Something Is Seriously Wrong: Global Debt is Rising

Ina was one of my co-workers a few years back, and she was an interesting character.

On the weekends, Ina exchanged her office suit for a dotted red dress, a mantle and castanets.

Truth is that Ina had a second job as a professional flamenco dancer/singer. If you have ever been to Andalucía you know that flamenco, a typical Spanish dance, is a huge part of the culture in southern Spain.

How did you get started?’ I asked her one day.  I didn’t realise then that I was in for an unusual story.

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Ina had married young and had had three children.

The family had bought a home, but they were struggling with their mortgage payments…and then Ina’s husband lost his job.

It’s when Ina started her flamenco career — something that up to then had been a hobby — to make some extra income. But even with the extra job they were still having difficulties.

It was then that they had a weird stroke of luck…for them.

A fire broke out at the bank that held their mortgage. This was Spain, in the late 80s.  Most banks didn’t have computers back then, and kept paper records.

The fire destroyed several mortgage debt records, including Ina’s. Just like that, the bank wiped their debt clean.

But their financial windfall didn’t last too long. Ina’s husband mismanaged their money, which meant they lost their home anyways a few years later.

By the time I met Ina she was divorced, and still performing on the weekends.

The following headline reminded me of Ina’s story this week:

‘Chase Bank forgives all outstanding credit card debt for Canadian customers’.

Yep you read right. Chase has wiped out all credit card debt for their Canadian clients.

How did Canadians get so lucky?

Well, after doing business in the country for 13 years, Chase announced last year they were closing up shop. They stopped credit card applications and kept collecting credit card payments for a year.

They have now come to the conclusion that it is cheaper for them to forgive all outstanding debt than trying to recoup it.

Clients were obviously static.

I couldn’t believe it’ said one to CBC. And here is a college student: ‘It’s kind of like I’m being rewarded for my irresponsibility’.

Getting debt wiped out is a stroke of luck, but my point is that it’s one that doesn’t happen very often.

The reason why I bring all this up is that we are seeing global debt increasing.

Even after suffering a massive debt crisis in 2008, we have seen debt swell over the years. As you can see below, since 2007 debt has increased in all areas of the economy, particularly for corporate and government.

The Rum Rebellion - 17-08-19

Source: McKinsey

[Click to open in a new window]

All this debt is creating zombie companies and asset inflation. We are also seeing stagnant salaries.

Much of the ‘growth’ and ‘recovery’ we have seen in recent years is not real. It’s coming from debt binging, and at some point, all this weight will sink us.

How can we get rid of all this debt?

Well, one way to get out of it is through inflation.

Central banks are decreasing interest rates and governments are lowering taxes. They are trying to create a boom to resuscitate inflation. I get it…but it doesn’t seem to be working.

It’s why we will most likely see more central bank meddling.

After debt binging, we need time to deleverage. The problem is that this could bring in a lost decade, much like it did in Japan. Deflation and a slowdown in consumption will stop the economy in its tracks.

There is also more talk of a debt jubilee.

Could a debt pardoning be in the cards? Not sure.

It’s unconventional, but it has happened before throughout history to wipe the slate clean.

We are already seeing plenty of unconventional policies and it seems like central bankers are willing to do whatever it takes to keep the economy from going under.

Unconventional policies like negative rates.

A few years back, economists didn’t think negative rates were even possible. That people would be getting paid to take out a loan. In a way, with negative rates you are getting a discount on your debt.

At negative rates, who will want to hold debt? And, who will want to deposit money in the banks?

Remember, bank deposits are basically a loan to the bank. Negative rates mean you are getting less money than what you have deposited. At some point this will lead to tighter credit.

Growth is slowing, burdened under the weight of all that debt.

Markets were reeling this week after the US yield curve inverted. The yield curve basically shows the interest rates for short-term bonds against long-term bonds. An inverted yield curve means that bonds in the short term are paying more than the long term. It shouldn’t happen since investing in the longer term is riskier.

The truth is that this can’t last.

It’s probably why US$100 bills in circulation are increasing and why people are jumping into things like gold. By the way, if you haven’t seen Greg Canavan’s report on the ‘Top Two ASX Gold Stocks for 2019’, you can do so here.

At the end of the day, there is something seriously wrong here.


Selva Freigedo Signature

Selva Freigedo,

Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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