Just when will the debt overwhelm the system?

Current national debt...

A brief history (simplified)...

We went off the so called gold standard in the 60s and early 70s. We began trading in dollar assets. We imported a bit more than we exported in the 70s, largely due to oil imports. The dollar fell in value, which prompted the circulation of more dollars and thereby inflation. 

That led to the so called eurobonds (not to be confused with Euro Bonds). In this case the eurobonds were principally in deutschmarks, meaning the debt was to be repaid in deutschmarks, regardless of the trading value with the dollar... which was weakening against these eurobonds.

Famously, Paul Volcker dramatically raised interest rates, which propelled bond yields upward, with the resultant demand in dollar based debt instruments.

The era of the strong dollar, increased purchasing power for imported goods, which escalated. Normally, the profits from these imported goods, would have been repatriated to the exporting country currency, keeping the dollar vs foreign currency rather stable. 

However creative ways and methods, including opening up U.S. companies, property, etc. to foreign entities. Of course, the early and easiest route was strong demand for U.S. debt. This continued until the early 2000s, when more and more U.S. property became the target and the attraction to Treasury debt became relatively stable. The dollar remained strong, as competing countries currencies weakened. 

It became a necessity for everyone, to keep the dollar strong, as any weakening threatened the value of dollarized assets. 

The graph above, indicates the timing of the various "QE" programs. The FED was basically absorbing the debt at the primary dealer market to keep interest rates low and inflation at bay. 

When the "trust" hits zero, a hole of $300B~$400B will need to be somehow covered. Congress would need to authorize that additional expenditure.

Where will it come from?

1. Additional debt creation, requiring ever increasing interest rates. Who will purchase that debt and at what premium, that will likely be spiraling upward?
2. Could the FED enact a never before seen size of QE, in attempts to keep interest rates at bay?
3. Will congress finally be forced to massively cutting spending?

As for #1: There is no willpower in Congress, now, in the near future, or even when staring at the abyss... to reduce spending and limit further debt creation. We'll be have gone over the fiscal cliff, before such cuts are forced, via eurobonds, extreme interest rates and massive weakening of the dollar, of which would happen rapidly and dollar holdings will get dumped, as everyone is heading for the exits. 

As for #2: The FED in theory could enact a massive QE program, but it would require fiscal restraint by Congress. Remember that an unrestrained fiscal spending outlook, couple with a massive QE would eventually lead to undermining the entire financial system, which leads to same result as outlined in #1.

As for #3: Probably, once it is too late and public is clamoring for massive change. 

All of that is extreme, but the "Trust" will be bust in 4th quarter of 2032, per the latest estimate. There is also a national election during that 4th quarter, as well. 

If it goes bust, which I have spent most of this article predicting... an immediate and huge impact will hit the economy. Seniors that rely soley on S.S. trust fund income, will be in need of many of the other government programs, which will simply move the debt into those areas. Those that do not soley rely on the trust fund, will likely cut back on spending. 

In the interim, goods and services will take a hit and industries will need to reduce spending (manpower) to bridge gap. Additionally, they may require loans to cover expenses, while the various product pipelines reduce inventories to a new reality. Just as the government is driving up interest rates on their bonds, notes, bills, etc. This is not just a U.S. debt problem, as the sum total of debt worldwide is increasing at a rapid rate.

If you think none of this can happen, just remember... we were here before, when everything was tiny, compared to today, and when there was a willingness to address the problems.

I would suspect that 2033 will be the year of reckoning, although significant cracks will be observed in the runup to that period.

There Is More Than the National Debt to Worry About!

 I keep reading about the national debt, then consumer debt, etc. 

I probably should worry, but I am getting up there in years, so I find it hard to worry too much about things in the future... I have no control of.

A few things that seems to be overlooked, are corporate debt, municipal and state debt. 

When the time comes for corporate debt to be rolled over, the interest rates will certainly weigh on earnings. Fine, they can raise prices... if the consumer market will bear the increase. I won't even bring in the topic of new debt, to finance some innovative product or expansion. That will also cost more in interest. 

Of course, we have state and municipal debt. In most of these cases a balanced budget is required. Any additional costs due to increased debt service, whether from roll over bonds or new bonds, must be budgeted... and the budget must be balanced.

Of course, newer sources of revenue will be sought (new taxes) as well as potential increases in taxes.

I'm sure the consumer will gladly pay for this, just as they will merrily pay for corporate price increases. 

Soooo... when your eyes roll and cloud up over discussion of treasury rates and home interest rates, don't forget the host of other things happening. 

Everybody is borrowing and you wonder who might be paying. Open your eyes... you know the answer.

PAY ATTENTION!!!

Are We, Or Aren't We...

... in a recession?

No one truly knows, although many have an opinion, and depending on political stripe... we either are or we aren't. And it is always because something is a clear sign. Never mind, those government stats containing revisions from previous months, it must be deemed as absolute. 

Then there are the BIG money folks, that have gotten rich off QE and want those glory days to return... meaning the FED to reverse policy. BIG money really needs there to be a recession for that to happen and will lobby long and hard, that we are already in a recession and are betting on the FED to ease off rate hikes, etc. 

GDP gets revised a couple of times and then is revised once a year thereafter. 

Yep... revised from a negative in June 2015, to a positive in one month after third release and by 2021, was downright stellar.

Citing GDP as some guarantee, one way or the other... is based on something likely to be revised. Besides, it might just be possible that the 3rd quarter of this year could be positive. Would that mean the recession is over?

Employment situation... the word revised is used 4 times in the latest report. This month...

The change in total nonfarm payroll employment for May was revised up by 2,000, from

+384,000 to +386,000 https://www.bls.gov/news.release/archives/empsit_08052022.htm

The previous month...

The change in total nonfarm payroll employment for April was revised down by 68,000, from +436,000 to +368,000, and the change for May was revised down by 6,000, from +390,000 to +384,000 https://www.bls.gov/news.release/archives/empsit_07082022.htm

Which is it? 

My goal is not to cast doubt on government reports, but putting my heart and soul into a specific set of data as gospel... is just plain foolish, in my opinion. 

Earlier I mentioned the possibility of a 3rd QTR GDP print being positive. I base that on the blowout of trade balance and how it impacted the 1st two Quarters.

The trade deficit started blowing out in 3rd Qtr. 2020 and then accelerated, with another major drop down in the 1st Qtr, and barely easing the 2nd Qtr. That would be the period when our business leaders went nuts with over ordering. That may ease back a bit going forward. 

In an alternate universe, where the trade imbalance did not drop so dramatically, the 1st Qtr. GDP would have been +2.3% and 2nd Qtr. at +1.6%

Of course on the potential negative side is the extreme jump in credit. I have no idea how much longer that can last, but with the Federal Reserve ready to push up rates further... something's got to give, in my opinion. BUT, that set of data might likely also be revised. 

There is an old adage of "When your neighbor is out of a job... it's a recession. When you're out of a job... it's a depression". Probably the most accurate of all metrics!

Now for MY opinion. We are not in a recession yet. We may soon be, but the severity is unknown, until we are actually in the middle of it. I would say that any looming recession in the U.S. will be exacerbated by the current economic morass of Europe. 

I am trying to get a grasp on why Germany's trade balance is narrowing, when the Euro is cheaper now than 1 year ago. Is it difficulty in obtaining necessary materials to manufacture items? Is it the high cost of Natural Gas that is offsetting any gains from the weak Euro? Is it a combination of both, or several other factors. 

I don't know, but do worry about the impacts on Europe as a whole, which would include the U.K. in this instance. The natural gas issue, will not go away anytime soon, in my opinion. The materials issues are likely not to go away anytime soon, as well. 

This appears to be a very challenging time for Western Civilization. 

We seem to have a situation where many folks are being duped by big money into believing we are already in a recession, which could cause a recession via lack of confidence. Be careful what you wish for. 

Of course, we also have folks in the U.S. eagerly anticipating and repeating statements of a C.O.L.A. being above 10.5% or more, without considering how much additional inflation is required to get us to that level. But then, the point might be to inflate expectations and then cry foul, when it doesn't happen. Be careful what you wish for.

A Conundrum On Inflation and Recession.

I'm not the brightest bulb and may be seeing things wrong, but... the Just in Case inventory surplus may be coming to an end.

To clarify... we had all sorts of supply chain issues, which were originally shortages of goods, due to parts, etc. THEN the supply chain issues became a snarled supply chain which caused shortages AND was exacerbated by companies ordering heavy to ensure arrival of supply to meet demand. This is Just In Case inventory control. 

The reduction in inventories allowed companies to pocket some hefty profits and pep up stocks. Everything from reduction of Oil and oil product inventories to freezers, etc. I even noticed my local Walmart pulled in those shipping containers all over their back lot.  

Now companies, such as Walmart and Target are talking about reduced profits, due to excess inventory. Oops! Certain major companies that supply all those retail stores with products (excluding food) are now beginning to cancel components to make their products... from their suppliers.

Understand the mantra is how the consumer's spending habits are changing. Seriously, how many TVs and Freezers, etc. can people buy for stimulus money they were given. 

As these companies slow their ordering to reduce inventory... a potential recession is looming. Meaning their inventory is no where near where it should be. Should be a buyers market at some point... just not yet. Again, this will not really impact food... as we still gotta eat. 

So these companies that had slowly began reducing inventory will now need to speed up. With interest rates sharply climbing, financing the debt to hold excessive inventory climbs as well. Not a good scenario to be in. Think GM in 2008, with their excessive inventory wish mushroomed and sales slumped to where they could not pay vendors.

Which brings me to the other part of this diatribe. How many zombie companies are about to be flushed out of the system?

The consumer, which is solely holding the economy together, will at some point overcome the euphoria of post covid and slow down the spending. My guess is a reduction will begin around fall, with an uptick for the holidays... and then the gloom of January will hit us.

Let's hope those companies have shed their excess inventories by then. Or as I think of it.. the time of steep discounts.

At some point, this may also impact the workforce, as it is not difficult to foresee it finally rebalancing and all those help wanted signs being stored away.

It will be a difficult time, as energy costs may linger and food is certainly not going to go down. I would expect the overall inflation rate to slide.

I probably should stop reading the hysterical headlines and let my brilliant leaders tell me how I should think and feel.