A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates, the International Monetary Fund has warned.
The ability of companies to cover interest payments is at its weakest since the 2008 financial crisis, according to one measure.
The IMF’s twice-yearly Global Financial Stability Report released on Wednesday highlights what economists at the fund see as one of the main risks facing President Donald Trump and his plans to boost US growth via a combination of tax cuts and infrastructure spending.
Before the holiday weekend begins, best-selling author James Rickards joins Olivia Bono-Voznenko outside the NYSE to talk all about the markets and his latest book, “The Road to Ruin.” Jim discusses the currency wars, Trump’s turnaround on China & the Fed and an inevitable crisis amid a weak system.
“Have 10% of your investable assets in [physical] gold.” — James G. Rickards
The U.S. annual budget deficit remained near its highest level in three years during March amid flat government revenues and higher federal spending.
Federal spending exceeded revenue by $176.2 billion last month, the Treasury Department said Wednesday. The budget gap was about $68.2 billion higher than a year ago. Through the first six months of the fiscal year, the deficit was about 15% wider compared with the same period a year earlier.
If something cannot go on forever, it will stop.” This is “Stein’s law”, after its inventor Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon. Rüdiger Dornbusch, a US-based German economist, added: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
These quotations help us think about the macroeconomics of China’s economy. Growth at rates targeted by the government requires a rapid rise in the ratio of debt to gross domestic product. This cannot continue forever. So it will stop. Yet, since the Chinese government controls the financial system, it can continue for a long time. But the longer the ending is postponed, the greater the likelihood of a crisis, a big slowdown in growth, or both.
I have argued that it is in the interests of China and the rest of the world to keep their financial systems separate. The rapid growth of indebtedness and the size of its financial system represent a threat to global stability. China needs to rebalance its economy and stabilise its financial system before opening up capital flows. Western financiers will have a different view. We should ignore this sectional interest.
Twenty years after the Asian financial crisis and a decade since the global credit crunch, the region is swimming in debt.
The debt binge is spread across companies, banks, governments and households and is inflating bubbles in everything from the price of steel rebar in Shanghai to property prices in Sydney. As the Federal Reserve raises borrowing costs, that means debt is again a concern.
…Still, the pace of borrowing is eye watering. A debt hangover in Asia matters because the region is the biggest contributor to global growth.
One of the great mysteries and biggest concerns in the economy right now is the slowing growth in bank lending. Economists are searching for answers but none are entirely satisfying.
Total loans and leases extended by commercial banks in the U.S. this year were up just 3.8% from a year earlier as of March 29, according to the latest Federal Reserve data. That compares with 6.4% growth in all of last year, and a 7.6% pace as of late October.
The slowdown is more surprising given the rise in business and consumer confidence since the election. And it is worrisome because the lack of business investment is considered an important reason why economic growth has remained weak.
U.S. debt is likely to double as a share of the economy over the next 30 years, according to the Congressional Budget Office.
Considering President Trump’s push for big tax cuts and a promise not to touch key drivers of the debt, the picture could worsen.
Right now the nation’s debt amounts to 77% of GDP. That’s already the highest level since the post-World War II era. If current law remains in effect, it’s on track to jump to 150% by 2047, according to the latest long-term budget projections from the CBO.
…Interest on the debt, meanwhile, will almost quadruple — from 1.4% today to 6.2% by 2047. That’s due to rising rates and the growing pile of borrowed money.
PG View: This has been a major driver for gold for decades and clearly it’s going to continue for decades . . .
Government debt and budget deficits are both set to spiral higher in the coming three decades if current patterns hold, according to new projections released Thursday by the Congressional Budget Office.
Due largely to increases in Medicare and Social Security, federal debt will reach 150 percent of gross domestic product in 2047, the CBO report said.
The total current debt held by the public of $14.3 trillion is 77 percent of GDP. The current total debt level of $18.8 trillion is about 101 percent of GDP (the CBO computes debt to GDP based on public debt).
The U.S. hit its again on Thursday — a whopping $19.9 trillion this time — and the Treasury Department started using accounting maneuvers to buy several months to raise it to avoid a potential federal government default.
The statutory limit on borrowing has become a partisan flash point in recent years. During the Obama administration, conservatives in Congress tried unsuccessfully to include spending cuts with any debt increases.
Euphoria has been pervasive in the stock market since the election. But investors seem to be overlooking the risk of a U.S. government default resulting from a failure by Congress to raise the debt ceiling. The possibility is greater than anyone seems to realize, even with a supposedly unified government.
…The Republican Party is already facing a revolt on its right flank over its failure to offer a clean repeal of the Affordable Care Act. Many members of this resistance constitute the ultra-right “Freedom Caucus,” which was willing to stand its ground during previous debt ceiling showdowns. The Freedom Caucus has 29 members, which means there might be only 208 votes to raise the ceiling. (It’s interesting to recall that, in 2013, President Trump himself tweeted that he was “embarrassed” that Republicans had voted to extend the ceiling.)
Treasury Secretary Steven Mnuchin has raised the alarm on the U.S. debt ceiling, and Republican leaders insist they won’t push it to the limit as in past years by using it as a bargaining chip for deep spending cuts.
President Donald Trump hasn’t weighed in recently, but both he and his hawkish budget chief have criticized Republicans in the past for being too willing to raise the debt limit — a statutory cap on how much money the U.S. can borrow — and may be more willing than previous administrations to threaten a default.
According to the International Monetary Fund, global debt has grown to a staggering grand total of 152 trillion dollars. Other estimates put that figure closer to 200 trillion dollars, but for the purposes of this article let’s use the more conservative number. If you take 152 trillion dollars and divide it by the seven billion people living on the planet, you get $21,714, which would be the share of that debt for every man, woman and child in the world if it was divided up equally.
…We are living during the greatest debt bubble in the history of the world, and our financial engineers have got to keep figuring out ways to keep it growing much faster than global GDP because if it ever stops growing it will burst and destroy the entire global financial system.
Central banks attempt to walk this fine line – generating mild credit growth that matches nominal GDP growth – and keeping the cost of the credit at a yield that is not too high, nor too low, but just right. Janet Yellen is a modern day Goldilocks.
How is she doing? So far, so good, I suppose. While the recovery has been weak by historical standards, banks and corporations have recapitalized, job growth has been steady and importantly – at least to the Fed – markets are in record territory, suggesting happier days ahead. But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.
I’m with Will Rogers. Don’t be allured by the Trump mirage of 3-4% growth and the magical benefits of tax cuts and deregulation. The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond.
PG View: Gross makes a good point about being more concerned about capital preservation. Although he doesn’t mention it specifically, one of the best assets for accomplishing that task is gold.
Treasury Secretary Steven Mnuchin sent a letter this week to Congress warning that the United States is about to reach its legal borrowing limit by next Thursday.
That’s because the current debt ceiling suspension expires at the end of Wednesday, March 15.
Since Congress will almost certainly not act in time to raise the ceiling or extend the suspension, Mnuchin will have to start an official juggling act to ensure the country can continue to keep paying all its bills in full and on time. After the current suspension expires, the debt ceiling should reset a little north of $20 trillion next Thursday.
PG View: Adding to the fun is the timing: The debt ceiling will be reinstated on the same day that the Fed announces policy, which will likely include a rate hike.
President Donald Trump on Monday pledged “big” infrastructure spending, putting focus on a key campaign proposal that has taken a back seat in the first month of his administration.
Speaking to a group of governors at the White House, Trump said he will make a “big statement” about fixing roads and bridges in his Tuesday night address to a joint session of Congress. So far, the Republican-controlled Congress has not seen Trump’s infrastructure spending pledge as a priority amid efforts to repeal the Affordable Care Act and pass tax reform.
“I’m going to have a big statement tomorrow night on infrastructure,” Trump said. “We spend $6 trillion in the Middle East and we have potholes all over our highways and our roads … so we’re going to take care of that. Infrastructure — we’re going to start spending on infrastructure big. Not like we have a choice. It’s not like, oh gee, let’s hold it off.”
An act of Congress in 2015 that temporarily suspended the country’s borrowing limit has taken spotlight off of the debt-ceiling debate, which has repeatedly roiled the markets in recent years.
However, the halt expires on March 15, according to Fitch. After that, the Treasury will need to take on what it calls extraordinary measures to cope with the statutory limit. But, it will ultimately fall on lawmakers to raise or suspend it.
“But more probable is a repeat of previous debt limit confrontations and last-minute agreements, revealing sharp fiscal and other policy differences between Congress and the administration, and underscoring persistent weaknesses in US fiscal governance.” — Fitch
PG View: This could pose quite a conundrum for lawmakers who have historically voted a certain way on the debt ceiling issue . . .
In the age of Trump, America’s biggest foreign creditors are suddenly having second thoughts about financing the U.S. government.
In Japan, the largest holder of Treasuries, investors culled their stakes in December by the most in almost four years, the Ministry of Finance’s most recent figures show. What’s striking is the selling has persisted at a time when going abroad has rarely been so attractive. And it’s not just the Japanese. Across the world, foreigners are pulling back from U.S. debt like never before.
PG View: I’ve got news for the Fed: Another 25 bps, or even 75 bps, are unlikely to change their minds.
The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars.
Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.
Italian government debt is coming under heavy selling pressure today, sending benchmark 10-year yields to the highest level since the Greece’s eurozone crisis in the summer of 2015.
Investors are dumping Italian debt after a major ruling from Italy’s highest constitutional court paved the way for early elections in the eurozone’s third largest economy, which will introduce a form of proportional representation to the country.
PG View: Events in Europe have been pushed from the headlines in recent weeks, but it’s worth remembering that the risks there remain considerable.
The fact is that whenever one party has firm control of government, it has a powerful incentive to borrow to finance its priorities, knowing that it won’t necessarily be the one to foot the bill. So expect US President-elect Donald Trump’s administration, conservative or not, to make aggressive use of budget deficits to fund its priorities for taxes and spending.
…If a Trump presidency does entail massive borrowing – along with faster growth and higher inflation – a sharp rise in global interest rates could easily follow, putting massive pressure on weak points around the world (for example, Italian public borrowing) and on corporate borrowing in emerging markets. Many countries will benefit from US growth (if Trump does not simultaneously erect trade barriers). But anyone counting on interest rates staying low because conservative governments are averse to deficits needs a history lesson.
PG View: If President Trump is successful in initiating policies that need to be financed with increased deficits, the national debt will explode higher. It’s already nearly $20 trillion. Treasury Secretary nominee Steven Mnuchin has already said that raising the debt ceiling will be one of his highest priorities. That would be good for gold.
China’s economy grew a faster-than-expected 6.8 percent in the fourth quarter, boosted by higher government spending and record bank lending, giving it a tailwind heading into what is expected to be a turbulent year.
But Beijing’s decision to prioritize its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt.
PG View: Amid ongoing capital outflows and considerable uncertainty with regard to future trade relations with the U.S., China seems likely to at least try to paper over these risks with debt and further weakening of the yuan.
The current economic picture looks eerily similar to the one in 2008: Economic growth is sluggish, personal debt is extremely high, the government is running massive annual deficits, and riskier investments are being encouraged by the current market conditions, although this time it’s being caused by excess cash in the monetary supply.
President-elect Trump enters the White House at a crucial moment in U.S. history. If the economy does not grow rapidly in the coming years, allowing market distortions to correct and the Fed to safely increase interest rates to bring the monetary supply back to its historical norm, there could be another large-scale economic collapse in the not-so-distant future.
Since every penny of that new debt was presumably spent, it should come as no surprise that the latest batch of headline growth numbers have been impressive. Which is the basic problem with debt-driven growth: The good stuff happens right away while the bad stuff evolves over time – in the form of higher interest costs that depress future growth – making it hard to figure out what caused what.
That’s bad for regular people who have to live through the resulting slow-down or crisis.
PG View: It looks once again like we may be pulling economic growth forward from the future via increased debt. While that may give the economy a short-term boost, the longer term prospects becoming increasing dire as the debt load mounts.
“The fiat money quantity has now breached the $15 trillion level, standing at $15,108bn on November 1st 2016, the last calculable date. This is now $6.3 trillion above the pre-Lehman crisis trend-line, exceeding it by 72%. Instead of the Lehman rescue being a temporary fix, the increase in the quantity of fiat money has continued to grow over eight years later.”
PG View: The proliferation of paper — paper in the form of debt and paper in the form of fiat currency — is one of the primary driving forces behind gold price appreciation over time. I concur with Mr. MacLeod when he says, “gold must be regarded as significantly undervalued relative to fiat dollars.”
The debt limit as it exists now came into being between the first and second world wars. Before 1917, Congress authorized every new debt issuance. By 1939, it had delegated nearly full authority to the Treasury to issue debt by setting an overall cap. But over time, the debt limit has morphed from a tool for simplifying the borrowing process into a weapon that individual lawmakers “can wield against our economic well-being,” Mr. Lew said.
PG View: I might argue that unrestrained debt accumulation is a weapon of mass economic destruction. Do we really trust our policymakers to wrack up the national debt at the escalating pace that has developed over the last decade-plus? Seems like there should be some checks and balances; and if not a debt ceiling, then what?
“Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.
Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.”
PG View: Corporations are leveraged to the hilt; at levels not seen since right before the financial crisis.
“China’s capital outflows are accelerating and the central bank is selling larger amounts of foreign exchange, Goldman Sachs Group Inc warned as the yuan headed for its biggest annual decline in more than 20 years.”
PG View: As the yuan is driven lower, it is exacerbating the problems arising from recent dollar strength. This is only going to escalate president-elect Trump’s contentions that China is a currency manipulator, strengthening the case for his threat to impose import duties. That in turn could start a trade war. China has already been selling Treasuries and dollars in an alleged effort to shore up the yuan, to the point where China is no longer the top holder of U.S. government debt. That honor goes to Japan, which hasn’t held that dubious title for any sustained period since the financial crisis.