Meet The Three Headed Debt Monster That's Going To Ravage The Economy

Authored by EconomicPrism's MN Gordon via,

Mass Infusions of New Credit

“The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath

Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent.


It looks hungry… once it is finished with this little Godzilla snack, it will probably come for the rest of us.


In short, investors were simultaneously anticipating inflation and deflation.  Naturally, this is a gross oversimplification.  But it does make the point that something peculiar is going on with these markets.

Clear thinking and simple logic won’t make heads or tails of things.  For example, late Wednesday and then into Thursday the reverse happened.  Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent.  What to make of it?


Gold and treasury yields have been inversely correlated for some time. This is probably due to inflation expectations driving expectations about interest rate policy – click to enlarge.


With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds.  More than likely, it has something to do with central bank intervention into credit markets.  Though, the Federal Reserve is not the only culprit.

If you recall, the Federal Reserve’s quantitative easing program concluded in late 2014.  The Fed even says it plans to start shrinking its balance sheet later this year.  So if the Fed’s not the source of liquidity for Treasury purchases, who is?

Certainly, the People’s Bank of China and the Bank of Japan are popular Treasury buyers.  In fact, after selling part of its massive hoard of Treasuries in 2016, the People’s Banks of China is once again buying.

And in addition to the Bank of Japan’s Treasury holdings, regional Japanese banks have been stocking up on Treasuries; over the last five years they’ve increased their holdings of U.S. Treasuries and other foreign bonds buy 80 percent.

At the moment, mass infusions of new credit are also being injected from Europe.  Specifically, Treasury purchases are being prompted by the European Central Bank’s never ending quantitative easing program.

Just this week, for instance, ECB President Mario Draghi announced that the ECB would be holding interest rates at 0.0 percent and will extend its quantitative easing program, if required. In Draghi’s mind, Europe just can’t get the inflation it needs so that he can shut down the printing press.


Europe’s finger-wagging printer-in-chief, Mario Draghi. He and the ECB Council erroneously assume that the economy “needs” constant devaluation of the monetary unit in order to grow. This monetary quackery has become the standard  program of central banks around the world and is the main reason why money supply expansion has gone “parabolic” everywhere, because consumer prices as measured by official statistics are not rising “fast enough”. That is bound to have severe repercussions down the road.

Unsustainable Debt Burdens

While the U.S. government can seemingly borrow and spend without limits, the U.S. consumer appears to be nearing the end of its rope.  Somehow this always seems to happen at the worst possible time.

The problem, of course, is that U.S. consumer debt has gone parabolic since early 2009.  Student loans, auto loans, and credit card debt has all recklessly piled up to dizzying heights.  In reality, U.S. consumers have borrowed much more – nearly $13 trillion – than they can ever pay back.  Stagnating wages also exacerbate the problem.

Matt Scully, at Bloomberg, clarifies the dilemma:

“Americans faced with lackluster income growth have been financing more of their spending with debt instead.  There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes.  Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.


“Some companies are growing worried about their customers.  Public Storage said in April that more of its self-storage customers now seem to be under stress.  Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans.”

Indeed, they’ll need plenty of money set aside to cover unpaid debt.  You just wait and see…


Total US household debt (incl. mortgages) – at a new all time high as of the end of Q1 2017 – click to enlarge.


The Three Headed Debt Monster That’s Going to Ravage the Economy

Obviously, bad debt doesn’t just go away.  Over time, it metastasizes through the financial system like a wicked three headed monster.  At first it is subtle and no one really notices the hideous growth taking place.  But then, in the blink of an eye, the monster rampages through the economy leaving destruction in its wake.

The three heads of the consumer debt monster consist of student loans, auto loans, and credit card debt.  What makes these debts particularly nasty is that there’s no collateral backing them. Where’s the collateral?

The collateral for student loans is non-recoverable.  For it has been dispersed into oversized professor salaries, oversized lecture auditoriums, and oversized sports complexes. 

Similarly, credit card debt has been run-up purchasing 72-inch flat screen televisions, avocado toast, and combination dinner platters at Applebee’s. How does a creditor recover the cost of a meal that was consumed 2 years ago?

Technically, auto loans have some form of collateral.  The cars can always be repossessed.  But new cars lose value nearly as fast as fresh tomatoes turn to rot.  Presently, record levels of auto loans are backed by cars with negative equity – the debt owed is more than the cars are worth.


The post-crisis car lending lunacy in all its awe-inspiring splendor – click to enlarge.


What’s more, easy lending over the last 8 years has compelled more and more car buyers to roll their negative equity from prior loan balances into new loans.  On top of that, some amiable lenders only verified income on 8 percent of their auto loans.  Why bother with such inconveniences when the bad loans are being securitized in packaged debt offerings and sold to pension funds?

The point is, this three-headed debt monster’s been constructed in earnest over the last 8 years.  Cheap credit, zealous creditors, and money-pinched consumers desperate to maintain their standard of living have built it up with reckless abandon.

Of course, the chief architects, the policy makers – particularly Bernanke and Yellen – provided the blueprint.  Remember, the almighty American consumer was to borrow all the cheap credit being sprinkled about and spend the economy back to optimal growth.  Well, the consumers did their part.  Yet the lame economic theories fell flat.

Who would you like to feed to the three headed monster for breakfast?


cbxer55 Haus-Targaryen Sat, 06/10/2017 - 20:54 Permalink

I don't even have student loan debt. I got diddly squat for debt. Zero, zilch, nada. And refusing it by not answering my phone any more, since inevitably the caller is someone trying to get me to buy some crap I don't want, or need. I even have car dealers calling me trying to get me to trade in my paid off vehicles for new financed vehicles. Fuckin LOL. Can't make this shit up!The car dealers are the ony one's who bother to leave a message when my phone automatically shunts their call to voice mail, since they are not on my contact list. ;-)

In reply to by Haus-Targaryen

Putrid_Scum takeaction Sat, 06/10/2017 - 14:32 Permalink

There's a reoccurring theme on Zerohedge that bugs me.

The System, Capitalism, has a Framework. It's not just a set of ideas or fantasies that some of you like and some of your don't. There's a Framework.

The Framework is not that malleable. The Central Bankers are not all powerful beings that can set an arbitrary rate of interest that suits your fantasy. It appears to me that the Framework is never mentioned in the media, or academia, because it would reveal uncomfortable truths about the underlying matrix of power relations of Capitalistic Society.

Unfortunately the System Framework is presently defunct and we're the unfortunate saps that are going to have to live through The Reset. And the political economy which follows. My preliminary assessment is that it'll be very dangerous to be rich after The Reset.

Get Ready Guys


In reply to by takeaction

Macavity Putrid_Scum Sat, 06/10/2017 - 15:12 Permalink

What's the System Framework? Money means power means more money means more power ad nauseum?

Good books, both of yours. When's the third one due? Not that you need it but JK Galbraith's THE ANATOMY OF POWER is decent, if terse, regarding power structures. James Richards's THE ROAD TO RUIN is a fun take on the next crash.

In reply to by Putrid_Scum

Macavity fbazzrea Sat, 06/10/2017 - 19:07 Permalink

Galbraith's The Economics of Innocent Fraud Got me started reading econ books again. Voice of the Poor was illuminating. But he's pompous, prolific (used here as an insult), and nothing of his is directly relevant to today without abstraction.

Agree on Rickards readability. There are almost ZERO self-styled econ books today that say anything useful. Everything useful looks unrelated--symptoms of corruption, injustice, theft, etc...mostly within the letter of the law. Ah, 2017!

In reply to by fbazzrea

Macavity Putrid_Scum Sat, 06/10/2017 - 19:16 Permalink

The big reset will involve effective protection for the powerful, wealthy,and savvy:
- extension of US/UK contract law for ownership of real assets (everything bought with funny money, frenzied over the last 10-20 years)...I.e. Extension globally, so that Bush still owns most of Brasil after the reset
- effective destruction of value of currencies and means of exchange, especially digital (yes, Bitcoin is probably just speculation)
- bit of war here and there, but not the big 3

In reply to by Putrid_Scum

TradingTroll Putrid_Scum Sat, 06/10/2017 - 16:31 Permalink

Good luck with the relocation thing to small towns as part of preparation for the reset.


-no one knows what will happen
-in some past collapses, supply chains to cities outlasted rural supply
-there are probably less than 50 small communities in N.America that would be quality enough (tight knit, self sufficient) to warrant requesting to be a part of said community, so the numbers aren't in our favor
-if the reset involves pole shifts, according to some research, 1/3 of the population dies in shock during a pole shift, then come the tsunamis and earthquakes to decimate more people
-by that time the release of noxious chemicals and radiation from nuclear accidents like Fukushima (not even war is necessary) will do in a bunch more people
-in the 70's and 80's scientists warned of an impending ice age, corroborated by NASA. There is enough evidence to support this ( but it's impossible to fit 7bn people between the Tropic of Cancer and the Tropic of Capricorn. If there is no pole shift or war, that is where there may be enough photosynthesis to feed *some* people.

I have young kids. Either we are brave enough to attempt to continue to propagate the human race or we cower in fear.

There is an obvious risk to 'over prepping'.

At the end of the day, survival will be largely random, with slight differences between locations.

Basically, do a bit of prepping then get your mental, emotional and physical house in order. Then work on family and friends to expand your network.

Over prepping could bring an early demise to some families just as relocating to a town where one has no history is equally risky.

In reply to by Putrid_Scum

thisguyoverhere TradingTroll Sat, 06/10/2017 - 17:28 Permalink

Moving to a town where you 'have no history' is what people have been doing for millenia. " All things being equal the ideal would be not being isolated, many people are and many are so damaged that they cannot open up to others without help. Its a big mess.

I get what you are saying as, "You can follow whatever formulae you want, but when SHTF no matter where you are it may be much worse than you imagine."

Lots of stressors out there, many are too unhealthy to manage the basic stressors.

Prayer, practicality and action will be important tools.

Be well

In reply to by TradingTroll

TradingTroll thisguyoverhere Sat, 06/10/2017 - 20:15 Permalink

Well yes, the nomadic way of life is in our history, but the nomadic way you speak of will not be like moving towns, as people do today. It will be to keep on the move before the locals kill you or steal your stuff.

In general the nomadic way is the default. The idea of planning a bug-out location when no one knows what the trick will happen is virtually no different from staying in place.

In reply to by thisguyoverhere

Hugh_Jorgan TradingTroll Sun, 06/11/2017 - 11:05 Permalink

If you don't have a big network, where you go is more important than how many people you know there. Find people with common values. Study the election result maps, visit and talk to people first. Make sure you get to know your neighbors wherever you are. Create ties immediately, try to exchange favors as much as you can, have cookouts, watch a game together.

In reply to by TradingTroll

gatorengineer Sat, 06/10/2017 - 14:07 Permalink

Sorry, I think these three can play out for a long time yet.  There is nothing causing the student loan bubble to pop now, or tomorrow, it can keep inflating.  and it can be socialized at a moments notice.  creidt card debt.  Credit card debt, yeah the obvious sign is the shakeout in retail, thats real.  Auto loans, no thats not ""real"" that is being paid forward.  I saw lease ads, for $129 a month, $3500 down for two years on 40k Rides.  No that can be printed for a long time, and with alot of it japanese money or ECB, not popping any time soon.The big oversights are housing and inflation.  Home prices are falling in alot of the country.  I know not the headline cities.  When folks that have their kids living in the basement, not being able to make the nut on the 4th time they have refied.  Then its game over.Lots of feel good stories for the sheeple on record low gas.... I am scratching my head, and looking at $2.60 in pennsytucky with $45 oil against a relatively week dollar.  That doesnt make any sense.  Cold cuts at the store $12.99 (and people still buy), green peppers $2 EACH, half gallon of milk $3.20, a whole gallon $3.99  yeah its comming.  Electric rates $170 for 1000 kwh.....  all that money sloshing for the last decade is starting to get hot, against falling salaries.  

chicagomike666 gatorengineer Sat, 06/10/2017 - 14:35 Permalink

I agree with you..unless there is a "triggering event".  However, I'm amazed at the costs you've mentioned.  I live in Chicago--which seems ungodly expensive these days---but a Gallon of milk is about $2.10 at Jewel, and according to my latest ComEd bill--I'm only paying $69 per 1000 Kwh.  Even gas prices here at cheaper--at least in the suburbs LOL.  finally even cold cuts (Dietz and Watson, Eckerich etc) are running more like $7 per pound.  However, taxes are the highest in the nation--with 10.25% on retail--and a variety of "specialty taxes" favorite is the recently enacted "convenience tax" of $.07 for a bag at grocery stores...Perhaps the higher taxes result in a mild deflationary trend in actual goods prices--I actually doubt this--but you've made me feel better ( a tiny bit) about cost of living here....????

In reply to by gatorengineer