The 'debt' steamroller is headed for us - The Daily Reckoning

The 'debt' steamroller is headed for us

Jul 2, 2015

- By Bill Bonner

Bill Bonner
Baltimore, Maryland

Dear Diary,

Things settled down yesterday. Investors bent over to pick up a few pennies in the stock market; they didn't notice the huge steam roller headed their way.

The Dow rose 138 points as the mainstream media reported that "macro economic obstacles" were being removed. By that it meant that the Greek situation was calming down, with the Greeks and the Germans agreeing to work things out in an orderly way.

Here, we get a report directly from one of our dear readers:

    Greetings from Greek islands. Although news seems bad from reading papers etc. life here is rolling along. I am vaca with family and pulled out 500 euro from atm last night (Sunday June 28) on island hydra. Restaurant accepted Amex. So far so good.
Yes, so far, so good.

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But the steam roller is still rolling.

Americans aren't really interested in what happens to the Greeks - unless they happen to be on 'vaca' there. But the chief macro obstacle in Greece is the same one in China and in the United States of America. It is debt.

The Germans and Greeks can blab, hondle, and bluff all they want. It won't go away.

According to Credit Suisse, Greece has total debt equal to 353% of GDP. But US debt is even higher - at 370%. Germany, that paragon of financial virtue, is nevertheless at 302%.

All are in good shape, however, compared to the UK, with debt equal to 546% of GDP and Japan with a debt/GDP ratio of 646%. And if the Credit Suisse numbers are correct, Ireland is off the charts with debt of more than 10 times GDP.

The Greeks are feeling the heat because they can't pay their national debt right now. They can't pay it for the very same reason they got it in the first place - false pretenses. First, the claimed they met the guidelines for entry into the euro system. And then they claimed they could afford to live in the style to which they became accustomed. Then, they claimed they would pay back the money they borrowed to make payments on the debt they couldn't afford. None of it was true.

And now, with their backs to the euro wall, they can't "print their way out" of their predicament. They are actually expected to pay up. The Germans take it as a moral responsibility.

"That's the difference between beer drinkers and wine drinkers," says a friend. "The beer drinkers pay."

Lenders thought the euro promised stability and security. It was backed not by the wine drinkers, but by the beer drinkers. We're not sure how Ireland fits into this story, but our friend notes that the countries of Northern Europe - where they drink beer - tend to repay their debts. Southern Europe - Spain, Italy, and Greece - are bad credit risks.

On the streets of London, this time of year, people stand on the sidewalks with barrels of beer in their hands. And on the 4th of July holiday, this Saturday, more Americans will raise glasses of beer than wine. Still, we doubt the 'Beer Theory of Credit Quality' will hold up under the pressure of a generalized credit contraction.

In Europe, the beer drinkers of the north sold automobiles, for example, to the wine drinkers of the south. Then, when the winos couldn't pay, the beeros gave them more credit. And now, when the Greeks still can't pay, the Germans are getting huffy about it.

And everybody is nervous. Because, if the Germans put the screws to the Greeks, they invite problems with the rest of the wine drinkers. What the Greeks owe is peanuts compared to what the Italians and Spanish owe. And then, if the credit stops, who's going to buy the Germans' cars?

Nobody wants the credit to stop.

That is true in another pair of star-crossed debtors - the Chinese and the Americans. Like the Greeks and Germans, the Chinese lent and the Americans spent. And now, how do you like that, it's the Chinese who seem to be in trouble.

Wait, what do the Chinese drink? We don't know. But the Shanghai index fell 17% in the last 30 days. And it dropped another 5% yesterday.

McKinsey Global Institute puts Chinese total debt at 282% of GDP. (McKinsey and Credit Suisse do not necessarily measure debt or GDP in the same way. And McKinsey's figures are fresher. But we don't look for precision. We look for insight.) Says McKinsey:

    "China's debt has quadrupled since 2007. Fueled by real estate and shadow banking, China's total debt has nearly quadrupled, rising to $28tn by mid-2014, from $7tn in 2007. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China's overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable."
McKinsey says total world debt is now over 3 times GDP. That is a 'macro obstacle' about as big as they get. It is a steamroller. And it is headed for us all, no matter what we drink.

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

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