Nothing to report from Wall Street. Dow down a little yesterday. Gold up peanuts. But the most telling stories are coming from the world economy, not its manipulated markets.
The price of copper is collapsing. The Baltic Dry Index is dragging on the bottom. Seven years after the beginning of the debt crisis, and the economy is still struggling. And George Soros says Europe could be in for a 25-year slump. Bloomberg reports:
Billionaire investor George Soros said Europe faces 25 years of Japanese-style stagnation unless politicians pursue further integration of the currency bloc and change policies that have discouraged banks from lending.
Europe “may not survive 25 years of stagnation,” Soros said in the interview with Francine Lacqua.
The first crack appeared in the spring of ’07 – in the weakest part of the debt structure, subprime. In March of ’07 the value of subprime mortgages had risen to $1.3trn. Mortgage interest rates were rising. Defaults and foreclosures followed.
The following autumn, the rate of mortgage delinquencies had tripled from the year before. By January ’08, it had quadrupled, and by May it had quintupled.
It was a classic debt deflation. Homeowners had taken on more debt than they could afford. Now, the debt was going bad and investors were getting queasy.
Defaults were bad news to marginal homeowners who lost their houses. They had to move. They were bad news to the people who owned the mortgages too. This mortgage debt had been cleverly sliced and diced and sold all over town. But the sellers seem to have forgotten what was in this sausage. They didn’t seem to realise that it was about to make them throw up.
First, Bear Stearns ran running from the room, holding its stomach. Then, it was Lehman Bros. At that point, the Feds came in with every quack cure they could think of. Bailouts, cash for clunkers, ZIRP, QE – one estimate put the total cost at more than $10trn, about three times the cost of WWII.
The problem with the cures was always a fundamental one. The crisis was caused by too much debt. And all the feds had to offer was more debt.
As Bloomberg reported last week, the world’s stock of toxic sausages has exploded to $100trn:
The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.
The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the US economy.
You cannot lose weight by eating more. And you can’t reduce debt by borrowing more. The whole approach was clearly futile from the get-go. Instead of letting the debt wash out of the system, the feds added to it. Instead of cleansing the economy, the feds made it dirtier than ever.
Debt is an obligation laid upon the future by the past. The larger it gets, the harder it is for the future to happen. Growth rates slow. This has been demonstrated by several studies, most prominently the one by Rogoff and Reinhart. There were some errors in their maths, that critics rejoiced in, but the conclusion was solid: when government debt/GDP increases, growth slows.
That is what has happened in Japan for the last 23 years, and in Europe and America for the last seven. All of these economies are still fighting deleveraging, resisting debt deflation, and pretending that they can continue to add debt forever, and that somehow this will get them out of their debt traps.
But they are doomed. Without growth they can’t pay the debt. With so much debt, they can’t grow.