What an over burden of debt will do

Jan 7, 2015

- By Bill Bonner

Bill Bonner
London, England

Dear Diary,

A man puts a single bullet in a revolver and gives the chamber a spin. He puts the gun to his head. He pulls the trigger. Nothing happens. He spins the chamber again. Gawkers watch. Speculators take bets on whether he will live or die.

Again, he pulls the trigger. The gun clicks. But no discharge. He spins the chamber again. And again, the speculators make their bets. Even though the odds are exactly the same, they bet that he must be getting closer to the end of his game. The odds go from 6-to-1...to 5 -to -1.

Again, he pulls the trigger without effect. The tension mounts. Another spin. More bets. Odds have fallen to 4 to 1.

Once again, he is lucky. Speculators are betting heavily now...spotting an opportunity, he puts his little game on U-Tube. Now, it's all over the internet. He gets paid per $3 per ad views on his site. Millions of people are watching ...many are making their bets. And now, after three tries on a six-shoot revolver, they're betting his luck is running out. Odds fall to 3-to-1.

But one more time he pulls the trigger and nothing happens.

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Now, speculators are beginning to wonder. He's awful lucky. Too lucky. Maybe the bullet wasn't live. Maybe there's some trick involved. Or maybe he is being protected by divine intervention. The odds stick at 3-to-1 on the 5th try.

'How lucky can this guy be?' people ask. Another spin. Another round of bets. Another pull on the trigger...and still...nothing.

This goes on for several more tries. Now, speculators begin to feel a pattern that they can't quite explain. "More of the same," is beginning to seem more and more likely. They shift the odds. They give 10-to -1 odds that nothing will happen. Later, they are up to 20-to-1. More of the same seems almost inevitable.

Smart people don't know what to think. Dumb people don't think at all. And a shrewd speculator reasons as follows:

"The odds each time are 6-to-1. They don't change. But I've been losing money betting on the actual odds. That is, I've been losing money betting rationally. This is one lucky SOB. I'm not betting on the math. I'm now betting on how lucky he is. Even though the odds don't change...I don't know when his streak of luck will end. In the meantime, I can't stick with my losing bets. I'll go over to the other side and made some money until his luck runs out."

The next time, the fellow puts the gun to his head and blows his brains out.

"Too bad," says his accountant. He was getting rich."

Yesterday, the Dow went down another 130 points. Gold held above $1,200. No biggie. But sooner or later (as we keep saying) the hammer will find the live bullet.

Dead-head student debt, malinvested emerging market debt, oil slick debt, corporate buy-back debt, government stimulus debt, household over-spending debt - none of it produces a dollar's worth of extra output. Without more real income growth, it is unpayable. So, it will all go bad, eventually.

Already, 30% of student debt is in arrears. This debt was taken in the belief - supposedly - that education would increase earnings enough to pay for itself. This proved untrue. Here is the evidence from Tyler Cowen:


How can people earning less money pay more money to service the debt that was supposed to lead to higher earnings? You might ask the same question to the people who bought $500 billion of subprime debt from the energy sector. Or those who bought a trillion dollars' worth of European periphery government debt. Or those who 'invested' in $4 trillion worth of emerging market debt. They answer is everywhere the same: they can't.

Polls show that most student debtors think it will be forgiven. And why shouldn't it be? Where did it come from? The sweat of the laboring man's brow? The forebearance and patience of the saver? The cleverness and creativity of the entrepreneur?

No...it fell, like manna from heaven...upon the just and unjust alike...through no effort on the part of the former and no prejudice against the latter. For God's sake, don't you understand -- it is free damn money!

Which makes it highly likely that it goes as readily and easily as it comes.

But that is still to come...and we're sitting on the edge of our seats...along with every other curious spectator...to see how the show turns out.

Stocks have gone up and up and up...over the last 6 years...without a break. Your correspondent has watched with amazement. During this time, the real, developed world economy has not grown significantly. And real household consumer incomes for most people have fallen. Why then would companies be so much more valuable? Mathematically and logically it didn't quite add up. The real economy didn't seem to justify such high equity prices.

Why the higher prices? You already know the answer. Central bank intervention. They offer the only thing they have - more 'liquidity,' aka debt.

Take Germany out of the picture and almost every developed economy has followed the same path...from debt to more debt. Ex-Germany, the developed world added $50 trillion to its debt burden in the first 8 years of the 21st century, with the debt to GDP ratio rising from 260% to 390%. In the 6 years since, households have tried to shuck the burden of so much debt, but government and corporations have borrowed more than ever. Now, the ratio is 415% -- or another $15 trillion, give or take a few trillion.

Logic, math and experience all tell us that an over-burden of debt - unsupported by higher real earnings -- will collapse onto the heads of the people beneath it. But how? When? On whom?

We wish we knew, dear reader; we wish we knew.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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