Another debt bubble is bursting

We missed a few days of news. Here in Nicaragua time slides by like a snake. It hardly rustles the leaves or disturbs the grass. There seems no need to check the news.

Checking in over the weekend, we find little has changed. After the Obama election win was announced, stocks lost ground. Then, late last week, they recovered some of what they had lost.

Gold is still over $1,700.

What is important? What is going on that could affect our wealth and our lives?

The papers are still talking about the fiscal cliff. This, from Reuters, brings us up to date.

The S&P 500 rebounded from a 1 percent decline, gaining more than 20 points from its low after Boehner, an Ohio Republican, said he was optimistic that a budget deal to avoid big spending cuts and tax hikes can be worked out. President Barack Obama added to the good feelings, saying he hoped to get a deal done in the next four weeks.

Whether or not those remarks reflect the reality of negotiations is another story.

‘The fiscal cliff is dominating the discussion, and short term, we’re a little bit too optimistic on it being fixed right away’, said John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York.

But will the fiscal cliff make any real difference? Probably not. The Republicans will compromise. The Democrats will compromise. The commentariat will describe the great workings of the democratic process…

…and the nation will continue on the road to destruction.

Why destruction? Because that’s what you get when you spend a lot more than you make and you can’t stop yourself.

Our thinking on this issue has evolved. We’re beginning to understand what we previously only guessed. When governments – especially democracies – head for disaster, they can’t turn around. Because the farther they go, the more voters have an interest in going further.

Half of US families get money from the government. Half of the voters pay no taxes. And the more industries the feds subsidise, bail out or sponsor, the more people – directly or indirectly – want to see the whole thing continue.

Check this out. The bubble in student debt is blowing up. These loans, backed by the US government, are going into default at an alarming rate: 

Percentage of 90+ day delinquent US student loans chart

But student debt is only a bit over $1trn. There’s $85trn more.

Here’s the story: the real federal deficit for this year – including unfunded Medicare and Social Security obligation – is more than $7trn. That’s 21 times the amount of additional growth for the same period. It is as if you got a $1,000 raise and spent an additional $21,000.

How long could you keep that up? Well… that’s what we’re going to find out.

Meanwhile, the total debt, when you take Medicare and Social Security into account, is not the widely reported $16trn. It’s $86trn, five times GDP and going up fast. And that’s also why the fiscal cliff babble is a waste of time. It is a pine needle in a forest. Insignificant. Trivial.

One way or another, the feds will have to default. How? Directly and honestly, by announcing to the world that they can’t honour their commitments? “Sorry, bondholders, sorry, old people, we don’t have the money we promised.”

Or, will they take the easy way out, printing up new money to cover shortfalls until the whole system explodes?

Hope for the best, dear reader but protect yourself from the worst.

• Don’t miss Bill’s next Daily Reckoning. To receive the next article straight into your inbox as soon as he’s written it, sign up to the email list here .

Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Customer services: 020 7633 3600. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. http://www.fsa.gov.uk/register/home.do FSA number: 1152 34

  • Noel Falconer MEcon

    “Protect yourself from the worst” – HOW???

    You underrate the venality, capacity for self-deception and cunning of governments, which will find and steal your gold and its every analogue.

  • Dale

    They’ve already decided to just keep printing money until the money myth explodes. For now, they’re calling it QE or other covert printing stimulus, and other nations across the world are doing the same, diluting the effect.

    The problem for the average person is that nearly all that money creation is going into the very top end of the economy and not moving (very low velocity of money), thus keeping visible inflation fairly low. When fiat money confidence really starts to go, though, there will be an ever-increasing scramble to buy up all worthwhile hard assets with soon-to-be-worthless dollars, creating near-instant hyper-inflation, starting with high-end assets (gold, silver, land), going down through industrial commodities, and then hitting the low-end retail markets to cause the final disaster.

  • DRS

    Actually, there is not much change from previous eras.

    Inflation & growth will pay down debt over the long term.

    Which means the price of real estate and other real assets will go up in price and debt will devalue.

  • LERENARD

    - When there is too much money in circulation, governments will rob us by issuing new currency to replace the old.
    - Financial discipline means caps on state borrowing and control of money supply. The Germans succeeded, so why can’t we ?

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


22 December 1973: Opec more than doubles the price of oil

On this day in 1973 Opec, the oil price cartel, more than doubled the price of oil from $5.12 a barrel to $11.65.