Why The Debt Time-Bomb Is (Finally) About To Blow

Why The Debt Time-Bomb Is (Finally) About To Blow
Sometimes even children’s cartoons can shed important insights on our behavior.

“I’d gladly pay you Tuesday for a hamburger today.”

Wimpy was a fringe character in the old Popeye cartoons. He was the original debt-based consumer. The first Deadbeat Debtor.

Wimpy was always wanting to consume another hamburger. He just never had the cash to pay for it. So he funded his consumption with debt.

He was a character that (at the time) attracted either amusement or scorn, depending on one’s perspective. His fiscal management was as unsustainable as it was short-sighted.

Consumption (with the exception of durable goods) is transitory. But the debt is permanent – without the surplus funds to retire it.

Add in compounding interest on that debt and there is only one possible outcome: bankruptcy.

The Era of the Deadbeat Debtor

Now look at the 21st century, where governments, businesses and individuals alike are all drowning in debt. The Era of the Deadbeat Debtor. A world full of Wimpys.

Governments, businesses and individuals are all “managing” their finances through ever-increasing levels of debt.

Whether it is governments and businesses funding their operations with debt or individuals funding their consumption with debt, it is equally short-sighted and unsustainable.

The great Debt Apologists here are the Keynesian economists.

These monetary/financial witch doctors preach that ever-increasing debt is sustainable. According to their folklore, incremental economic growth parallels the rate of growth in debt.

This makes the debt load “sustainable” (supposedly) because it isn’t increasing relative to the overall size of the economy.

Debt goes up and up and up. But everyone lives happily ever after.

It’s a seductive fairy tale to some. The problem is that there has never been an example in all of human history of any economy that has been able to sustain ever-increasing debt.

What do we see in our 21st century world of debtors? We see debt levels continuing to rise not only in absolute terms, but also in relative terms.

Put another way, debts are increasing (at every level) at a much greater rate than economic growth. Hopelessly unsustainable.

It is all about to end. One stat provides us with the economic death-knell.

In the 1950’s, the world was generally in surplus. Much of the World War II debts had been repaid.

In that environment, adding debt was a seductive means of juicing economic growth. At first, debt-servicing costs (and the lost productivity that goes with it) were minor.

However, as debt levels have moved higher and higher and higher and higher, debt servicing has become ever more costly and painful.

The response of the Keynesians? It’s the old joke about someone jumping off the roof of a 100-storey building.
As he plummeted past an open office window on the 50th floor, someone heard the jumper exclaim “So far, so good.”

The joke is now over because (finally) the global economy is about to go “splat” on the pavement below.

End game for an unsustainable economic system

Look at the growth in U.S. sovereign debt over the past decade (above). This comes at a time when the U.S. is once again claiming to be the growth-engine of the global economy.
US economy under Trump: Is it the greatest in history?

“Our economy is the envy of the world. Perhaps the greatest economy we’ve had in the history of our country.”
-  President Donald Trump, February 2020

Now look at the collapse in the marginal utility of U.S. debt.

It takes ten times as much debt to generate an additional dollar of U.S. GDP compared to the 1950s.

But that’s not even the worst news from the data above.

This comes during a decade when the costs of debt have never been lower in human history.

At a time when debt has never been cheaper, the economic return from each new dollar of debt has never been lower.

This is not a surprise – to anyone with half a brain (all Keynesians are excluded here).
Law of Diminishing Marginal Returns

What Is the Law of Diminishing Marginal Returns?

The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

Economists call this a “law”, but it’s really just common sense. Too much of anything can be (will be) a bad thing.

Raise taxes too high and there are no discretionary dollars of spending left over to fuel the economy. Cut taxes too low and there are no funds to maintain basic government services.

Taking some vitamin C is good for us. But keep increasing the dosage and you soon reach a toxic level, where it literally does more harm than good.

Now, in a time of economic crisis, we look around the global economy at a collection of economically bankrupt nations governed by intellectually bankrupt politicians (and central bankers).

They have only one play in their fiscal playbook: more debt. And that play no longer works – at all.

Cheap debt is supposed to fuel economic growth. Just look at urban real estate markets.

A decade of ultra-cheap debt has fueled ultra-extreme urban real estate bubbles around the world. But it hasn’t made our economies stronger or healthier.

A small percentage of people have gotten richer. The vast majority is relatively poorer. Bubble real estate prices are causing more people to sink even deeper into debt.

No overall societal or economic benefit. Pseudo-prosperity, courtesy of the Keynesian witch doctors.

And it is ending.

Debt costs are as cheap as they can go unless one envisions (permanent) “negative interest rates”: a world where all lenders pay all debtors for the ‘privilege’ of loaning them money. Who will lend? Yet with debt already at a near-zero cost, it is providing near-zero economic stimulus.

Meanwhile the overall debt loads keep growing.

A larger percentage of every dollar of new revenue (or new debt) goes into debt servicing. Less and less is left over as productive capital. And that capital is generating ever-diminishing returns.

It is a recipe for utter failure.

Broken toys

These debt-based economies and our debt-based economic system are like broken toys. You can put in “fresh batteries” (i.e. print up trillions of units of new fiat currency), but the toy still isn’t going to run.

Nothing but a complete reset of the global economy can replace all of these broken toys with functional, solvent and sustainable economies.
  • Debt Jubilee to make economies, businesses and individuals solvent and sustainable
  • A new gold standard to keep the politicians and central bankers honest

It isn’t coming overnight.

This reset will be extremely painful and unpleasant – like any major surgery that is postponed as long as possible.

Meanwhile, debt-addicted governments continue drowning themselves (and us) in more debt. Inflation-addicted central banks continue drowning everyone/everything in oceans of new fiat currency confetti. This is despite the utter futility of these economic policies.

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