Topic: Peak debt

In a Nutshell

In the wake of the global financial crisis in 2008 during which Western governments and banking authorities printed trillions of dollars bailing out private (too-big-to-fail) banks, new legislation has been introduced in most OECD countries to ensure that depositors’ money instead of taxpayers’ money will be used next time a bank fails.

FAQ

Mortgage debt aside, revolving debt (credit cards), auto loans and student loans have each exceeded one trillion dollars in the US. Auto loans (alarmingly of the sub-prime type) and student loans exploded in the aftermath of the 2008 financial crisis.

Read: Peak Debt Part 2: Auto & student loans

Seeing no growth in sight that would justify their stock prices, private corporations have been engaging in financial engineering by buying back large amounts of their own stocks (in the range of $500 billion per year for the S&P companies) in order to goose stock prices. Not only have a lot of companies used up all their cash generated from operation to fund buybacks and dividends, many have actually borrowed additional money by issuing bonds to buy back their own shares, taking advantage of the low yields because of the zero/negative interest rate policies of the central banks.

Read: Peak Debt Part 3: Corporate debt

Even without taking future liabilities such as pensions and social security into account, the debt levels of federal, state and municipal governments all over the OECD have already gone past the red line and the point of no return, and the situation continues to worsen.

Personal debts are relatively easy to predict, as their ability to borrow and service the debts and the lenders’ criteria on whether to extend further credit or wipe off existing loans are fairly well defined. As witnessed in 2008 during which millions of mortgage loans were defaulted upon, the next recession will see large portions of mortgage and auto loans defaulted upon. Student loans would not need to wait for a next recession. At some point it will be picked up by the taxpayers.

Sovereign debts are harder to predict. It is at the mercy of creditors’ confidence in the sovereign’s ability to service their debts.

The mountain of debt can only be dealt with in several ways:

  • Paid off as continued growth enables the debtors to service their debts. Remember the end of growth?
  • Defaulted upon
  • Engineer inflation to inflate it away.
  • Start a war and wipe the debt off the table, assuming the debtor is the victor.

As the 2008 financial crisis was only a preview of what is to come, the next debt implosion would likely lead to a monetary reset during which large swaths of existing global financial structures, institutions and relationships will be wiped out and a new monetary order will be re-established.

Reading guide:

Nature of debt, relationship with deflation and the monetary reset: link
Types of debt:

  • Personal and household debt (mortgage): link
  • Personal and household debt (auto loans & student loans): link
  • Corporate debt: link

How peak debt feeds into end of growth: link


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This interview with David Stockman describes a likely outcome of the much anticipated yuge fiscal stimulus and resulting market reaction.

March 2, 2017

Share Buybacks 2016 Q2 Udpate

The latest FactSet report on S&P buybacks show the buyback frenzy in the past several years might have peaked.

November 30, 2016

Household Debt Hits $12.4 Trillion As Subprime Loan Delinquencies Hit Highest In 6 Years: NY Fed

Latest snapshot of the US auto loans – subprime loans continue to rise while their delinquency rate deteriorates notably.

November 30, 2016

Peak Debt Part 3: Corporate debt

Part 3 of the peak debt series examines the state of corporate debt, how it is used and where it is heading.

June 1, 2016

Peak Debt Part 2: Auto & Student Loans

Part 2 of the peak debt series digs into the auto and student loans component of household debts.

March 19, 2016

Peak Debt Part 1: Household Debt

Part 1 of the peak debt outlines the logic for this phenomenon and examines one of the debt components – household debt starting with mortgage debt.

February 27, 2016

Deflation, Debt & the Monetary Reset

A confluence of driving forces nudges the global monetary system toward a reset, with deflation leading the charge.

February 13, 2016