look at this graph of the percentage of US companies that have failed to make enough money over the last three years to service the interest on their current debt. They are dubbed “zombie firms” and now makeup 20% of the total compared to almost nothing in 2008. What will happen when they face a major increase in interest rates as well? The most indebted will be facing more than a 1-2% increase because of the risk they already pose.

Economists William Rhodes and John Lipsky, who lead the Sovereign Debt Working Group at the Bretton Woods Committee—a semi-official US economic think tank—wrote in the Wall Street Journal this week about growing “challenges” in the sovereign debt market as well.

“The warning signs of a crisis are already clear,” they stated. “According to International Monetary Fund figures, interest payments on public debt as a percentage of public revenues are four times as high in low-income countries as in advanced economies, while the same ratio in emerging economies is twice as high.”

A decade ago this ratio was similar across all countries, but today, according to the World Bank, some “60 percent of low-income countries are either suffering from debt distress or at high risk of doing so.”

The day of reckoning has been postponed again and again by the US Federal Reserve and its allied central banks around the world since the crisis of 2008. The debt and money creation machine kept pumping and pumping.

Current high levels of inflation worldwide mean that this must end. Inflation is now averaging 7% across the globe. This is entirely a central bank-created problem. This is not something to do with Covid-induced supply problems. Inflation hurts working people by reducing real wages unless we fight very hard to keep up.

However, inflation is also a process whereby debt is being radically reduced in value. The 1% ruling elite rely on their ownership and control of debt to enrich themselves fabulously. They will not allow inflation to continue to reduce its real value. But their only tool to kill inflation is to reduce the money supply by reducing the credit available (a reverse quantitative easing) and increasing interest rates.

Keynesian economists don’t understand this. They mistakenly see inflation as a cost-plus problem and blame inflation on wage increases or oil price rises similarly to how they did in the 1970s. They were wrong then and the US dollar suffered a radical devaluation against gold that threatened hyperinflation before control was restored by what was dubbed the Volker Shock in 1979 – a US Fed interest rate of 20%. Mortgage rates and other debt rates followed. Multiyear US recessions and economic contractions around the world followed as did an explosion in the Third World debt crisis given that all debts were denominated in US dollars.

Keynesians lost control of public policy and central banks to the monetarist followers of Milton Friedman following that inflationary crisis of the 1970s.  Inflation was never meant to exceed 2% and we were supposed to trust them to do achieve that goal consistently.
Monetarism was in turn abandoned in 2008 to stop the capitalist crisis from going into a depression and interest rates were driven to historic lows and money was printed and handed to the 1% to settle debts between themselves. The same course was adopted in late 2019 when a new recession threatened. But Covid forced the government’s and central banks to not only give to the 1% but to ensure working people had incomes to support themselves during the crisis. This meant budget deficits and monetary creation that wasn’t just for the 1%. It was this fact that made generalised inflation inevitable.
The requirement to increase interest rates and cut back on the money already in the system to end inflation will also bring an abrupt end to what has been dubbed a “superbubble” in the US economy.
In his latest commentary titled – “Let The Wild Rumpus Begin“, investment fund manager Jeremy Grantham explains in a sober and factual manner why we are currently in the fourth “superbubble” of the last hundred years. Here’s an excerpt from the commentary:

Today in the U.S. we are in the fourth superbubble of the last hundred years.

Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle.

The penultimate feature of these superbubbles was an acceleration in the rate of price advance to two or three times the average speed of the full bull market. In this cycle, the acceleration occurred in 2020 and ended in February 2021, during which time the NASDAQ rose 58% measured from the end of 2019 (and an astonishing 105% from the Covid-19 low!).

The final feature of the great superbubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the blue chip market rises. This occurred in 1929, in 2000, and it is occurring now. A plausible reason for this effect would be that experienced professionals who know that the market is dangerously overpriced yet feel for commercial reasons they must keep dancing prefer at least to dance off the cliff with safer stocks. This is why at the end of the great bubbles it seems as if the confidence termites attack the most speculative and vulnerable first and work their way up, sometimes quite slowly, to the blue chips.

The most important and hardest to define quality of a late-stage bubble is in the touchy-feely characteristic of crazy investor behavior. But in the last two and a half years there can surely be no doubt that we have seen crazy investor behavior in spades – more even than in 2000 – especially in meme stocks and in EV-related stocks, in cryptocurrencies, and in NFTs.

This checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.

This means a market crash with a prolonged loss of value in sharemarkets, bond markets, and the property market at the same time. The crisis seems unavoidable and working people need to prepare.

The wild swings of the value of tech stock on Wall Street last week are a portent of what is to come and was highlighted by the Facebook parent company Meta losing 26.4% in value in a single day, equal to $230 billion, the biggest value loss by a company in history.

Unfortunately for the working class, we have no stake in either monetary theory used to maintain capitalism. We must go beyond trying to fix a broken system. We need to take the economic power being kept in the hands of the 1% out of their hands. That means making all money and its creation a public service. That means the banks, pension funds, insurance companies have to be nationalised and placed under democratic control and planning. The 1% have to be expropriated and the economy made to meet human needs and not be forced to only serve private profit and greed.

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27 Comments

  1. Too late for your highly pertinent final paragraph. Mind you, its not like ‘they’ have never known any of that anyway.

    The ruling class engendered is reset is coming, that is crystal clear to see.

  2. It looks like its going to be Luxons and Seymours mess to sort out. Latest Roy Morgan Poll. All that debt just to make the rich richer. Robbo and Orr should be in prison.

    https://www.roymorgan.com/findings/8892-nz-national-voting-intention-january-2022-202202072332

    Chloe Swarbrick calls for an enquiry to find out how just how corrupt the RBNZ and Robbo have been. Jacinda won’t like this because it will show that she in fact a classic Tory.

    https://www.nzherald.co.nz/nz/politics/covid-19-omicron-outbreak-greens-chloe-swarbrick-calls-for-economic-response-inquiry/CXBYI2E2IO6K2EZWA2HY56XMEM/

    Go Chloe!!!!!

    1. No Biggy,

      You needn’t concern yourself with Snookerballhead and Seemoreseeless having to clean up any mess in 2023. As disillusioned some people are with the Ardern Government at this time, she will not be rolled in 2023. If you’d like to wager on this and put your money where your mouth is, I’m a very keen starter. I will even give you odds. I will accept any figure you’d like to wager. A chocolate fish up to 10k.

      Snookerballhead is in campaign mode. Very easy to spend days trying to create appealing soundbites when you have nothing better to do and are attempting to cash in on any perceived Government failings but context is crucial. The Governments biggest failing is housing which is an area National displayed complete indifference toward. Nick Smith: Housing crisis? What housing crisis?

      As things move forward, Snookerballhead will be under the spotlight big time. As he’s exposed most of NZ that aren’t Smurf Party supporters will recoil at the man. He represents a time in NZ Politics that mercifully we’ve evolved away from. Younger voters especially will not buy his bullshit.

      Seemoreseeless is also the master of soundbites but when you scratch the surface what you see is not something Kiwis on mass will embrace. He’s had a free pass but that is all over now. Coinciding with that is the fact he’d have to go into coalition with Snookerballhead to take over the top floor. If you think that will happen in 2023, you have rocks in your head. Ardern has a lot of currency to burn for that to become a realistic prospect.

      We know progress will be made on housing between now and 2023. We also know things can’t get any worse. When the dynamic changes it will at the very least give people the impression the Government is on the right track. Ardern is plenty smart enough to ensure this occurs.

      Don’t be fooled by the loud dissatisfied protestors at this time. Kiwi’s are already losing patience with their attacks and undermining of the system we all live in. Their “freedom’ protests are a confused and delusional mess from expert-novices with Facebook medical and vaccine degrees who couldn’t possibly care less about your freedom. That has been proven again in the streets of Wellington. They are empty drums and as we know, empty drums make the most noise. How many of the protestors are Ardern supporters? ZERO so it will come down to the majority that got vaccinated which is over 90% and the clueless protestors that still can’t decide what the actual fuck they are protesting about. Those that got vaccinated and understand the need for mandates will in big numbers continue to support Ardern. They most definitely don’t want to be on the same page as the eggplants on Wellington streets.

      Omicron will eventually stop being an issue and we can all get back to some kind of normality. Many will be grateful to have got through it and have their loved ones get through it. Some of that gratitude will be toward the NZ handling of the crisis.

      Self preservation is a big motivator for politicians. Ardern is very much a people person. Someone that many young people want to have a selfie with.

      If the Greens pull finger as well, the status quo will remain until at least 2026. In October 2017, I told everyone that would listen that Jacinda Ardern would be a 4 term Prime Minister. I’ve seen nothing to cause me to doubt that adamant prediction. Even the best surfers in the world cop unfavourable waves but still win the comp.

      Big picture stuff. Anyone who thinks Snookerballhead and Seemoreseeless will be Government in 2023 is looking at a very small short sighted picture and they are almost certainty viewing it via vested interest.

  3. The answer is simple. Each sovereign nations print an unlimited amount of currency BUT only use that to repay the interest and principal owing.

    It should never be used to prop up the people with more debt.

    The old story about you are in trouble if owing the bank $100 but the bank being in trouble if you owe them $1,000,000.

    Same scenario with sovereign states owing huge volumes to the 1%. Simply repay it with a deposit into the bank of their choosing with, gathered from thin air currency. Just like they loaned the debt to the sovereign states. With currency created from thin air.

    Question is will the current (or any future) government have the will power to this?

    NO! they wont, and for the life of me cant figure it out what holds these elected representatives of ours so beholden to the 1%.

    One of the reasons the 1% want a war with Russia and China. Those two sovereign states have not curtsied to the demands of the 1%.

    Funny that the commentator wants nationalisation of assets to be placed under “democratic control and planning”. When in New Zealand we are moving away from democratic representation to ethno-nationalism state control.

    2. Problem being the U.S gets a free ride at the expense of the rest of the globe.
      The U.S cannot go broke!
      They control the major financial institutions and the U.S Dollar is still default currency for international commerce.
      Inflation has been hidden’ in property prices skyrocketing,but cannot be contained any longer.
      The 1% will win,regardless.
      This Govt are enthrall to bankers like all the rest.
      War is a handy the diversion when things get this bad.

      1. Yes war is handy – it fills up all the blank spaces in minds. It is a way of directing and controlling people and the economy. It’s a money-maker for suppliers, before, during and in reconstruction. And its good for developing war toys which boys love to play with, and people can be robbed easily of possessions or sex and bad behaviour can be lost in despatches. And land and other resources can be gained for the victors.

  4. “We need to take the economic power being kept in the hands of the 1% out of their hands. That means making all money and its creation a public service. That means the banks, pension funds, insurance companies have to be nationalised and placed under democratic control and planning.” ie going back to standard Keynesian economics! This is the critical difference .
    The article seems not to include the effect on banks of the looming crisis as if they are immune and only companies and investors are implicated.
    The effect of raising interest rates even a tiny bit will almost immediately put all speculative investment under pressure. Share markets will drop immediately and more QE will be pumped in to keep them from collapse. Once the galloping inflation of all investments stops it will suddenly matter that share market , bitcoin and property inflation is actually the only thing that is keeping any of it alive, including the banks. We have been running on inflation since 2008 and now it is entering the real economy.
    The interest rates cant be increased meaningfully or for more than a few weeks without precipitating collapse , and they wont be.
    D J S

    1. Time for that rude joke again, where a poor bloke pulls out his empty trouser pockets and pulls down his zip and says ‘Look at me I’m an elephant’. They have long memories it is said, and we need those also to think about truth and consequences when talking about the poor and the wealthy. It’s time to change the paradigm – but how?

  7. Meh, nothing that another round or four of Quantitative Easing can’t sort out. Even small rises in interest rates will instantly detonate the economy both private and public (i.e. especially the over-leveraged business and the housing sector). All debt will ultimately be monetised. This will of course cause massive financial harm to those without “hard assets” that automatically adjust for inflation – i.e. those on fixed incomes, beneficiaries, pensioners, the working poor etc. They don’t care – they’re not nearly as an important or vocal voting block and the government will throw them all to the inflationary wolves given that this is easier than crashing the economy and housing market.

  8. And this has some hard hitting statements that seem to stand up on the evidence that we see around us. Watch and think if you can bearing in mind the words of Gustave Le Bon I think, that start the video off. It is not kids stuff as it appears at first.
    https://www.youtube.com/watch?v=09maaUaRT4M
    MASS PSYCHOSIS – How an Entire Population Becomes MENTALLY ILL made in conjunction with the Academy of Ideas. 21.48m

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