Staggering World Debt Points toward Crisis

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goodasgold
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Staggering World Debt Points toward Crisis

Post by goodasgold » Sun Mar 06, 2016 2:32 pm

As all sailors know, it is a bad sign when you suddenly notice rats scurrying around the deck while wearing life vests.

Huge and ever-growing national debts, unfunded liabilities rising to the height of the Tower of Babel, ZIRP, NIRP, the dubious effectiveness of additional QE binging, a generalized refusal to consider reforms even as the global house of cards trembles, etc., all point to bad news. Hang onto your gold, brothers and sisters. It will be an especially bad sign when the portraits of PPers begin appearing on the "wanted" posters in your local post office, accused of being "Plutocratic, Gold-Hoarding Enemies of the People:"

http://www.telegraph.co.uk/business/201 ... dit-binge/

I hate to sound this theme too often, but I can't help worrying that the world's collective Krugmanian frenzy and disdain for basic arithmetic will soon catch up with us, with disastrous results.
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Re: Staggering World Debt Points toward Crisis

Post by jason » Wed Mar 09, 2016 1:16 pm

goodasgold wrote: As all sailors know, it is a bad sign when you suddenly notice rats scurrying around the deck while wearing life vests.

Huge and ever-growing national debts, unfunded liabilities rising to the height of the Tower of Babel, ZIRP, NIRP, the dubious effectiveness of additional QE binging, a generalized refusal to consider reforms even as the global house of cards trembles, etc., all point to bad news. Hang onto your gold, brothers and sisters. It will be an especially bad sign when the portraits of PPers begin appearing on the "wanted" posters in your local post office, accused of being "Plutocratic, Gold-Hoarding Enemies of the People:"

http://www.telegraph.co.uk/business/201 ... dit-binge/

I hate to sound this theme too often, but I can't help worrying that the world's collective Krugmanian frenzy and disdain for basic arithmetic will soon catch up with us, with disastrous results.
All true, but it's impossible to time it.  People have been saying this since the early 70s when the US went off the gold standard.  Ron Paul has been talking about the impending collapse for decades.  It does look like things are stepping up and possibly coming to a head, but there is no way to know if the big crash is truly right around the corner, or not.  This is why the PP is so amazing and so valuable - you are covered either way.
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Re: Staggering World Debt Points toward Crisis

Post by Jack Jones » Thu Mar 10, 2016 12:00 pm

jason wrote: All true, but it's impossible to time it.  People have been saying this since the early 70s when the US went off the gold standard.  Ron Paul has been talking about the impending collapse for decades.  It does look like things are stepping up and possibly coming to a head, but there is no way to know if the big crash is truly right around the corner, or not.  This is why the PP is so amazing and so valuable - you are covered either way.
Harry devoted one of his radio shows to this topic and had the same conclusion. I think it was this one, but I'm not certain:

https://web.archive.org/web/20160324133 ... -12-12.mp3
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Re: Staggering World Debt Points toward Crisis

Post by barrett » Thu Mar 10, 2016 7:28 pm

Jack Jones wrote:
jason wrote: All true, but it's impossible to time it.  People have been saying this since the early 70s when the US went off the gold standard.  Ron Paul has been talking about the impending collapse for decades.  It does look like things are stepping up and possibly coming to a head, but there is no way to know if the big crash is truly right around the corner, or not.  This is why the PP is so amazing and so valuable - you are covered either way.
Harry devoted one of his radio shows to this topic and had the same conclusion. I think it was this one, but I'm not certain:

https://web.archive.org/web/20160324133 ... -12-12.mp3
Thanks for sharing that link. That's a great show. To sum up, US debt is a major problem but it may not manifest itself as such along any kind of predictable timeline. HB talks about how people were sounding the debt alarm as far back as the 1960s. So, while goodasgold's advice to hang onto your gold is sound, Harry Browne would probably add, "And while your at it, hang onto your stocks, bonds and cash as well."
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Re: Staggering World Debt Points toward Crisis

Post by rickb » Thu Mar 10, 2016 10:07 pm

The modern monetary system is truly bizarre.  Modern money is not backed by a tangible resource like gold.  It's backed by debt.  What the levels of world wide debt increasing means is that people (overall) have more money.  It's like the gold supply increasing over time.  This is not necessarily as bad as it might seem.  Over time, you probably want the money supply (and, therefore, debt levels) to increase.  However, you probably don't want debt levels to increase at a faster rate than productive capacity. 

Staggering world debt means there's a staggering amount of wealth (money) in the world.

Does staggering wealth sound like a problem?

This is, of course, ultimately a Ponzi scheme.  The debt (which backs money now) is actually a claim on future earnings.  By increasing the debt faster than earnings increase (which is what we've been doing for a long time), we're making claims on earnings farther and farther into the future.  In some sense, the future is infinite, so there's no obvious limit to how much future earnings we can claim now.

The forcing function will be when people, and governments, start defaulting on debt.  This will cause a loss of confidence in "money".  The very good thing about backing money by, specifically, gold is that it's very hard to make gold go away.  Debt, on the other hand ...
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Re: Staggering World Debt Points toward Crisis

Post by Pointedstick » Thu Mar 10, 2016 10:14 pm

Well said, rickb. "Truly bizarre" is the right way to put it.
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Re: Staggering World Debt Points toward Crisis

Post by tennpaga » Thu Mar 10, 2016 10:59 pm

rickb wrote: The debt (which backs money now) is actually a claim on future earnings.
The same is true of stocks!  That is, a share of stock is simply a claim on the company's future earnings stream.

In October 2014, U.S. Stock market capitalization was $22 trillion (link), while GDP was $17.5 trillion (see page 3).
* Gresham's Law: Bad behavior drives out good.
* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

https://fs.blog/2009/12/mental-model-greshams-law/
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Re: Staggering World Debt Points toward Crisis

Post by BearBones » Fri Mar 11, 2016 5:31 pm

rickb wrote: The debt (which backs money now) is actually a claim on future earnings.  By increasing the debt faster than earnings increase (which is what we've been doing for a long time), we're making claims on earnings farther and farther into the future.  In some sense, the future is infinite, so there's no obvious limit to how much future earnings we can claim now.

The forcing function will be when people, and governments, start defaulting on debt.  This will cause a loss of confidence in "money".  The very good thing about backing money by, specifically, gold is that it's very hard to make gold go away.  Debt, on the other hand ...
Great explanation! We can all make our own guesses as to whether or not the 21st century will be as prosperous as the 20th. Judging by past posts on Overshoot, seems PS might say yes, and MT no.
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Re: Staggering World Debt Points toward Crisis

Post by MachineGhost » Sat Mar 26, 2016 3:41 pm

jason wrote:
goodasgold wrote: As all sailors know, it is a bad sign when you suddenly notice rats scurrying around the deck while wearing life vests.

Huge and ever-growing national debts, unfunded liabilities rising to the height of the Tower of Babel, ZIRP, NIRP, the dubious effectiveness of additional QE binging, a generalized refusal to consider reforms even as the global house of cards trembles, etc., all point to bad news. Hang onto your gold, brothers and sisters. It will be an especially bad sign when the portraits of PPers begin appearing on the "wanted" posters in your local post office, accused of being "Plutocratic, Gold-Hoarding Enemies of the People:"

http://www.telegraph.co.uk/business/201 ... dit-binge/

I hate to sound this theme too often, but I can't help worrying that the world's collective Krugmanian frenzy and disdain for basic arithmetic will soon catch up with us, with disastrous results.
All true, but it's impossible to time it.  People have been saying this since the early 70s when the US went off the gold standard.  Ron Paul has been talking about the impending collapse for decades.  It does look like things are stepping up and possibly coming to a head, but there is no way to know if the big crash is truly right around the corner, or not.  This is why the PP is so amazing and so valuable - you are covered either way.
Nothing to see here.  I'm going back to bed.  Wake me up when its all over.

P.S.  The debt isn't the bad news; the bad news precedes the debt.  Doh!
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Staggering World Debt Points toward Crisis

Post by jason » Tue Mar 29, 2016 3:20 pm

TennPaGa wrote:
rickb wrote: The debt (which backs money now) is actually a claim on future earnings.
The same is true of stocks!  That is, a share of stock is simply a claim on the company's future earnings stream.

In October 2014, U.S. Stock market capitalization was $22 trillion (link), while GDP was $17.5 trillion (see page 3).
I think owning a share of stock is a bit different.  If you own a share of stock, and the company does not pay dividends, then you are not a debt burden/creditor to the company.  That share of stock might have been issued 30 years ago, and just keeps changing hands, with no negative impact on the company. 

With national debt, each country is paying interest on the debt.  Aren't the interest payments on this debt what the fuss is all about?  If you could just roll over the debt anytime you wanted by selling Treasuries, without paying any interest, there would be no downside to having massive debt.  But the interest payments are currently pretty big, and will become huge if interest rates rise, and that will become a big burden on the budgets of many nations, who will be forced to raise taxes and/or print even more money to pay the interest.  Ultimately, this could lead to very high taxes combined with very high inflation.  Based on what I have read, I think all of this is accelerating lately, and has become somewhat exponential, and is not sustainable on the current trajectory.  The money supply tripled over just a few years.  The only reason why we haven't seen massive inflation is because very little of this new money is circulating.  Last time I looked into this, the bulk of it was parked at the Fed, collecting interest for the banks.  If this money starts circulating at some point (that is a big if), there is a good chance we will see big-time inflation.  And the Fed will probably want to raise interest rates to get the inflation under control, which in turn would increase the interest payments on our national debt, which in turn would force us to print more money to pay the higher interest payments, which in turn adds to the inflation, and so on, creating a downward spiral.
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Re: Staggering World Debt Points toward Crisis

Post by technovelist » Tue Mar 29, 2016 3:50 pm

jason wrote:
TennPaGa wrote:
rickb wrote: The debt (which backs money now) is actually a claim on future earnings.
The same is true of stocks!  That is, a share of stock is simply a claim on the company's future earnings stream.

In October 2014, U.S. Stock market capitalization was $22 trillion (link), while GDP was $17.5 trillion (see page 3).
I think owning a share of stock is a bit different.  If you own a share of stock, and the company does not pay dividends, then you are not a debt burden/creditor to the company.  That share of stock might have been issued 30 years ago, and just keeps changing hands, with no negative impact on the company. 

With national debt, each country is paying interest on the debt.  Aren't the interest payments on this debt what the fuss is all about?  If you could just roll over the debt anytime you wanted by selling Treasuries, without paying any interest, there would be no downside to having massive debt.  But the interest payments are currently pretty big, and will become huge if interest rates rise, and that will become a big burden on the budgets of many nations, who will be forced to raise taxes and/or print even more money to pay the interest.  Ultimately, this could lead to very high taxes combined with very high inflation.  Based on what I have read, I think all of this is accelerating lately, and has become somewhat exponential, and is not sustainable on the current trajectory.  The money supply tripled over just a few years.  The only reason why we haven't seen massive inflation is because very little of this new money is circulating.  Last time I looked into this, the bulk of it was parked at the Fed, collecting interest for the banks.  If this money starts circulating at some point (that is a big if), there is a good chance we will see big-time inflation.  And the Fed will probably want to raise interest rates to get the inflation under control, which in turn would increase the interest payments on our national debt, which in turn would force us to print more money to pay the higher interest payments, which in turn adds to the inflation, and so on, creating a downward spiral.
This is why the Fed is in a box.

They can't announce that they will never let rates go to a market-clearing level, because if they did, the dollar would go to zero.

They can't announce that they will raise rates to a market-clearing level, because that would trigger the spiral you refer to.

So they have to keep temporizing about "raising rates very slowly some day", while not actually doing anything.

Some day that will fail too, as we reach a tipping point where enough people realize this conundrum that there is no market for Treasury debt other than the Fed itself. At that point the game is over.
Another nod to the most beautiful equation: e + 1 = 0
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Re: Staggering World Debt Points toward Crisis

Post by MachineGhost » Wed Mar 30, 2016 12:11 am

Banks don't need reserves to create loans.  They find it after the fact to fufill regulatory requirements...  several Western countries have no bank reserve requirements at all.  So the false idea that all the bank reserves are "not circulating in the economy" is merely a conflation of the fact that there is currently little demand and little borrowing from banks.  Money is created on demand when a borrower applies and is approved for a loan, not by the Fed with bank reserves.  That is, there's a deflation in confidence by borrowers, so inflation and yields are currently low.  Banks cannot force people to borrow unless negative interest rates force them to give loans to creditworthy people that don't need it.  We'll see if that happens.

In theory, with so much unneeded bank reserves on the balance sheets, banks could create gigantuan amounts of loans and engage in a massive malinvestment scheme if for some strange reason everyone went manic and starting borrowing en masse and credit and documentation requirements were lax...  oh wait, been there done that, it was called the subprime crisis.  With the strict Frank-Dodd regulations in place and 40-page mortgage applications, it'll never happen again.  And better yet, the Fed at any time can take back all those bank reserves if it so chooses.

Debt is not bad if it is issued for productive purposes.  You have to make a convincing argument that both private sector and government debt has been massively malinvested to support a doomsday scenario where economic confidence is lost and there's no bid at auction for safe assets.  That's easy to do in Red China with endless empty cities, corruption and human rights abuses.  But the USA?  We've got decaying infrastructure, a joke of an education system, means testing for all kinds of transfer payments, stingy banks that have strict credit criteria, lack of any fiscal spending due to political polarization and total assets several times more than all total liabilities, including the unfunded.  That's a huge smorgasbord of productive opportunities just waiting to be filled.  So I think we'll do just fine for another decade or two, especially if we get a recession soon to clear out all the zombie companies.

BTW, government debt is never paid off.  It's always rolled over and inflation always reduces the burden over time, and now without an austerity-imposing "gold standard", the USD is free to devalue to let off the inflationary steam without extreme soccially dislocating economic shocks like 1929, 1942 or 1971.

Basically, "sound finance" adherents don't understand anything that I just said above.  They are stuck in the pre-1971 era operational reality of fixed exchange rates, warehouse receipts redeemable in silver or gold, inflation being the result of rising real wages, endless banking panics and runs, and an inelastic money supply.
Last edited by MachineGhost on Wed Mar 30, 2016 12:20 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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