The Great Debt Crisis And Today

 If you started reading this blog in late 2006 you know that I was puzzled and worried by the escalation of sovereign and private debt, the explosion of real estate prices, the proliferation of tranched mortgage bonds and leveraged credit derivatives.  Today, many have forgotten that the trouble was not isolated to sub-prime loans. There was excess everywhere, from FNMA and GNMA all the way to government bonds, real estate and consumer banking in PIIGS (Portugal, Italy, Ireland, Greece, Spain). 

Greece, Lehman, Nationwide Savings and many more went bankrupt, Cyprus  seized bank deposits over 100.000 euro, Iceland reneged on all foreign investors, AIG, Merrill Lynch and others were bailed out or forced into shotgun mergers. Yeah, there was much more trouble than people remember. The movie Big Short, though quite accurate, described just one aspect of the excess (sub prime loans and derivatives).

Yet, compared to today the Great Debt Crisis (GDC) was a walk in the park.

In many ways, GDC never ended - the real problems were just swept under the carpet. The ECB hasn’t raised rates in over a decade and many countries “enjoyed” negative interest rates. Money policy-wise, we have been living in party-hardy times for a very, very long time. I would dare say an unconscionably long time, if it wasn’t for the pandemic, which panicked governments into taking monumentally unwise actions.

In sum, zero interest rates for over a decade, plus gigantic money creation in 2020-22 resulted in:

1. Enormous risk appetite. Basically, people threw money at everything, including truly moronic “assets” .
2. The creation of an ocean of money supply, the fuel for inflation which has now ignited.
3. The unshakeable belief that central banks will always come to the rescue, no matter what (the so-called Fed put).

Today’s problems are systemic and widespread.  They go to the very heart of monetary economics and policy, as practiced by governments and central banks in the US and EU who no longer consider money as a storehouse of value. They use it as just another expedient political tool, a sort of socioeconomic panacea, a cure-all whipped out for each and every malady.  

And why? Because truly effective macroeconomic political solutions have become impossible to enact, or even propose. 

• The US is deeply divided politically, economically and socially. Inequality is back to 19th century levels and the working middle class has been eradicated.
• The EU is a hodgepodge of completely unequal sovereign nations bound together by the euro straight-jacket.  Well intentioned, but terribly executed.

In the absence of coherent political leadership, everything and anything is thrown to the Fed and ECB, whose heads have become mere compliant figureheads.  Instead of facing reality, they have come up with Modern Monetary Theory where money just doesn’t matter.  

In some ways the period from 2006 to now is like WWI and WWII, which we now understand to be a Long War interrupted by a period of growing imbalances leading to disaster.  We cannot make the same mistake. To wit:

1. We have to restore the Middle Class in the West, particularly the US.
2. We have to renounce Permagrowth globally.
3. We have to remove financial markets’ influence on political decisions.
4. We have to restore faith in money.

I will close with a chart. After all, a Sudden Debt post can’t be complete without one 😆😆

In the past 40 years the top 0.01% of Americans have seen their income grow 600% while the “bottom” 99% saw only a 50-80% rise. Mind you, this chart comes from the Council on Foreign Relations, publisher of Foreign Affairs, not some dubious left wing fringe.  It vividly portrays the need for #1 above.

Soaring inflation for essential goods plus much lower wage gains create a highly toxic social mixture.  I fear that Trumpism and the attack on Capitol Hill are a mere opening act; discontent could easily spin out of control into rage.