A recent Forbes article summed up everything about the financial markets and uncontrollable debt situation in the United States today:
“Ten years have passed and the idea that we have learned our lessons seems at best quaint and at worst laughable… One of the most basic lessons not learned is that a massive buildup of debt tends to end in a serious financial crisis. Even a small liquidity event that gets in the way of rolling over higher and higher amounts of debt eventually brings down the whole edifice.”
This is far from an only American or recent 2008 crisis phenomenon. If you consider the now-infamous Dutch Tulip Mania of the 1630’s, debt was a huge part of that fiasco.
This was the first incident recorded where we know of a bubble (yes in tulips and tulip bulbs) that became astronomical in size because of the modern day use of leverage. These so-called “tulip futures” were much like the mortgage derivatives based on the housing bubble that caused the earth-shaking devastation of the Great Recession and Global Financial Crisis in 2008.
There have actually been many such notorious crises that occurred because of runaway debt (or featured it heavily in the disaster). Year 1982 saw the Latin America debt crisis. In the U.S. you witnessed the 1990 S&L Savings and Loan crisis. Japan suffered from its 1990 crash that it has never fully recovered from after several lost decades.
Then the Asian Crisis of 1997 wiped out markets overseas. It was unstoppable debt and growing credit (way beyond out of control) that underlay these financial disasters.
Central bankers appear not to have learned any lessons from the crisis. As soon as the global markets had blown up and the dust had settled, they re-inflated the bubble.
They did this through unlimited money printing and by creating the lowest interest rates in history (and maintaining them at these low levels for seven years in the U.S.). The world’s central banks now have the dubious honor of having created or directly encouraged trillions in additional debt in government, corporate, and personal segments of the world economy.
Take the U.S. government. This August the American government managed to notch a new record for one month spending. They amassed a one month deficit that amounted to $214 billion.
The yearly budget deficit shortfall for 2019 will top a trillion dollars. Cumulative American federal government debt is now more than $21.3 trillion, an all-time record for any nation or empire in the history of the whole world. This chart tells the sad tale:
Corporate debt is an even scarier problem now, as hard as that is to believe. U.S. corporate debt today is equal to 45 percent of GDP. Moody’s tells you where American firms are concerned , the majority of them have what they label “speculative” credit ratings.
This means that more than one out of two U.S. corporations carry a high risk credit/debt profile. Globally, non-financial firms have issued corporate bonds on a scale unimagined in the past. This has nearly tripled from year 2007 to date, rising from $4.7 trillion to $11.7 trillion per the McKinsey Global Institute.
The U.S. consumer fares little better lately. Cumulative household debts in the United States reached an all-time high of $13 trillion by 2017. This debt level is greater than that which existed the day before the Great Recession began. It rose by an additional $176 billion for 2018 Q2. This represents another 4.8 percent increase versus the past year.
This is all a giant explosive mountain of debt dynamite only waiting for the right match to set it ablaze. The increasing interest rates are precisely the kind of fire that the debt mountain needs to avoid at all costs. Yet higher interest rates are happening already and continuing to come from the U.S. Federal Reserve (and other governments globally) in a quick-fire rapid pace.
Bond yields have pointed out the danger. They are climbing. This past week, two year costs of government borrowing touched their decade-long high. The 10-year Treasury yield was over three percent. This not only means that the government is having to pay higher interest rates, but also the highly over-leveraged corporations and consumers in the U.S are suffering from them as well.
For the federal government, this is a growing problem already (and a self-inflicted one at that!). Last month saw the U.S. government pay $32 billion for only interest on the current debt. With each rise in the interest rates, this number gets higher and worse. Based on the current trajectory, the annual servicing for the American federal government debt will be the same as the price tag for Social Security in only 30 years or less.
Is Your Retirement Portfolio Prepared for The Debt Bomb and Rising Interest Rates Explosive Combination?
Forbes leaves you with some sobering words on the future of the U.S. and its out of control debt situation:
“History shows that beyond a certain level, debt burdens become too heavy to bear. It is not clear what that level might be, when it will happen, or how severe a crisis could get.”
It is possible that the next crisis has already started. Whether it has or not will be made clear in time. For countries like Turkey, India, Argentina, Venezuela, the Philippines, and others the crisis began months ago. When it will hit the U.S. remains to be seen.
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