David Stockman is a former businessman who served as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget under President Ronald Reagan. He was recently interviewed on two different programs and made the following comments:
“The carnage is coming soon . . . . Our two-decade long grand experiment in financial bailouts, massive money printing by central banks everywhere, and non-stop Keynesian debt stimulus is heading towards the wall.
“[I]t’s inconceivable that there will be any lasting deal on Greece. It’s almost certain that we’re at the threshold which will result in a crackup of the EU and the euro. That will then catalyze a global crisis of confidence in central banks . . . . The central banks of the world are on the edge of desperation.”
Mr. Stockman’s not the first or only commentator to warn of a loss of confidence in central banks—but his warning still strikes me as strange. Virtually every nation has confidence in its fiat currency but which nations have much awareness of, let alone confidence in, their central banks?
Stockman’s not warning that we’ll lose confidence in our fiat currency or in our national economy. He’s warning that we’ll soon lose confidence in central banks.
Did the American people ever have much “confidence” in the Federal Reserve? I don’t think so. How could the American people lose confidence in our “central bank” if we never thought about that institution enough to have confidence in it in the first place?
“In Europe, Sweden (has now) joined the cavalcade of negative interest rates. . . . Denmark was already there and is desperately fighting off a massive inflow of capital out of the EU. . . . We saw the calamity a few weeks ago when the Swiss finally had to give up their rather lunatic peg to the euro and the exchange rate soared overnight, creating enormous losses and carnage. The European Central Bank, is about ready to unload $1.3 trillion of make-believe, printed-out-of-thin-air currency into the European financial and bond markets.
“In Asia, Japan’s madness knows no limit. . . . Beijing sees an implosion everywhere in their massively overextended and debt-ridden markets, particularly real estate.
“Brazil and Turkey are in huge trouble.
“There are unlimited flashpoints—points of breakdown in the global economy and financial system. It’s only a question of what becomes the catalyst to touch this whole situation off.”
There’s the real point: The world is awash in a multitude of potential “flashpoints” that may each have the capacity to trigger the collapse the global, debt-based monetary system. Given this multitude, it seems likely that one of more of those “points” will “flash” in the near future. If so, may see some sort of global decline or collapse.
“We’re in the crack-up phase. Four main factors threaten the world economy and financial markets:
1) “Increasing desperation . . .. Central banks from Japan to Sweden have opened their cash spigots.
2) “Increasing market volatility. In the last three months, the CBOE Volatility Index has soared as high as 25.2 and dropped as low as 11.53.
3) “Investment . . . . will be driving a huge deflation of commodity and industrial prices worldwide.”
4) “Demand has run smack up against peak debt. Global debt now totals $200 trillion.”
I agree that global demand has probably been slowed by “peak debt”. In other words, the world is already so deeply indebted that existing debt can’t ever be repaid in full. Therefore, it’s generally unreasonable for creditors to lend to borrowers who can’t repay their current debts let alone additional debt.
Now is not a good time to lend. It’s a better time to save.
I don’t understand what Stockman means in “Global debt now totals $200 trillion”. Perhaps he meant to say “Official global debt now totals $200 trillion.” Perhaps he was misquoted.
But the Congressional Budget Office has declared that the US National Debt (including unfunded liabilities) is over $200 trillion. Including derivatives, some calculate that the total global debt may be as much as $2 quadrillion. Thus, Stockman’s warning about a “mere” $200 trillion seems misstated.
Still, Mr. Stockman is probably right in warning that global demand has run up against the “wall” of total global debt. The world is so deeply in debt . . . that most nations can’t borrow any more currency . . . to buy more stuff . . . to create more demand . . . to provide more corporate business . . . to generate more profits . . . to justify hiring more employees. . . . so they can buy more stuff . . . to create more demand, etc..
This excessive debt problem isn’t news. It explains why the Federal Reserve has purchased over $3 trillion in US government bonds and mortgage-backed securities (toxic “assets”) over the past six years. The Fed purchased US government bonds because almost no one else would.
Q: Why did most private and foreign creditors stop or restrict lending to the US gov-co?
A: Because they believed that the US gov-co was already so deeply indebted that it could never repay most of its existing debt and would surely default on most of its new debt.
So, the Fed bought more government debt and paid for it with fiat currency. The Fed could do this because the Fed has a monopoly on printing fiat dollars and could therefore “spin” Monopoly Money out of thin air to pay for government bonds. That Monopoly Money was supposed to be lent into the US economy to “stimulate” the economy, and allow us all to borrow more currency (Monopoly Money), so we could buy more stuff . . . to create more demand . . . to make more corporate profits, etc. so our economic hamster wheel could keep spinning faster and faster.
My point is that the “debt wall” that Mr. Stockman warned against is not simply something in our future. It’s something we’d already encountered five or six years ago when creditors stopped lending freely to the US gov-co.
More, if this metaphorical “wall” exists, it isn’t hard like a brick wall. It’s soft like a wall of marshmallows. We “hit” that “wall,” several years ago, but we didn’t have a real crash. Our first encounter with the “debt wall” didn’t cause a catastrophe, per se. It was more like landing in a soft, viscous swamp. We didn’t suffer any broken bones, but we did suffer an economic slow-down as we tried to slog through the “marshmallow swamp”.
Can we continue to slog through the “swamp” of debt marshmallows until we reach more solid ground? I doubt it, but it’s not impossible.
Mr. Stockman, however, seems convinced that all that global debt is reaching a point where many of us won’t merely be slowed, but stopped. Once we’re stopped, the hamster-wheel will stop spinning. What happens then?
Stockman’s not optimistic.
Neither am I.