Debt Crisis Update 2020

Back in 2005 I wrote a piece called, “The Path To Economic Crisis”. I thought it was a critical time then and in fact a crisis was only 3 years away. A financial and economic crisis hit in late 2008 when stocks halved, banks were failing and the Great Recession hit.

I looked at the government response and in 2009 came to the conclusion a collapse was not likely anytime soon. The government demonstrated it was going to take any measure it had to in order to avoid a collapse. From TARP, to chronic deficit spending, to printing oodles of money, they were successful in avoiding a collapse.

We got a recovery/ expansion but due to the building structural problems (debt, declining work ethic, regulation, and printing of money) I predicted we’d slide economically for up to 20 years, and then the world economy or financial system would collapse in some way, shape or form. GDP growth in the 2010's was sub-par, about 2 percent. Growth in the 2010's was about 2.2 percent. If it was not for the final deficit spending boost in GDP in 2017, 2018 and 2019, growth for the decade would have been the lowest since the Great Depression. The slide is contining even as the government tries to prop everything up. I do think the slide is accelerating in the early 2020's.

Things have decayed so fast the past few months I need to update the outlook. Mainly, the decay is reflected in the government’s response. In 2008-09, the government responded with hundreds of billions in money printing and fiscal spending/ bailouts. Today, the response has been in the trillions, indicating how bad the economic and financial cratering has been. The Fed printed about $3 billion in three months. The US Treasury's annual deficit is running close to $4 trillion as we are heading to $30 trillion in federal debt outstanding.

The primary problem with the economy and financial system is piles of debt, in both the public and private sectors. When income, wealth or equity is spent on interest payments, it cannot be consumed or invested. This slows economic and income growth. Less income growth, and it is harder and harder to service the debt. Everything from investment to consumption to saving bogs down.

Instead of addressing the problem by cutting spending and dealing with the defaults and write-offs, our policy leaders just print money and borrow and spend in an effort to keep the economy rolling. But with each passing iteration of the business cycle, more and more stimulus is required to keep the economy moving.

It is like the marathon runner who has run 2 or 3 marathons. Instead of letting him rest, when he slows down his handlers jump pump him up with more and more amphetamines until his heart just explodes. This is where we are heading folks.

I cannot see us escaping a major economic or financial crisis this decade. I envision some sort of crisis that slows growth. Covid-19 could be the start, especially if a second shoe drops (another crisis) or Covid-19 lingers and lingers, changing habits for a long term. All this debt starts to weigh on the economy and income growth. Things start to crater and the Fed prints oodles of money. The Fed is already bailing out the US Treasury buying record amounts of its debt. It has been buying mortgages from banks at a good clip. Now the Fed is buying corporate bonds, trying to bailout the weakest corporations that issued way too much debt. The CARES Act which is bailing out states with trillions for things like unemployment benefits or helping in the medical response. Heck the Treasury is even directly making payments to households. All this is an indication of how the economy is starting to crater in various sectors.

What could give way next? My hunch is it will be commercial mortgages or it could be the pension systems. The private and public pension systems will be paid, albeit with massive federal bailouts of printed money. That money will be spent, and it will result in much higher inflation. Gold and SC real estate are the best investments to keep pace with the devaluing currency that will unfold throughout the 2020’s.