"Debt Ruins"
When the past overtakes the present, the future is doomed...
by Bill Bonner
"There’s a great deal of ruin in a nation."
~ Adam Smith
"How about this from Fortune: "Hotshot Wharton professor sees $34 trillion debt triggering 2025 meltdown as mortgage rates spike above 7%: ‘It could derail the next administration’ Among the illustrious nameplates adorning the offices of Ivy League business schools is one Joao Gomes. A Wharton Business School finance professor, Gomes is issuing a warning cry many of his peers so far have chosen to ignore: America’s burgeoning public debt mountain.The gist of Gomes’ warning is that the ruin of America is bound to come from its $34 trillion of debt. The more current income you have to devote to past spending, the less you have left over for current spending. Not to put too fine a point on it, but people with less money to spend are poorer.
In more immediate terms, the feds have to borrow more and more money in order to pay the interest on their $34 trillion debt pile and continue their excess spending. They inevitably compete with private borrowers and drive up interest rates.
That ‘70s Show: Yesterday, we remembered the 1970s. In 1979, the going rate for a mortgage was 12.9%. Today, there’s $12 trillion of mortgage debt. Much of it is fixed, at very low rates. Sales have dried up, because, for the sellers, it would mean taking on a new mortgage at much higher rates.
The adjustment to higher rates takes time. Already, the housing industry is not building as many houses as it used to, because it can’t sell them. And buyers aren’t buying like they used to either, because they can’t afford them. With a median house price of $435,000 (up from $25,000 in 1970!), a mortgage at 12.9% would mean monthly payments – interest only – of $4,676. The median household income is only about $6,000; doesn’t leave much to live on.
Even at 7%, the mortgage payment – around $3,000/mo. – is more than most people can afford.
Most likely, house prices will go down as demand for expensive houses shrinks. But mortgage rates are likely to continue going up as the demand for credit increases. At some point – Professor Gomes says it will come next year – a debt crisis will begin. The economy will fizzle and spark…then, die like a wet flame.
We’ve been warning about public debt – off and on – for the last 50 years. This gives us some street cred in the doom and gloom industry. But most people think our clock has stopped. A half century is ‘long term;’ they assume that if nothing bad has happened in 50 years it’s not going to happen at all. A few gray-beards remember the post-WII experience. The debt/GDP ratio then was as high as it is now. But…lo…no catastrophe followed. Instead, the debt went down and the economy boomed.
No End in Sight: Mightn’t that happen again? Very unlikely. The WWII debt was different. It was entirely driven by the war. Households and businesses – unable to buy anything – saved their money. By the end of the war, they were flush with real money and ready to spend, invest, and build. Come the Japanese surrender, military spending plummeted and civilian spending soared.
Today, the situation is almost the opposite. Consumers and businesses are deep in debt too. And whatever ‘war’ we are engaged in, there is no end in sight. But it all takes time to play itself out. You can boil an egg in 3 minutes. You can watch a movie in an hour and a half. But neither wine nor whiskey matures overnight. And Rome wasn’t destroyed in a fortnight. You might see Halley’s comet in the night sky and then keep watching for it. After a few years, you would give up. The comet had gone off into the black universe, you might conclude, never to be seen again. But you gave up too soon. It comes back every 75 years or so.
Even jumping out of an airplane leaves you seemingly suspended in air…as if time had stopped. And yet, no matter how long it takes, you’re going to end up on the ground.
It took the US 190 years to accumulate its first $1 trillion of debt. But now the ‘ground rush’ begins; time speeds up. The US adds $1 trillion in debt every few months. The latest projections show national debt at $60 trillion by 2034. That would put the interest expense around $3 trillion. You reach for the rip cord. But it’s not there. The insiders benefit from federal spending…and they control Congress. No parachute is available.
One way or another, the past will get what’s coming to it. Patience."
No comments:
Post a Comment