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The relentless increase in global debt is an enormous problem for the economy. Public deficits are neither reserves for the private sector nor a tool for growth. Bloated public debt is a burden on the economy, making productivity stall, raising taxes, and crowding out financing for the private sector. With each passing year, the global debt figure climbs higher, the burdens grow heavier, and the risks loom larger. The world’s financial markets ignored the record-breaking increase in global debt levels to a staggering $313 trillion in 2023, which marked yet another worrying milestone.

In the Congressional Budget Office (CBO) projections, the United States deficit will fluctuate over the next four years, averaging an insane 5.8 percent of GDP without even considering a recession. By 2033, they still expect a 6.9 percent GDP budget hole. Unsurprisingly, the economy, even using optimistic scenarios, stalls and will show a level of real GDP growth of 1.8% between 2028 and 2033, 33% less than the 2026–2027 period, which is already 25% lower than the historical average.

Some analysts say that this whole mess can be solved by raising taxes, but reality shows that there is no revenue measure that will fill an annual financial hole of $2 trillion with additional yearly receipts. This, of course, comes with an optimistic scenario of no recession or economic impact from a higher tax burden. Deficits are always a spending problem.

Citizens are led to believe that lower growth, declining real wages, and persistent inflation are external factors that have nothing to do with governments, but this is incorrect. Deficit spending is printing money, and it erodes the purchasing power of the currency while destroying the opportunities for the private sector to invest. The entire burden of higher taxes and inflation falls on the middle class and small businesses.

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The 2030 Agenda: The Totalitarian Trojan Horse

February 21, 2024

The 2030 Agenda: The Totalitarian Trojan Horse

Upon perusing the 17 UN Sustainable Development Goals included in the well-known 2030 Agenda, one may conclude that they are all harmless and entirely reasonable goals. Who could be opposed to reducing poverty and hunger or advancing infrastructure, innovation, and industry? The trick, akin to the tale of the Trojan Horse, is that those goals have been appropriated by the most heinous interventionism, and bureaucrats with a foundation of conceit and stupidity use it to impose governmental control over every aspect of the economy. They are attacking farming, agriculture, and nearly any private activity in a Europe that is beginning to resemble a society suffocated by a predatory state and zombies close to the government, à la Chapter 9 from Ayn Rand’s “Atlas Shrugged.” First, they destroyed the very industry that the 2030 Agenda is purportedly committed to strengthening.

The most interventionist politicians are really attacking the 2030 Agenda because, despite their pretenses to the contrary, their policies invariably have the opposite effect of what they seem to support. The socialists in all parties have taken over the 2030 Agenda, which does not advance industry, growth, equality, or the fight against poverty or hunger.

This exploitation of the 2030 Agenda’s objectives is exactly like the Trojan Horse that conceals people who will destroy the city beneath the guise of an impressive and lovely gift.

The number of farms in the European Union has drastically decreased in recent years. According to Eurostat, there were 9.1 million farms in 2020, a projected 37 percent decrease, or roughly 5.3 million fewer than in 2005. This trend has only worsened since 2020.

According to the European Commission itself, the EU’s agricultural land is predicted to shrink by 1.1 percent between 2015 and 2030, primarily due to the declines of the two main groupings (agricultural land and farming), which are forecast to decline by 4.0 percent and 2.6 percent, respectively. This implies ruining our future and increasing Europe’s dependence and poverty.

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Global Rate Hikes Hit the Wall of Debt Maturity

December 17, 2022

Global Rate Hikes Hit the Wall of Debt Maturity

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.

The most challenging obstacle is also the accumulation of debt.

The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the second quarter of 2022, according to the Institute of International Finance (IIF), the global debt-to-GDP ratio will approach 350% of GDP. IIF anticipates that the global debt-to-GDP ratio will reach 352% by the end of 2022.

Global issuances of high-yield debt have slowed but remain elevated. According to the IMF, the total issuance of European and American high-yield bonds reached a record high of $1.6 trillion in 2021, as businesses and investors capitalized on still-low interest rates and high liquidity. According to the IMF, high-yield bond issuances in the United States and Europe will reach $700 billion in 2022, similar to 2008 levels. All of the risky debt accumulated over the past few years will need to be refinanced between 2023 and 2025, requiring the refinancing of over $10 trillion of the riskiest debt at much higher interest rates and with less liquidity.

Moody’s estimates that United States corporate debt maturities will total $785 billion in 2023 and $800 billion in 2024. This increases the maturities of the Federal government. The United States has $31 trillion in outstanding debt with a five-year average maturity, resulting in $5 trillion in refinancing needs during fiscal 2023 and a $2 trillion budget deficit…

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Printing and Borrowing Always Ends Badly

December 8, 2021

Printing and Borrowing Always Ends Badly

As more countries copy the Federal Reserve’s monetary policy without the global demand of the US dollar, financing trade and fiscal deficits printing a weakening currency, nations become more dependent on the US dollar.

Neither domestic nor international citizens demand local currency, and governments continue to build large fiscal and trade imbalances believing the magic money tree will solve everything. However, as confidence in their domestic currency collapses, global US dollar-denominated debt soars because very few investors want local currency risk and central banks need to build US dollar reserves to cushion the monetary debasement blow.

Implementing aggressive so-called expansionary policies almost always backfires because the impact on growth of large spending plans is minimal, and the destruction of purchasing power of the currency rises.

Governments always want to believe that they will be able to disguise their imbalances with monetary debasement, but the effect is the opposite.

It is, therefore, no surprise that most global currencies have depreciated against the US dollar even in a year of high Federal reserve injections and commodity price rises. When a commodity exporting country sees its currency collapse despite rising exports, you know that -again- the myth of modern monetary theory has evaporated.

As the domestic economy and currency in countries like Brazil, Argentina or Turkey get worse, governments turn the blame to the International Monetary Fund.

The relationship of countries with the International Monetary Fund (IMF) always makes the headlines when governments have already spent the money they borrowed and do not want to return it. Interestingly, few seem to criticize the IMF when it rescues governments from their fiscal imbalances, and harsh comments only surface when the money must be paid back.

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Government “Stimulus” Keeps Having a Diminishing Effect

August 7, 2021

Government “Stimulus” Keeps Having a Diminishing Effect

The United States economy recovered at a 6.5 percent annualized rate in the second quarter of 2021, and gross domestic product (GDP) is now above the prepandemic level. This should be viewed as good news until we put it in the context of the largest fiscal and monetary stimulus in recent history.

With the Federal Reserve purchasing $40 billion of mortgage-backed securities (MBS) and $80 billion in Treasurys every month, and the deficit expected to run above $2 trillion, one thing is clear: the diminishing effect of the stimulus is not just staggering, but the increasingly short impact of these programs is alarming.

The GDP figure is even worse considering the expectations. Wall Street expected a GDP growth of 8.5 percent and most analysts had trimmed their expectations in the past months. The vast majority of analysts were sure that real GDP would comfortably beat consensus estimates. It came in massively below.

What is wrong?

In recent times, mainstream economists only discuss the merit of stimulus plans based on the size of the programs. If it is not more than a trillion US dollars it is not even worth discussing. The government continues to announce trillion-dollar packages as if any growth at any cost were acceptable. How much is squandered, what parts are not working, and, more importantly, which ones generate negative returns on the economy are issues that are never discussed. If the eurozone grows slower than the United States, it is always blamed on an allegedly lower size of stimulus plans, even if the reality of figures shows otherwise, as the European Central Bank (ECB) balance sheet is significantly larger than the Fed’s relative to each economy’s GDP and the endless chain of fiscal stimulus plans in the eurozone is well documented.

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The G-7’s Reckless Commitment To Mounting Debt

June 15, 2021

The G-7’s Reckless Commitment To Mounting Debt

Historically, meetings of the largest economies in the world have been essential to reach essential agreements that would incentivise prosperity and growth. This was not the case this time. The G7 meeting agreements were light on detailed economic decisions, except on the most damaging of them all. A minimum global corporate tax. Why not an agreement on a maximum global public spending?

Imposing a minimum global corporate tax of 15% without addressing all other taxes that governments impose before a business reaches a net profit is dangerous. Why would there be a minimum global corporate tax when subsidies are different, some countries have different or no VAT rates (value added tax), and the endless list of indirect taxes is completely different? The G7 “commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises”. This entire sentence makes no sense, opens the door to double taxation and penalizes the most competitive and profitable companies while it has no impact on the dinosaur loss-making or poor-margin conglomerates that most governments call “strategic sectors”.

The global minimum corporate tax is also a protectionist and extractive measure. The rich nations will see little negative impact from this, as they already have their governments surrounded by large multinationals that will not suffer a massive taxation blow because subsidies and tax incentives before net income are large and generous. According to PWC’s Paying Taxes 2020 (https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2020.pdf), profit taxes in North America already stand at 18.5% but, more worryingly, total tax contributions including labour and other taxes reach 40% of revenues. In the EU & EFTA profit taxes may be somewhat smaller than in North America, but total taxation remains above 39% of revenues.

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Investors Do Not See “Transitory” Inflation

May 4, 2021

Investors Do Not See “Transitory” Inflation

The Federal Reserve and European Central Bank repeat that the recent inflationary spike is “transitory”. The problem is that investors do not buy it.

Inflation is always a monetary phenomenon, and this time is not different. What central banks call transitory effects, and the impact of supply chains are not the real drivers of inflationary pressures. No one can deny certain supply shock impacts, but the correlation and extent of the increase in prices of agricultural and industrial commodities to five-year highs as well as the abrupt rise of non-replicable goods and services to decade-highs have monetary policy to blame. Injecting trillions of liquidity makes more funds chase fewer goods and the rise in the real inflation perceived by citizens is much larger than the official CPI.

Take food prices. The United Nations Food Price Index is up 30% in the past five years and up 10% year-to-date (April 2021). The rise in food prices already caused protests all over the world in 2018 and it continues to reach new highs. The correlation in the price increase of most agricultural goods also shows that it is a monetary effect.

The same can be said about the Bloomberg Commodity Index which is also at five-year highs and up 15% year-to-date.

Yes, there have been some supply disruptions in a few commodities, but it is not widespread let alone the norm. If anything can be said is that the rise in agricultural and industrial commodities is happening despite the persistent overcapacity that many of these had already before the pandemic. We should also remember that one of the unintended consequences of massive monetary expansion is perpetuation of overcapacity. Excess capacity is refinanced and maintained even in crisis times…

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Yield Curve Control: Bubbles And Stagnation

March 25, 2021

Yield Curve Control: Bubbles And Stagnation

Central banks do not manage risk, they disguise it. You know you live in a bubble when a small bounce in sovereign bond yields generates an immediate panic reaction from central banks trying to prevent those yields from rising further. It is particularly more evident when the alleged soar in yields comes after years of artificially depressing them with negative rates and asset purchases.

It is scary to read that the European Central Bank will implement more asset purchases to control a small love in yields that still left sovereign issuers bonds with negative nominal and real interest rates. It is even scarier to see that market participants hail the decision of disguising risk with even more liquidity. No one seemed to complain about the fact that sovereign issuers with alarming solvency problems were issuing bonds with negative yields. No one seemed to be concerned about the fact that the European Central Bank bought more than 100% of net issuances from Eurozone states. What shows what a bubble we live in is that market participants find logical to see a central bank taking aggressive action to prevent bond yields from rising… to 0.3% in Spain or 0.6% in Italy.

This is the evidence of a massive bubble.

If the European Central Bank was not there to repurchase all Eurozone sovereign issuances, what yield would investors demand for Spain, Italy or Portugal? Three, four, five times the current level on the 10-year? Probably. That is why developed central banks are trapped in their own policy. They cannot hint at normalizing even when the economy is recovering strongly, and inflation is rising.

Market participants may be happy thinking these actions will drive equities and risky assets higher, but they also make economic cycles weaker, shorter, and more abrupt.

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This Time Is Not Different. More Debt, Less Growth

December 30, 2020

This Time Is Not Different. More Debt, Less Growth

I remember that in 2009 three messages were constantly repeated: “In this crisis measures are different, because governments are investing in the recovery by increasing public spending,” “the funds from stimulus plans will strengthen the recovery “and “central banks help a stronger recovery by lowering rates and increasing liquidity”. Then, 2010 arrived and the Eurozone entered a deeper crisis. In many aspects, this recession is similar. Many governments are doing the same as they did in 2009. Extend and pretend. Extend structural imbalances and pretend this time will be different.

It is worrying to see the same level of excessive optimism of 2009 these days, and we must prepare for a complex environment and a difficult recovery if we are to emerge from this crisis stronger.

A recent analysis by Ned Davis Research shows that as government debt rises, growth slows, and jobs recovery is weaker. Using a multi-factor mode analysis with data from 1951 to 2020, as government debt to GDP exceeds 100%, real growth per annum falls to 1.6%, non-residential investment falls and non-farm payroll recovery weakens to 0.6% per annum.

Two factors tell us that the recovery in 2021 will likely be disappointing. Massive liquidity injections, with $26 trillion injected by central banks, have been used mostly to perpetuate elevated government spending, fundamentally current spending, and fund public debt. The second is that corporate balance sheets have been damaged to a level that will make it difficult to see a significant growth in investment above depreciation. SP Global expects global capital expenditure to remain weak in 2021.

Global growth estimates look too optimistic. The consensus assumes a recovery of 4% globally in 2021, returning to the GDP of 2019 at the end of 2022. This assumes an extraordinary and unprecedented fiscal multiplier of debt and liquidity…

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Why Are Mainstream Economic Forecasts So Often Wrong?

December 21, 2020

Why Are Mainstream Economic Forecasts So Often Wrong?

Every end of the year, by the end of the year, we receive numerous estimates of global GDP growth and inflation for the following year. Historically, almost in all cases, expectations of inflation and growth are too optimistic in December for the following year.

If we look at the track record of central banks, it is particularly poor in predicting inflation while large supranational entities tend to err on the side of optimism in GDP estimates. The IMF or the OECD, for example, have been particularly poor at estimating recessions, but mostly accurate at making long-term trend estimates. Contrary to popular belief, it seems that most forecasts are better at identifying long-term economic dynamics than short term ones.

Forecasting is a dirty job, but somebody has to do it. Economic forecasting is exceedingly difficult because there are numerous factors that can drastically change the course of a global economy that is increasingly complex and subject to important uncertainties. However, macroeconomic forecasting is also essential to provide a frame of reference for investors and policymakers. It should not be considered the revealed truth nor entirely dismissed, just an important framework that allows us to at least identify the major points of discrepancy as well as the areas to look at for positive or negative surprises as the year unravels. Yes, macroeconomic forecasting is essential.

The first lesson is that independent forecasts are almost every year more accurate than those of supranational bodies and central banks. There is a logic behind it. Independent forecasters do not feel the political pressure to use a benign view of government policies in their estimates. This is one of the main reasons why investors increasingly use their own economic forecasting teams alongside truly independent firms…

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The “Great Reset” and Plans for a Global War on Savings

December 9, 2020

The “Great Reset” and Plans for a Global War on Savings

Global debt is expected to soar to a record $277 trillion by the end of the year, according to the Institute of International Finance. Developed markets’ total debt—government, corporate, and households—jumped to 432 percent of GDP in the third quarter. Emerging market debt-to-GDP hit nearly 250 percent in the third quarter, with China reaching 335 percent, and for the year the ratio is expected to reach about 365 percent of global GDP. Most of this massive increase of $15 trillion in one year comes from government and corporates’ response to the pandemic. However, we must remember that the total debt figure had already reached record highs in 2019, before any pandemic and in a period of growth.

The main problem is that most of this debt is unproductive debt. Governments are using the unprecedented fiscal space to perpetuate bloated current spending, which generates no real economic return, so the likely outcome is that debt will continue to rise after the pandemic crisis is ended and that the level of growth and productivity achieved will not be enough to reduce the financial burden on public accounts.In this context, the World Economic Forum has presented a roadmap for what has been called “the Great Reset.” It is a plan that aims to take the current opportunity to “to shape an economic recovery and the future direction of global relations, economies, and priorities.” According to the World Economic Forum, the world must also adapt to the current reality by “directing the market to fairer results, ensur[ing] investments are aimed at mutual progress including accelerating ecologically friendly investments, and [starting] a fourth industrial revolution, creating digital economic and public infrastructure.” These objectives are obviously shared by all of us, and the reality shows that the private sector is already implementing these ideas, as we see technology, renewable investments, and sustainability plans thriving all over the world.

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The “Great Reset” And The Risk Of Greater Interventionism

November 23, 2020

The “Great Reset” And The Risk Of Greater Interventionism

Global debt is expected to soar to a record $277 trillion by the end of the year, according to the Institute of International Finance. Developed markets’ total debt -government, corporate and households- jumped to 432% of GDP in the third quarter. Emerging market debt-to-GDP hit nearly 250% in the third quarter, with China reaching 335%, and for the year the ratio is expected to reach about 365% of global GDP. Most of this massive increase of $15 trillion in one year comes from government and corporates’ response to the pandemic. However, we must remember that the total debt figure already reached record-highs in 2019 before any pandemic and in a period of growth.

In this context, The World Economic Forum has presented a roadmap for what has been called “The Great Reset”. It is a plan that aims to take the current opportunity to “to shape an economic recovery and the future direction of global relations, economies, and priorities”. According to the World Economic Forum, the world must also adapt to the current reality by “directing the market to fairer results, ensure investments are aimed at mutual progress including accelerating ecologically friendly investments, and to start a fourth industrial revolution, creating digital economic and public infrastructure”. These objectives are obviously shared by all of us, and the reality shows that the private sector is already implementing these ideas, as we see technology, renewable investments and sustainability plans thriving all over the world.

…click on the above link to read the rest of the article…

The U.S. Dollar Collapse Is Greatly Exaggerated

September 1, 2020

The U.S. Dollar Collapse Is Greatly Exaggerated

The US Dollar Index has lost 10% from its March highs and many press comments have started to speculate about the likely collapse of the US Dollar as world reserve currency due to this weakness.

These wild speculations need to be debunked.

The US Dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the U.S. Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3% in the same period, according to data compiled by Bloomberg.

The speculation about countries abandoning the U.S. Dollar as reserve currency is easily denied. The Bank Of International Settlements reports in its June 2020 report that global US-dollar denominated debt is at a decade-high. In fact, US-dollar denominated debt issuances year-to-date from emerging markets have reached a new record.

China’s dollar-denominated debt has risen as well in 2020. Since 2015, it has increased 35% while foreign exchange reserves fell 10%.

The US Dollar Index (DXY) shows that the United States currency has only really weakened relative to the yen and the euro, and this is based on optimistic expectations of European and Japanese economic recovery. The Federal Reserve’s dovish announcements may be seen as a cause of the dollar decline, but the evidence shows that the European Central Bank (BOJ) and the Bank Of Japan (BOJ) conduct much more aggressive policies than the U.S. while economic recovery stalls. Recent purchasing manager index (PMI) declines have shown that hopes of a rapid recovery in Europe and Japan are widely exaggerated, and the Daily Activity Index published by Bloomberg confirms it. Furthermore, the balance sheet of the ECB is at the end of August more than 54% of the eurozone GDP and the BOJ´s is 123% versus the Federal Reserve’s 33%.

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The World Is Drowning In Debt

July 13, 2020

The World Is Drowning In Debt

According to the IMF, global fiscal support in response to the crisis will be more than 9 trillion US dollars, approximately 12% of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way in which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105% of GDP.

If we add government and private debt, we are talking about 200 trillion US dollars of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.

This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented to support bloated government spending, and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.

Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.

According to Bank Of International Settlements, the percentage of zombie companies – those that cannot cover their debt interest payments with operating profits – has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.

That is why all this new debt is not going to boost the recovery, it will likely prolong the recession.

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U.S. Depression? The V-Shaped Recovery Fades Away

May 10, 2020

U.S. Depression? The V-Shaped Recovery Fades Away

The recent jobless claims figures show how difficult it will be for the U.S. recovery to be as quick and strong as initially expected.

7.7 million jobs were lost in Hospitality and Leisure in April, 2.5 million in Education and Health, with 2 million in Retail and another 2 million in Professional Services. These sectors are unlikely to recover fast and enough to compensate the job losses of the past month and even less likely to see the same level of wages of 2019.
Credit card delinquencies are rising, and retail sales are going to see a very modest recovery because household debt is increasing, wages are under pressure and most citizens are changing their consumption patterns, looking to strengthen their savings in case another shock arrives.
Corporate debt is rising to new records due to the collapse in operating revenues. As such, companies will likely take all possible measures to conserve cash flow, reduce expenditure and be prudent about hiring decisions. This will lead to slower job creation and investment even once the economy opens.
Tax increases are likely to affect the recovery. The government deficit is soaring, with the Treasury looking at $2 trillion of new debt in 2020 due to the measures implemented to combat the economic impact of coronavirus. Unfortunately, the Democrats are looking to increase taxes just when the economy needs more investment and attraction of capital. If taxes rise significantly, what is already a weak outlook for capital expenditure and job creation is likely to worsen.

All of this makes a V-shaped recovery even more challenging than before. However, the U.S. economy is likely to recover faster than the Eurozone and suffer less in 2020.

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