The Dark Cloud Of Global Debt... The Perfect Storm Looms

Authored by Alex Deluce via GoldTelegraph.com,

While everyone is debating the effects of possible trade sanctions on the global economy, few are paying attention to a far more serious issue. Enormous global debt, combined with low-interest rates, have set the stage for a global recession that has the potential for economic chaos.

The combination of enormous debt and artificially low-interest rates were at the center of the 2008 credit bubble. One would expect central banks to be aware of this and show more concern. However, the overall silence has been astonishing.

An exception to this is the Bank for International Settlements (BIS), which has been making loud noises about the toxic level of global debt and the anticipated bubble. It recently reported that the global debt of 2008 was $60 trillion, small when compared to the current debt of $170 trillion. To make matters worse, today’s global debt is 40 percent higher in relation to GDP than it was in 2008, just prior to the Lehman Bros. downfall. To add to the current headache are the rising debt levels of emerging markets and corporate debts. According toMcKinsey & Company, a global consulting firm, two-thirds of U.S. corporate debt are from corporations that pose a high default risk.

Countries such as Brazil, India, and China have been busy issuing questionable credit. This dubious credit being issued in many emerging markets has come with extremely low-interest rates. If the borrowers’ default, the lenders won’t be looking at enough compensation to recoup their loses. Low-interest rates have become an overall global problem, including the rates in the U.S. high-yield bond market. Central banks around the world have been keeping interest rates artificially low while printing money with abandon. The current global debt is the direct result of this policy.

$2 trillion in corporate debt will be maturing annually through 2022. A considerable amount of this debt may default and cause debt repricing. The damage caused by central banks and their policy of easy credit has been done, and there is little that can be done at this point to stem the tide. It can only be hoped that they are more aware now than they were in 2008.

Just prior to 2008, during the halcyon days of easy mortgages, homeowners jumped onto the debt bandwagon by refinancing their homes and incur more than $300 billion in debt as the value of their properties increased. Many used their new-found wealth to purchase furnishings, automobiles, vacations or reinvest in the stock market. By the time anyone realized that the homes and stocks were highly overvalued, the stock market took a tumble, major lenders declared bankruptcy, and the world suffered through a massive recession.

More than a decade later, as global economies are still climbing out of the mire, the story is repeating itself, this time with major corporations leading the way. These companies are using cheap credit to pay dividends to stockholders and buy back their own stock. This has driven corporate debt to record heights with inflated assets. Sooner or later, the bubble will burst.

Awash in cash, corporations have created a “buyback” economy. They purchase their own stock for a short-term profit. Companies are expected to pour 2.5 trillion in buybacks and M&A this year. 

Corporations used to invest in equipment, products, and innovative services to generate growth and profits. In the buyback economy, the cash goes to stockholders, instead, while the companies stagnate.

Apple recently announced a $100 billion buyback of its stock. Since 2012, the company has paid $210 billion to its shareholders. In 2017, public companies used more than $800 billion of their equity to buy back stock and increase their debt. 

As a consequence of this corporate borrowing spree, more companies are binging on debt vs. focusing on their bottom line. This is a bad position to be in during any kind of economic turndown or when interest rates rise. When the time comes, a large amount of defaults is expected, causing renewed economic stress. It should serve as a warning to companies of problems that may lie ahead.

The world is drowning in debt. In addition to corporate debt, household and government debt are at a record high level, while interest rates are historically low.

With the recent tax cuts initiated by President Trump, the federal deficit is expected to exceed $1 trillion next year. This is in addition to the $20 trillion of already existing debt. Interest payments alone on this colossal federal debt will increase from $316 billion in 2018 to $915 billion in 2028. This is just the interest payments.

Consumers seem to have also forgotten the lessons from 2008. Household debt, in the form of mortgages, credit card, auto and student loans, have returned to record high levels. Thirty-eight percent of individual credit card balances are over $10,000.

As central banks contemplate rate increases, consumer interest payments will reduce buying power and cause a slowdown in the economy, bankruptcies, and eventually, perhaps a recession.

At the moment, the global economy is filled with a number of sharp pins, and no one knows which pin will be the first to prick the debt bubble. But a burst is almost certain.

Comments

toady Cryptopithicus Homme Thu, 07/05/2018 - 19:48 Permalink

It's tough to know what to do....

It's obvious that there's no way all this debt will be paid back. So.... pile up the debt and never pay it back! Everyone else is!

But it won't work... TPTB will be sure to make the sheep pay while they default.

So.... remain debt free.... but that won't work.... they'll squeeze blood from a stone. They'll confiscate your savings and property to pay a fraction of a penny on each dollar of their debt.

So... no debt, no savings of any kind, including property.... just wander the earth, like Kane in Kung Fu.

Yeah... sounds great.

In reply to by Cryptopithicus Homme

DaiRR toady Thu, 07/05/2018 - 20:56 Permalink

All things considered, I'd much rather be in the USA with its 2nd Amendment when the fiat monetary system collapses than a country where guns are outlawed.  It will be interesting to see what happens, and the differences between different countries' outcomes.

In reply to by toady

directaction DaiRR Thu, 07/05/2018 - 21:18 Permalink

I like the idea of selling it all, no debt, then buying a small cabin on a few acres in a small community of like-minded souls for safety. 

A garden, some fruit trees, chickens running here and there. A few goats. 

But it won't work for us. 

And for 99.999% of the population even that wouldn't save them. 

In reply to by DaiRR

luckylongshot powow Fri, 07/06/2018 - 01:22 Permalink

The debt crisis was guaranteed from the moment private bankers  took control of the right to create money and used it to put in place a financial black hole that sucks all wealth into their pockets. The only way to avoid an ugly end now is to cancel all this debt lock up the private bankers, confiscate their assets and move forward using sovereign money.

In reply to by powow

EINSILVERGUY directaction Fri, 07/06/2018 - 12:11 Permalink

Wife and I have done that. Only debt is a mortgage and I can liquidate enough to take care of that. Planted a garden and have veggies. Neighbor down the street has a garden and we swap cucumbers for Okra and best boy tomatoes. I know how to can and trade my pickles for eggs with another neighbor who has 30 chickens. I have 2 pecan trees bearing nuts and have a lemon tree bearing lemons and a new peach tree that will bear fruit in 2 more seasons.  My neighbors are older, conservative, own guns and we all all friendly. Beats the hell out of Houston where we moved from and  that is 90 miles away.  I like our odds

In reply to by directaction

shizzledizzle Thu, 07/05/2018 - 19:14 Permalink

It's been a perfect storm for a good while now... Their ability to keep reality at bay has truly impressed me... but as killgore said "some day this war's gonna end". Trade war might just be the push that makes them lose a handle on it. China isn't stupid and they know what's going on. Weaponized monetary policies coming. 

MoreFreedom Dr. Bonzo Thu, 07/05/2018 - 19:31 Permalink

The best financial minds say they wish they could time the market.  I think it will start with a sovereign reneging on their debt for some poor excuse.  And I believe that will result in a wave of countries starting to renege on their promises to citizens regarding socialist programs like Social Security and Medicare.  The net present value of those debts is more than the value of everything Americans own, and won't be paid.  My bet is they just print the money, which becomes worth less.  

In reply to by Dr. Bonzo

ThrowAwayYourTV Thu, 07/05/2018 - 19:26 Permalink

Theres WAY WAY WAY too much money in the system. People are just throwing it around like candy these days. I used to get a 40x40' foundation in for $7,500. Just had a 24x32 put in for $12,000. Whats changed? Is there a Lime stone shortage now? No! Assholes keep paying the high prices so assholes keep charging the high prices.

My foundation guy spends winters in the Med and works 5 months a year. So yes! Theres WAY WAY WAY too much money in the system.

sister tika Thu, 07/05/2018 - 19:35 Permalink

I'm throwing every free dollar I have at debt right now. Mortgage payment is $290.00 per month which includes local taxes and homeowners insurance. Outstanding principal for home mortgage is 38K. Shiny coins in the shadows for backup.

No worries. It's just our asses that are on the chopping block. (Very funny, sister.)

moonmac Thu, 07/05/2018 - 19:47 Permalink

2 Re-bids for Buys today.

20% increase since January
10% increase since April‎

Noting to do with S&D. It's all about Money Manipulation. Last time our Industry(PVF) thought it would go on forever. This time it's low supply and little demand. 

JibjeResearch Thu, 07/05/2018 - 19:47 Permalink

Americans are poorer because of too big DoD and the happy printing Fed!

This trade war will make many poor Americans worst off.

Most Americans can't avoid it because they are not very smart and can't figure out the global financial system...

Fantasy Free E… Thu, 07/05/2018 - 20:09 Permalink

Never have so many failed to understand. This is more than opportunist gaming Fed policy for a profit. Central banks really are assisting the elite in trying to permanently corner the entire equities market. They have to be forced to stop.

http://quillian.net/blog/the-predators-play-ground/

The original idea was similar to the "if you build it they will come." idea. As in rising asset prices will justify themselves by causing economic growth. That has not happened adequately but goosing the stock market has been highly profitable. Controlling stock prices is something that will be attempted forever unless the whole practice is killed and buried.  I guarantee you, there is a plan in effect right now to deal with a falling stock market. This will be much bigger than TARP was and will focus on central banks buying stock to "save the world." Count on it.

 

Fufi007 Thu, 07/05/2018 - 20:53 Permalink

Let's do away with money.

Everybody gets all basic needs free, i.e. nice apartment, food, water, electricity and public transportation.

Any special gadgets like speed boats, kite, etc should be earned by putting more work for.

That's the solution and that's where we heading after WWW III.

BTW, greedy will be annihilated on the spot at that time they are uncovered. So will be the wicked and criminal minds.

Let it Go Thu, 07/05/2018 - 22:22 Permalink

Since 2008 all growth has been built on a mountain of debt. Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. The article below questions when the burden of global debt will cause Atlas to shrug.

 http://When Will Atlas Shrug- The Burden Of Global Debt.html

everything1 Fri, 07/06/2018 - 07:39 Permalink

Debt doesn't matter anymore, does anyone think for a minute it's being paid back.  OR, what % of outstanding CC debt will be paid back.  Consumers are copying government, they know they can just declare bankruptcy if TSHTF.

The last thing I worry about is paying off the home loan, I could be dead by the time that's due, and what's the note going to be worth in future dollars, a pittance.  No way am I riding/starving myself into the ground trying to save enough money to come up with the 20-30k a year required just to buy health insurance 5-10 years from now.

Yah can't squeeze blood from the turnip folks.  Let the cards fall where they may.  Short the dollar, just like the rest of them, but if you can, keep enough in reserve to pay off any outstanding loans.