Ambrose Evans-Pritchard has the bad news — all the bad news:
Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.
The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.
“The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.
The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering (“forbearance”).
The presumption is that advanced economies “do not resort to such gimmicks” such as debt restructuring and repression, which would “give up hard-earned credibility” and throw the economy into a “vicious circle”.
But the paper says this mantra borders on “collective amnesia” of European and US history, and is built on “overly optimistic” assumptions that risk doing far more damage to credibility in the end. It is causing the crisis to drag on, blocking a lasting solution. “This denial has led to policies that in some cases risk exacerbating the final costs,” it said.
It’s been Ben Bernanke’s stated goal — and Janet Yellen’s wettest dream — to inflate, inflate, inflate. The Fed has successfully re-inflated the equities markets and the housing markets, but the dollar has remained stubbornly stable. The reason monetary inflation hasn’t happened yet is that there is so much government sitting on top of the economy that it can’t collect enough breath to move.
Of course, when those stable dollars buy you fewer stocks and a smaller house, and you can’t earn any interest on them by sticking them in the bank, then you realize exactly how screwed the middle class has been these last few years.
But when I say “I told you so,” let’s set the Wayback Machine for the first months of the Wiggleroom Administration. That’s when I formulated the Grand Unification Theory of Sucking. Here’s how I summed up Washington’s approach to the broken economy:
Let’s pretend for a moment that, god forbid, you break your arm. And somehow you end up with a team of doctors all trained at Obama University. As you lie there on the table in the ER, one doctor treats your arm by banging on the unbroken one with a ball-peen hammer. The second doctor takes the unusual course of setting your hair on fire. And the third one uses leeches.
Undeterred by your arm’s stubborn refusal to set, soon the doctors start blaming one another. And even though all of them are doing nothing but compounding your injury, none will take any blame. In fact, the louder you scream, the harder they go to work on you.
What’s changed since then? For a while, we got a sequester and things began to improve a bit. But now the sequester is unraveling at the same time ObamaCare is winding us all up real tight. So let’s reset the Wayback Machine for June of 2010 and my Second Grand Unification Theory of Sucking:
Huh. So it seems that artificially propping up home prices doesn’t help people buy homes or avoid foreclosure. Who knew?
The plan, I suppose, was to purposely return us to the housing bubble, when Americans borrowed against their homes to buy lots of cool stuff. Of course, the first time the bubble popped it cratered the economy of pretty much the entire planet. American consumers wised up, and stopped borrowing (not always by choice) and started socking money away and paying down debts.
American politicians on the other hand didn’t wise up, and instead doubled down on stupid. Make that tripled down — because not even government can get consumers to borrow and spend, while at the same time stopping banks from lending any money. Again — who knew? Although don’t be surprised if our Dear Leader manages to reinflate the housing bubble despite himself.
Sadly, that happened. And here we are nearly four years later and the only reason the unemployment rate is under nine or ten percent is that millions of Americans were kind enough to vamoose themselves from the working population.
But we still haven’t gotten to the big I-Told-You-So, the 17 trillion-pound elephant in the room. So one more trip in the Wayback Machine to November, 2012 to flesh out Evans-Pritchard’s warning:
Last year we had to refi almost three trillion in existing debt, on top of the trillion in new debt Congress created. So when we get to this next part, I want you to remember that there is already no market big enough to gobble up four trillion dollars in US debt. It doesn’t exist.
When and if that recovery comes, we’ll have Congress still trying to scare up buyers for a trillion dollars in debt each year. We’ll have the Fed trying to unload some unspecified number of trillions — nobody other than The Bearded One is allowed to know that number — in fairly short order. And we’ll have the Treasury trying to refi three, four trillion or more dollars, each and every year.
In a global marketplace that could only buy (or re-fi) a little over three trillion dollars, we’ll have to find the wherewithal to soak up five or six trillion dollars.
When the Big Churn comes, as it almost certainly must, I’m not sure any — any — assets will be safe from Uncle Sam’s gaping maw, except for what you bury.