The Debt Beneath

Authored by Sven Henrich via,

Debt is irrelevant and matters not. It’s different this time. That’s the message from politicians, markets and participants. Tax cuts pay for themselves (they do not), leverage doesn’t matter (it does) and the increased costs of servicing the debt as a result of rising rates will be offset by imaginary real wage growth to come (they won’t).

But the calmest market waters in history continue to keep these illusions alive as asset prices keep levitating from record to record.



Debt does matter and it was ironically left to Janet Yellen to voice any remnant concerns about the sustainability of debt to GDP: “It’s the type of thing that should keep people awake at nightshe said.

With good reason:

After all the debt burden has never been higher and rates, following years of enabling the largest debt expansion in human history, are starting to rise in the US. In the larger historic context rates are still low, but let’s be clear, they are rising:

And with rising rates come questions of the sustainability of servicing incredibly high debt loads.

The worldwide equity rally since the early 2016 lows has resulted in a massive increase in the market capitalization of global asset prices which have increased by over $25 trillion in value since then. As discussed in my 2017 Market Lessons US market capitalization is now north of 143% of US GDP.

Low rates and free money in form of global QE and now US tax cuts make it all possible and consequence free. But is it?

Let’s take a look at the leveraging game over the past 2 years since this is when the most recent rally began. And note in many cases we don’t have full 2017 data yet so I’m using the running 2 year data where I can pull it. The trend is the same: Up, up and away.

Federal debt has increased by $2.1 trillion. Different management, same result and tax cuts will leave a revenue source gap in the long term budget and will add further to the debt:

Corporate debt has increased by over $568B during the same timeframe:

Household debt has increased by $364B:

Revolving debt, you know the one subject to higher rates, is now exceeding $1 trillion, up over $100B in less than 2 years:

Student loans continue to expand unabated, up by another $166B:

And consumer loans on credit cards at commercial banks are up by another $100B since the February 2016 lows alone:

We don’t have full year end data yet, but there are indications on how the trend concluded:

“Shoppers in the U.S. racked up an average of $1,054 of debt this Christmas season — an increase of 5% over last year – 44% of shoppers racked up more than $1,000 in holiday debt, and 5% accumulated more than $5,000 in debt.”

So you see a solid portion of the GDP growth you are seeing is debt spending related. It’s not as organic as it may seem. US government deficit spending filters its way into GDP as much as consumer debt spending.

How will consumers deal with all these increases in debt? It’s a good question as real disposable income is up only $382 per capita over the same time period:

And personal interest payment obligations keep rising while the personal savings rate keeps dropping:

One more nugget: Margin debt in stock market accounts has increased by a whopping $146B since the February 2016 lows and now stands at over $580B. Graphically this looks like this:

The Fed say they are committed to reducing their balance sheet and will continue to raise rates.

Wall Street is projecting for the 10 year rate to move into the 3% range:

They’ve tried this forecast a few times before, but it has never materialized. Perhaps this time it will and, if it does, here are a couple of key questions looking at a 30 year chart:

What will the breaking of a 30 year downward trend in the 10 year do to equity prices that appear to have been entirely dependent on said downward trend?

And how will consumers sustain their debt driven spending habits as the burdens of ever higher interest payments are not a theoretical construct but a reality already knocking on the door?

The waters are calm, but they mask the real danger of the debt beneath and that is: The math doesn’t work.


Antifaschistische Unknown User Thu, 01/04/2018 - 16:44 Permalink

I have a dream...

...that one day, debt doesn't exist.

...where every time a .gov do-gooder politicians wants to fire up a new program, or build a new bridge, etc...that your taxes have to go up immediately to pay for that program. want 3 new Aircraft Carriers...then an extra $23 from each of your paychecks for the next 12 years. want universal free healthcare...then an extra $273 from each paycheck....forever. want to build a new football stadium...then an extra $74 from each paycheck for the next 10  years.

then, let the people vote for these programs. 90% percent of every program the politicians propose would get shut down immediately if we had to see the paycheck implications of .gov spending.

In reply to by Unknown User

JoJo Kracko Antifaschistische Thu, 01/04/2018 - 18:23 Permalink

Sure, that works.   But if you are one of the 62% of Americans who actually have jobs you are going to be pretty pissed about having to pay for everything while the other 38% gets it for free.   I'm happy to have employed people pay for my share of the debt and subsidize everything for me - said every one in the 38%.


On the other hand, if we aren't making employed people pay for everything, who else is gonna do it?


BTW, can we all agree to stop using the BS unemployment rate and start using a count of employed full and part time people instead?



In reply to by Antifaschistische

chubbar BlindMonkey Thu, 01/04/2018 - 16:47 Permalink

to say nothing of the 30 year multi-trillion dollar bond bubble bursting, you know that is going to leave a mark. Not sure what everyone's plan B looks like but owing tens of thousands of dollars going into the jaws of a massive depression isn't going to be pretty. Going to be a lot of people learning or re-learning how to suck cock, imo.

In reply to by BlindMonkey

Sid Davis Four Star Thu, 01/04/2018 - 16:00 Permalink

So here is the deal; the average New Yorker or average individual anywhere can't fork over his share to pay the debt. And since the government can only get money from citizens, either by tax or by printing money, the debt cannot be paid, not now or ever.

Government debt since 1900 has grown at a compounded rate of 8.5% so in another 8 or nine years it will double.  And that doesn't include the unfunded liabilities.  But the economy only grows at about 3% at best, so the wealth to pay the debt is not keeping up with the growth in the debt.  As time passes, the debt becomes even less likely to be paid as it becomes a greater burden.

Default in some form is a certainty.  The only question is who will be left holding the empty bag. Can any government endure a default on its debt, and the related economic collapse? I doubt it.

Here is the dictionary definition of "politician":

: a person experienced in the art or science of government; especially : one actively engaged in conducting the business of a government

2 a : a person engaged in party politics as a profession

b often disparaging : a person primarily interested in political office for selfish or other narrow usually short-sighted reasons

Break out the ropes and plans for Madame Guillotine cause these will be in demand at some point in the future.

In reply to by Four Star

bitzager Four Star Thu, 01/04/2018 - 16:13 Permalink

False statement, what you mean by "owes"..  It's all DEBT, no real "Money" involved, only accounting tricks a.k.a Debit/Credit... Banks do not LOAN anybody anything... There is no "Budget".. You, peeps leave in MATRIX.. How can you "PAY" off Anything, when there is no lawful money by definition? Welcome to hell... US.Gov.CORP.. You are lost at sea slave without real Identity, BONDED when you born... Yeah, keep "paying" for "bills" to those bloodsuckers... How can Anybody TAX DEBT/a.k.a. "Promise to pay"/ IOU's? You got've been slaved and sold all the way... Search how UCC-1 has been filed by "Obozo" for 14 Trillion $$$ for every human in the USA... Google it.. You've been f*cked and your body parts are used as collateral for US.CORP DEBT... Keep paying..

In reply to by Four Star

Davidduke2000 Fireman Thu, 01/04/2018 - 15:46 Permalink

for the wheel to continue turning or a better example, for the ponzi scheme to continue you need many many new people, yet trump stopped new people from coming to the country in very large numbers as needed , he threw a monkey wrench in that big wheel of credit stopping it cold.

Now you understand why both parties wanted to legalize all the illegals adding new 20 million newcomers to the credit market to continue the ponzi scheme. 

In reply to by Fireman

chubbar Davidduke2000 Thu, 01/04/2018 - 16:51 Permalink

Fuck it, keep em out, it's a good trade. I'll take the collapse over having my daughter gang raped by a bunch of animals or having to give up my culture and customs because a bunch of assholes from other countries are now offended by them. It'd all collapse eventually regardless, best to do it while the culture is still recognizable.

In reply to by Davidduke2000

shizzledizzle Thu, 01/04/2018 - 15:27 Permalink

Don't worry, Janet and Ben have set it up so we will be able to pay the debt and then some! The bad news is receipts will come in the form of 500lb bombs dropped at 20000 ft. 

GoldenDonuts Thu, 01/04/2018 - 15:33 Permalink


Your recent changes to the commenting on this site suck.  I cannot easily look back on a comment and respond to someone about it.   Reversing the order that they are listed also sucks.   You have removed a lot of the joy that users get from your website.

wmbz Thu, 01/04/2018 - 15:38 Permalink

The reason gubmint doesn't worry about debt is, even though they create it, is they will not repay it. So of course they say debt does not matter. It isn't just the U.S. that thinks and acts that way, it is universal.

I remember when U.S. debt hit 1 trillion and far and wide you heard from the experts, that it was not sustainable. Yet here we are all those years later and we increase it continuously. So how does it end, when does it end, what causes it to end? I am not sure and seriously doubt I will live to see it.

One thing is certain we are leaving future generations one giant shit sandwich to chow down on.

HominyTwin wmbz Thu, 01/04/2018 - 16:42 Permalink

"One thing is certain we are leaving future generations one giant shit sandwich to chow down on."


One solution is for a subset to secede. Then they get to become another country, and all that debt gets stuck on the people who remain. The same people who see the Fed Gov as the solution to everything.


Another solution is to inflate it away, Zimbabwe/Weimar style.

In reply to by wmbz

two hoots Thu, 01/04/2018 - 15:45 Permalink

As long as we can keep debt within the borders of charts it should be okay.  If not, make the charts bigger.   It is really just an occasional slight extension of a red pencil line, what's the big deal, lead is cheap?  Might be a good idea if we don't even keep up with it, it just gives people headaches, it is in the past anyway? 


djrichard Thu, 01/04/2018 - 15:57 Permalink

You know what the wealthy (and China) like to do with the interest on treasuries they own?  They buy more treasuries with it.  If they had something better to do with their currency hoards, they wouldn't be buying treasuries in the first place.

But by all means, let's starve the winners of their ability to swap their currency hoards for treasuries.  They know this would mean less future cash flows for them as there would be less cash spent into the economy by the Fed Gov, which in turn would mean less cash for them to hoover up and hoard.  But as the architect says in "The Matrix" trilogy, "There are levels of survival we are prepared to accept."

AlphaSeraph djrichard Thu, 01/04/2018 - 16:18 Permalink

Not quite. The Chinese are playing the super long game. The income/cash generated from Treasury holdings is a facade. Nixon's EPA was created for one reason and one reason only. To grab valuable land and post it as collateral to the Chinese (mostly - there are other foreign entities involved) for the debt (suck it enviro-nazis, the EPA doesn't protect shit).

The Chinese are using America as their bitch to build up their manufacturing (check), buy gold with both hands non stop (check) and to have title to land all over the world and America (check).

The income they generate is a bonus. What they really want is all of the above and to be the strong hand of leverage.

In reply to by djrichard

Consuelo Thu, 01/04/2018 - 16:06 Permalink



I distinctly remember when Karl Denninger trotted out the 'math' thing, way back in 2009 on the Market Ticker.    He was sorta out in front at the time with that meme, and rather cocky about it too.    Thing is though, much like what public education has done to math, history and science, it sorta doesn't matter anymore, does it...?   And it sure has made a lot of otherwise smart men to look sorta - well, you know...   It's all been changed to a feel-good illusion.   

So the question begs:

Will real math (vs. the common-idiot variety), ever make a comeback...?

In.Sip.ient Thu, 01/04/2018 - 16:24 Permalink

Keep in mind here folks, the US$ value of all

bills and coins in circulation from all issueing

gov'ts world wide is around $7.6Trillion.


Everything else is "notional" value.  Keep that

$7.6Trillion figure in mind everytime someone

discusses GDP/ debt/ M2/ M3/ gov't spending... get the idea ...


Pasadena Phil Thu, 01/04/2018 - 16:31 Permalink

Right now, it's about getting the US economy up and running again and on all cylinders. Energy dominance is key to everything. There is a lot of shit to eat but with a return of a strong US economy, someone else will be eating most of it. I am hoping that the "party of Davos" will eat a big chunk of it together with China and all of those sovereign wealth funds. We can manage the rest after the crooked globalist Masters of the Universe are bankrupted.

So who will finance their wars? Who cares!!!!! It won't be our problem anymore!!!

Sonny Brakes Thu, 01/04/2018 - 16:46 Permalink

Does that mean debt repayment is optional? My experience has been that failure to repay debts incurred results in hardship for the debtor. I avoid using debt, but having a pile of fiat currency sitting in the bank is mostly useless.