Recently by Bill Bonner: The
Absurdity of Central Planning
is debt; it needs to go away.
Debt was the
market’s bête noire, this week and last. In Europe, it
snatched up the Irish and carried them off. Then it attacked the
Portuguese. Everyone knew the periphery states were going broke.
Their cost of borrowing soared. Then, when the search parties reached
them, the Irish turned them away. Debt has it usefulness, the Irish
figured. They held out until Wednesday, apparently negotiating terms
of their own rescue.
municipal debt collapsed by nearly 10% over the last two weeks.
It became more and more obvious that state and local governments
were headed for default too. California might get a bailout…but
California, like Ireland, is a sovereign state. It could refuse.
Borrowers worried that Californians and the Irish might prefer to
default like honest incompetents rather than submit to the rescuers’
Debt is underrated.
For one thing, it is more reliable than asset values. The crisis
of ’07–’09 wiped out about a third of the world’s
equity and property wealth. And it disappeared 7 million jobs in
America alone. But debt survived intact. In terms of the cash flow
needed to support it, debt actually grew larger.
can make a recession appear to go away. With enough hot money, they
might warm up asset prices or soothe the swelling unemployment rate.
But debt doesn’t cooperate. Neither monetary policy nor fiscal
policy will make it go away. Debt demands honesty. The debtor has
to fess up, admitting that he is a fool or a knave. Either he owns
up to his mistake and defaults…or he cheats.
all due respect, US policy is clueless,” said German Finance
Minister Wolfgang Schauble. “It’s not that the Americans
haven’t pumped enough liquidity into the market. Now to say
let’s pump more into the market is not going to solve their
speakers conveniently misunderstand the debt problem. The authorities
worked hard not to see the debt crisis coming. They made their careers
and reputations by not understanding it. Thousands of them work
for governments and central banks…if they caught on to the
problem now, they’d probably have to resign.
that the problem is a lack of “liquidity.” Or a failure
of capitalism. Or that the regulators dropped the ball. It is none
of those things. Each of those problems can be “solved.”
Short liquidity? The feds can add some; as much as you want. Did
capitalism lose its way? No problem again, the authorities will
apply more central planning. Not enough regulation? Are you kidding;
adding regulation is what they do best.
The real problem
is debt. In Ireland, for example, investors, householders and bankers
all lost their heads in the bubble era. Your editor bought a house
in Ireland in 2006. He knew perfectly well it was overpriced. He
had walked the streets of Dublin. He had seen storefronts offering
property, not just in Dublin…but in Dubrovnik. He had heard
people say that “property never goes down.”
Now his house
is worth about half what he paid for it – if he could find
a buyer. There is no reason to expect that house to ever recover
– at least in real terms – to the level it was 3 years
ago. That wealth has disappeared. Along with it went the banks’
collateral and the value of the debt it backed. It is all dead.
It is no more. It has ceased to be. It is past tense. But, rather
than let the banks’ bondholders take the losses they deserved
– in rushed the financial authorities with guarantees and more
credit. Ireland’s deficit rose to a staggering 30% of GDP.
Its national debt will rise from 100% of GDP to 120%.
California is moving closer to bankruptcy – and borrowing more
too. The state is $25 billion in the hole, with no plausible plan
to get out. The Milken Institute says unfunded pension liabilities
will rise to $10,000 per capita by 2013 – the equivalent of
an extra $40,000 mortgage for every household. Like Ireland, California
cannot pay the debts it has incurred. The federal government will
offer a bailout…but with strings attached.
And soon, the
bailers will be in trouble too. According to The Wall Street
Journal, a combination of 15 major national governments will
have to borrow a total of more than $10 trillion next year, to finance
deficits and repay maturing bonds. That’s 27% of their total
economic output. It also is equal to about twice the entire world’s
warn about the risk of “contagion.” They sweat to “calm”
the markets. But why bother? Debt of this magnitude cannot be repaid.
It has gone bad. At least give it a decent burial.
him mail] is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis
and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets (Wiley, 2007).