March 2017: The End Of A 100 Year Global Debt Super Cycle Is Way Overdue

Global Debt Super Cycle - Public DomainFor more than 100 years global debt levels have been rising, and now we are potentially facing the greatest debt crisis in all of human history.  Never before have we seen such a level of debt saturation all over the planet, and pretty much everyone understands that this is going to end very, very badly at some point.  The only real question is when it will happen.  Many believe that the current global debt super cycle began when the Federal Reserve was established in 1913.  Central banks are designed to create debt, and since 1913 the U.S. national debt has gotten more than 6800 times larger.  But of course it is not just the United States that is in this sort of predicament.  At this point more than 99 percent of the population of the entire planet lives in a nation that has a debt-creating central bank, and as a result the whole world is drowning in debt.

When people tell me that things are going to “get better” in 2017 and beyond, I find it difficult not to roll my eyes.  The truth is that the only way we can even continue to maintain our current ridiculously high debt-fueled standard of living is to grow debt at a much faster pace than the economy is growing.  We may be able to do that for a brief period of time, but giant financial bubbles like this always end and we will not be any exception.

Barack Obama and his team understood what was happening, and they were able to keep us out of a horrifying economic depression by stealing more than nine trillion dollars from future generations of Americans and pumping that money into the U.S. economy.  As a result, the federal government is now 20 trillion dollars in debt, and that means that the eventual crash is going to be far, far worse than it would have been if we would have lived within our means all this time.

Corporations and households have been going into absolutely enormous amounts of debt as well.  Corporate debt has approximately doubled since the last financial crisis, and U.S. consumers are now more than 12 trillion dollars in debt.

When you add all forms of debt together, America’s debt to GDP ratio is now about 352 percent.  I think that the following illustration does a pretty good job of showing how absolutely insane that is

If your brother earns $100,000 in annual income and borrowed $10,000 on his credit card, he could consume $110,000 worth of stuff.  In this example, his debt to his personal GDP is just 10%.  But what if he could get more credit year after year and reached a point where his total debt reached $352,000 but his income remained the same.  His personal debt-to-GDP ratio would now be 352%.

If he could borrow at super low interest rates, maybe he could sustain the monthly loan payments. Maybe?  But how much more could he possibly borrow?  What lender would lend him more?  And what if those low rates began to rise?  How much debt can his $100,000 income cover?  Essentially, he has reached the end of his own debt cycle.

The United States is certainly not alone in this regard.  When you look all over the industrialized world, you see similar triple digit debt to GDP figures.

When this current debt super cycle ultimately ends, it is going to create economic pain on a scale that will be unlike anything that we have ever seen before.  The following comes from King World News

That is the inevitable consequence of 100 years of credit expansion from virtually nothing to $250 trillion, plus global unfunded liabilities of roughly $500 trillion, plus derivatives of $1.5 quadrillion. This is a staggering total of $2.25 quadrillion. Therefore, the question is not what could go wrong since it is guaranteed that all these liabilities will implode at some point. And when they do, it will bring misery to the world of a magnitude that no one could ever imagine. It is of course very difficult to forecast the end of a major cycle. As this is unlikely to be a mere 100-year cycle but possibly a 2000-year cycle. It is also impossible to forecast how long the decline will take. Will it be gradual like the Dark Ages, which took 500 years after the fall of the Roman Empire? Or will the fall be much faster this time due to the implosion of the biggest credit bubble in world history? The latter is more likely, especially since the bubble will become a lot bigger before it implodes.

And there are certainly lots of signs that a global slowdown is already beginning.  For example, global trade growth has fallen below 2 percent for only the third time since the year 2000.  On each of the other occasions, we witnessed a horrible recession take place.  For more signs that economic conditions are deteriorating, please see my previous article entitled “Recession 2017? Things Are Happening That Usually Never Happen Unless A New Recession Is Beginning“.

Of course much of the globe is already in the midst of a horrible economic crisis.  Brazil is in the middle of their worst recession ever, and people are literally starving in Venezuela.  A new round of debt problems has erupted in Europe, with Greece, Portugal and Italy being the latest flashpoints.

Just like in 2007, many are mocking the idea that the a major economic downturn is coming to the United States.  They believe that the ridiculously high stock market valuations of today can stick around indefinitely, and they are putting their faith in politicians.

But it won’t be too long before a new economic crisis begins in America and the kind of civil unrest that I portray in “The Beginning Of The End” erupts all across the country.

I just don’t understand why more people cannot see this.  Government debt, corporate debt and consumer debt have all been growing much, much faster than the overall economy.  Can someone please explain to me how that could possibly be sustainable in the long-term?

Someone that I considered to be a mentor but that has since passed away once said that things would seem like they would be getting better for a little while before the next crash comes.

And it turned out that he was precisely correct.  We are in a season of time when economic conditions have appeared to be getting a little bit better in the United States, and this has blinded so many people to the truth of what is about to happen to us.

Former Reagan Administration Official Warns That Financial Disaster Is Dead Ahead

Disaster - Public DomainWhy won’t the American people listen to the warnings?  David Stockman was a member of the U.S. House of Representatives from 1977 to 1981, and he served as the Director of the Office of Management and Budget under President Ronald Reagan from 1981 to 1985.  These days, he is running a website called “Contra Corner” which I highly recommend that you check out.  Stockman believes that a global “debt super-cycle” that has been building for decades is now bursting, and he is convinced that the consequences for the U.S. and for the rest of the planet will be absolutely catastrophic.  His findings are very consistent with what I have been writing about on The Economic Collapse Blog, and if Stockman is correct the times ahead of us are going to be exceedingly painful.

But right now, most people don’t seem to be in the mood to listen to these types of warnings.  Even though there is a mountain of evidence that the global economy has already plunged into recession, U.S. stocks had a great month in October, and so most Americans seem to think that the crisis has passed.

Of course the truth is that the stock market is not an accurate barometer of the economy and it never has been.  Back in 2008, almost everything else started to go downhill before stocks did, and the same thing is happening once again.  In a recent article, Stockman explained that stocks are surging to absolutely ridiculous levels even though corporate earnings are actually way down

At this point, 75% of S&P 500 companies have reported Q3 results, and earnings are coming in at $93.80 per share on an LTM basis. That happens to be 7.4% below the peak $106 per share reported last September, and means that the market today is valuing these shrinking profits at a spritely 22.49X PE ratio.

And, yes, there is a reason for two-digit precision. It seems that in the 4th quarter of 2007 LTM earnings came in at 22.19X the S&P 500 index price. We know what happened next!

Why do so many refuse to see the parallels?

This crisis is unfolding so similarly to 2008, and yet most of the “experts” are willingly blind.

Much of the stock buying that has been happening in 2015 has been fueled by stock buybacks and by M&A (merger and acquisitions).  Many firms have even been going into debt to buy back their own stocks, but now sources of financing are starting to dry up.  This year we have already seen the most corporate debt downgrades since 2009, and big financial institutions are now becoming much more hesitant to loan giant stacks of cash to these large corporations at super low interest rates.

So it is very, very difficult to see how the equity markets are going to move much higher than they are right now.

Meanwhile, the global economy is starting to unravel right in front of our eyes.  In his recent piece, Stockman discussed some of these data points…

In the last two days we posted the latest data on two crucial markers of global economic direction——-export shipments from Korea and export orders coming into the high performance machinery factories of Germany.

In a word, they were abysmal, and smoking gun evidence that the suzerains of Beijing have not stopped the implosion in China, and that their latest paddy wagon forays—–arresting the head of China’s third largest bank and hand-cuffing several hedge fund managers including the purported “Warren Buffett” of China—-are signs not of stabilization, but sheer desperation.

So it is not surprising that Korea’s October exports—–the first such data from anywhere in the world—were down by a whopping 16% from last year, and have now been down for 10 straight months. Needless to say, China is the number one destination for Korean exports.

Likewise, German export orders plummeted by 18% in September, and this was no one month blip.

For many more recent statistics just like these, please see my previous article entitled “18 Numbers That Scream That A Crippling Global Recession Has Arrived“.

If the global economy really was doing “just fine” as Barack Obama and others suggest, then why is the largest shipping line in the world eliminating jobs and scaling back capacity?…

A.P. Moeller-Maersk A/S is scaling back capacity and cutting jobs in the world’s largest shipping line to adapt to a drop in demand.

The Danish company, which last month lowered its profit forecast for 2015 citing a gloomier outlook for the global shipping market, will shed 4,000 jobs in its Maersk Line unit as part of a program to “simplify the organization,” it said in an e-mailed statement on Wednesday.

And why are some of the biggest banks in the western world laying off tens of thousands of workers?…

Standard Chartered Plc became the third European bank in less than two weeks to announce sweeping job cuts, bringing the total planned reductions to more than 30,000, or almost one in seven positions.

The London-based firm said Tuesday it will eliminate 15,000 jobs, or 17 percent of its workforce, as soaring bad loans in emerging markets hurt earnings. Deutsche Bank AG, based in Frankfurt, last week announced plans for 11,000 job cuts, while Credit Suisse Group AG said it would trim as many as 5,600 employees.

And if things are so great in the United States, why is Target suddenly closing stores?

The truth, of course, is that things are not great.  Global GDP expressed in U.S. dollars is down 3.4 percent so far this year, and total global trade has plummeted 8.4 percent.

We have entered a major global economic slowdown, and like usual, equity markets will be the last to get the memo.

But when they finally do react, that is likely going to greatly accelerate our problems.  Just like we saw in 2008, when there is fear and panic in the financial markets that tends to cause the flow of credit to freeze up.  And that is something that we simply cannot afford, because the flow of credit has become the lifeblood of the global economy.

So no, “the crisis” is not “over”.

Rather, the truth is that “the crisis” is just beginning, and it will soon be making front page headlines all over the planet.

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