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How “Wealthy” Would We Be If We Stopped Borrowing Trillions Every Year?
How “Wealthy” Would We Be If We Stopped Borrowing Trillions Every Year?
These charts reflect a linear system that is wobbling into the first stages of non-linear destabilization.
The widespread presumption is the U.S. is wealthy beyond words, and will remain so as far as the eye can see: wealthy enough to fund trillion-dollar weapons systems, trillion-dollar endless wars, multi-trillion dollar Medicare for all, multi-trillion dollar Universal Basic Income, and so on, in an endless profusion of endless trillions.
Just as a thought experiment, let’s ask: how “wealthy” would we be if we stopped borrowing trillions of dollars every year? Or put another way, how “wealthy” would we be if the rest of the world stops buying our trillions in newly issued bonds, mortgages, auto loans, etc.?
The verboten reality is our “wealth” is nothing but a sand castle of debt. Take away more borrowing and the castle melts away. I’ve gathered a selection of charts that show just how dependent we are on massive debt expansion that continues essentially forever, as any pause in debt expansion will collapse the entire system.
Corporate buybacks have powered rising corporate earnings–and the buybacks are funded by debt. Corporate debt has exploded higher in the past decade, enabling stock buybacks on an unprecedented scale.
Government debt–federal, state and local– is rising an exponential rates.We’re not paying for more government programs with earnings–we’re simply borrowing trillions and hoping we can borrow the interest payments that will also rise along with the debt.
Household debt, student loans, auto loans–all are soaring. The corporate sector, government and the household sector–all are living on borrowed money, and relying on magical thinking to mask the inevitable consequences.
Here’s debt to GDP. Yes, the economy expanded, but debt expanded much faster. Every additional dollar of GDP now requires multiple dollars of new debt.
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The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear
The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear
You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash.
I first discussed the Paradox of Risk in August, 2008, just before the stock market melted down: The Unintended (Risky) Consequences of “Backstopping” Risk(August 12, 2008)
This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept.
I recently covered a related topic, The Dangerous Illusion That Risk Can Be Offloaded Onto Others (October 2, 2015).
The paradox is that believing risk has been eliminated leads us to take on insane levels of risk–levels that we would never have accepted before, levels that essentially guarantee our financial destruction.
I recently had the opportunity to discuss these topics with Max Keiser: Keiser Report: Global Paradox of Risk (25:40 — I join Max and Stacy in the 2nd half)
There are a variety of sources of the belief that risk has been lessened or eliminated:
1. The Fed Put, the belief that the Federal Reserve will never let stocks decline by more than a few percentage points before it steps in and saves the market from any further decline.
2. The belief that hedges dependent on counterparties paying off when the market craters have effectively transferred risk to others.
3. The belief in Modern Portfolio Management, i.e. that risk can be hedged or reduced to near-zero by diversifying one’s portfolio, investing in assets with low correlation, etc.
All of this is nice, but fatally flawed. Max and I discuss the reality that markets are not linear, they are fractal.
Central planning is linear, but reality is non-linear. The net result is the Fed can do whatever it wants, whenever it wants, and markets will still crash from time to time.
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