“2018 is apparently the year in which the world enters this final stage of its addiction to debt. Wherever you look, leverage is…”
Self-destruction usually happens in stages. At first there’s a binge in which the thrill outweighs the sense of transgression. This is usually followed by remorse, acknowledgement of risks, and an attempt to reform.
But straight-and-narrow is exhausting, and because of this is frequently just temporary, eventually giving way to a kind of capitulation in which the addict drops even the pretense of self-control.
2018 is apparently the year in which the world enters this final stage of its addiction to debt. Wherever you look, leverage is soaring as governments, corporations and individuals just give up and embrace the idea that borrowing is no longer a necessary evil, but simply necessary. Some recent examples:
(Reuters) – China’s banks extended a record 2.9 trillion yuan ($458.3 billion) in new yuan loans in January, blowing past expectations and nearly five times the previous month as policymakers aim to sustain solid economic growth while reining in debt risks.
Net new loans surpassed the previous record of 2.51 trillion yuan in January 2016, which is likely to support growth not only in China but may underpin liquidity globally as major Western central banks begin to withdraw stimulus.
Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December, according to Reuters calculations based on the central bank data.
Outstanding yuan loans grew 13.2 percent in January from a year earlier, also faster than an expected 12.5 percent rise and compared with an increase of 12.7 percent in December.
(CNBC) – Total household debt rose by $193 billion to an all-time high of $13.15 trillion at year-end 2017 from the previous quarter, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data report released Tuesday.
Mortgage debt balances rose the most in the December quarter rising by $139 billion to $8.88 trillion from the previous quarter. Credit card debt had the second largest increase of $26 billion to a total of $834 billion.
(Chicago Tribune) – President Donald Trump unveiled a $4.4 trillion budget plan Monday that envisions steep cuts to America’s social safety net but mounting spending on the military, formally retreating from last year’s promises to balance the federal budget.
The president’s spending outline for the first time acknowledges that the Republican tax overhaul passed last year would add billions to the deficit and not “pay for itself” as Trump and his Republican allies asserted.
Trump’s plan sees a 2019 deficit of $984 billion, though White House Budget Director Mick Mulvaney admits $1.2 trillion is more plausible after last week’s congressional budget pact and $90 billion worth of disaster aid is tacked on. That would be more than double the 2019 deficit the administration promised last year.
So far, the financial markets are responding pretty much according to script:
(CNBC) – U.S. government debt yields hit session highs Wednesday after the government reported inflation in January rose more than expected.
The yield on the benchmark 10-year Treasury note jumped to 2.882 percent as of 10:03 a.m. ET. It hit a four-year high of 2.902 percent on Monday. The yield on the 30-year bond was last seen higher at 3.146 percent. Bond yields move inversely to their prices.
Schwab’s Kathy Jones argued that the latest reading could mean that the yield on the benchmark 10-year note could test 3 percent in the next few months.
(Kitco) – Gold prices are posting sharp gains of around $20 an ounce in late-morning action Wednesday. A volatile day in the U.S. stock market is helping to boost safe-haven gold. U.S. stock indexes were poised to open the U.S. day session modestly up, but then dropped sharply in the immediate aftermath of a hotter-than-expected U.S. consumer inflation report. Since then the stock indexes have bounced back above unchanged. Meantime, the U.S. dollar index has lost good early gains to trade lower on the day, and that is also helping out the precious metals market bulls. April gold was last up $21.10 at $1,351.40.
Does the end of this process have a name? Yes, a really scary one: “crack-up boom.” From Investopedia:
A crack-up boom is the crash of the credit and monetary system due to continual credit expansion and price increases that cannot be sustained long-term. Often, banks will attempt to prevent a crack-up boom by halting credit expansion, which ends up backfiring and yielding the same results that the boom would have caused. Both scenarios result in an economic depression when the bubble finally bursts and the economic system crashes.
How Does It Happen?
When the economy is down, one way to give it a temporary revival is to feed extra money into the system – AKA economic stimulus. Providing people with credit makes them feel richer and more inclined to spend their money, which in turn feeds more money into the system. When people spend money, they tend to want to continue this trend and continue to buy, despite the fact that their extra cash isn’t coming from actual savings. The problem comes when the government continuously pours more and more money into the system and the actual economy beneath the false expansion cannot keep up.
Feeding money into the economy is a quick way to give it a short-term boost, but this practice isn’t sustainable over the long term. If credit expansion continues without limit, prices continue to rise until they reach the point at which the entire system collapses because it can no longer sustain itself. People can no longer afford the high prices, so credit must expand even more to accommodate these prices, which pushes them even higher.
What Type of Economy Can Be Hit by a Crack-Up Boom?
A crack-up boom is something that can only happen in an economy that relies on paper money rather than the gold standard, or electronic systems of monetary transaction rather than physical. In a gold standard economy, interest rates cap out at around 3 to 6%, since credit is based on actual saved money, instead of being adjustable depending on the circumstances. However, in a system that revolves around paper money, more cash can be printed at any time and introduced into the system. This affects the value of each dollar and affects the prices of market commodities. When the government introduces into the economy money that doesn’t really exist (in the form of false credit) it’s only a matter of time before the economy is damaged, even if the original intention was to boost it.