Debt wants its 'pound of flesh'..

Aug 5, 2011

Poitou, France

Investors were staggered yesterday. Stocks got walloped.

Dow down 512 points.

Today, bond yields are falling... oil is below $86. London, Paris, Frankfurt - all down heavily. Only gold has resisted the general rout. It lost only $7 yesterday.


The reason is debt. It won't go away. It won't say 'adios' and get on a bus. Like a bad houseguest, it won't leave!

The feds have tried to ignore it. They've tried to postpone it. They've tried to make the problem go away by stimulating the economy to grow faster.

But nothing has worked. Day by day the debt grows larger... And day by day, the moment of truth grows closer.

What truth?

That you can't make excess debt disappear. It has to be paid...either by the borrower, or by the lender. Someone has to suffer.

Why is that? Because borrowing takes from the future. Sooner or later, the future shows up and wants to be paid. It wants its 'pound of flesh.' Its recompense. It wants what is due.

Yes, dear reader, a high speed train may have changed to world of travel. The invention of Viagara may have changed man's lovelife. And don't forget Facebook; it's had a big effect on social life. All around us is Progress with a capital 'P'!

But where is the progress in the world of money? How is debt today any different from debt 1,000 years ago? How are bankers' mistakes any different? They lent too much to the wrong people in the time of Caesar; they make the same mistakes today.

And what about money itself? There was good money back then...and bad money. Good debts, and bad debts. Good investments and bad investments.

The life of money never changes. It's not a technical system, in which progress is made. It's a moral system, in which the same lessons get learned over and over again.

The lesson investors are learning now is that there are bear markets as well as bull markets. Stocks go down as well as up, in other words. And sometimes, a downturn in the stock market is not a buying's just a step on a long stairway to Hell.

It's too early to know whether yesterday's big drop was a step down the bear market staircase...or just a feint...or just an emotional reaction to bad news - or all of the above. So, let's turn back to what we do know for sure: there's too much debt in the system; it's gotta go away somehow.

Tuesday, the US hit a landmark. It joined the Losers Club. Here's the report:

The United States Public Debt Surpasses its Gross Domestic Product

  • By Zachary Keck, DC Foreign Policy Examiner

    On Tuesday the United States net public debt to GDP ratio reached 100%. That is, the federal government's accumulated debt is equal (actually surpassed) the United States Gross Domestic Product in 2010.

    After Congress and the Obama administration passed the debt ceiling limit, the Treasury borrowed $238 billion on Tuesday. This brought public debt to $14.58 trillion dollars, slightly higher than the United States GDP in 2010, which was $14.54 trillion.

    Richard Haass, the President of the primer Foreign Policy organization, the Council on Foreign Relations President, has repeatedly argued that the nation's growing debt is the greatest national security threat the country faces. As Yale diplomatic historian Paul Kennedy has convincingly demonstrated, the rise and fall of great powers since the time of the Roman Empire has been driven by the economic vitality of the country. Countries that aren't economically dynamic can't maintain large military. Traditionally, the red line has been when debt-to-GDP ratio reached 90%. At this level, it was difficult to reign in debt as growth remained stagnant if not decreased altogether. 100% is therefore quite worrisome indeed.

    It's also worth looking at which countries that puts the United States in a league with. According to Agence French-Presse the only countries besides the United States to have a public debt-GDP ratio of 100% are "Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent)."
  • ----------------------------------- Free 10 Minute Video -----------------------------------

    The US debt crisis may have been averted... but the chance that there could be a global crisis in the months and years to come cannot be ruled out.

    In fact, the crisis could be bigger than anticipated.

    Given this possibility, how should you plan your portfolio? Where can you find investment opportunities that could benefit from this scenario?

    To get answers to these questions and more, we spoke to Asad Dossani, author of The Lucrative Derivative Report.

    Asad's views on the crisis, and the opportunities it presents, are available in a 10 Minute video, which you can view right now! For Free! Just click here...


    *** Larry Summers is talking about a "double dip" recession. He's wrong twice. First, because there was no recession. Second, because there won't be another one anytime soon. This is a correction, not a recession.

    A recession is a different thing. In a recession, an economy takes a's like pulling into a rest stop along the highway. You fill up your gas tank, and you can start out again. But what began in 2007 was no rest stop. It was a complete stop. Time to check the map. Change direction.

    David Rosenberg explains:

    Plain-vanilla, garden-variety business expansions and contractions that are influenced by the manufacturing inventory cycle tend to have recessions separated between five and 10 years apart. That was certainly the experience that economists came to understand and appreciate in the post-WWII era,
    This time, we are dealing with something different. This is a balance-sheet downturn...when businesses and households begin paying down debt and rebuilding the asset side of their balance sheets. Instead of spending...they save.

    It is a very natural thing to do, but it hasn't happened in 80 years. And it changes the whole nature of the economy. The US economy has developed to provide goods and services to household spenders. That's why there are so many malls in America - 10 times as much retail space per person as in France, for example. And that's why a large percentage of the US population is employed in "service sector" jobs - lending, selling, installing, maintaining and otherwise helping households spend money. Manufacturing may have declined in America, but at least there was the service sector.

    What happens when households stop spending? Time to check the map! And change direction.

    The latest jobs report shows that even the service sector is no longer creating new jobs like it used to. And no wonder. Consumer spending is slumpy. It hasn't been so weak since WWII. And it actually went down last month.
    Considering that population and price levels are still going up, an actual decline in consumer spending is a sign that the Great Correction is intensifying.

    *** Advice to dear readers: if you're still in the stock market, get out; stay out until the Dow drops below 6,000.

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

    Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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    2 Responses to "Debt wants its 'pound of flesh'.."

    Maulik Suthar

    Aug 6, 2011

    Mid-2009 à economy appears to recover from the subprime crisis and minor recession. "The calm before the real storm."

    Late 2010 à Stock prices start to crash again, (Asian markets may bottom), Gold and precious metals will appear to be a hedge at first, but will ultimately collapse

    2012 à Dow Jones between 3,800 and 7,200

    Between mid-2012 and mid-2017 à interim boom stage, first major stock rally [No other time period is as likely to affect your wealth and well-being as the period from late 2009 into late 2012]

    2018 to 2019 à long-term slowdown

    Early 2020 à next global boom

    2020-2023 to 2035-2036 à next broad-based global bull market will be from [ India , not China , will dominate in this next global boom and the U.S. will outpace Europe .]



    Aug 5, 2011


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