Unsustainable Debt

Dear Friends,

It seems to me, unending debt is unsustainable. Imagine what would happen if the deeper in debt a person went, the lower his or her interest rate? Further, let’s say that the people with the most debt, 100% or more of their annual pay, would be given actual negative rates? Not just negative as a function of inflation minus interest paid but actual negative interest plus inflation? I would recon that people would rapidly take on credit card debt. Heck I would! It would be a self interested act to amass debt to get negative interest rates. Then your debt itself would become an asset. Who then in their right mind would pay down debt with the interest it pays? That would be absurd. Of course eventually, and most probably pretty quickly, the entire edifice would collapse, because interest rates have to normalize at some point. Everyone reading this understand that it would, but, this is exactly the way government debt is treated…

In Europe the average debt ratio is over 100% debt to GDP. In Japan and China debt far exceeds 100% debt to GDP. The US passed the 100% debt to GDP under Obama… and continues to grow. The unfunded liabilities of nations the world over is mind boggling. Even funded liabilities far exceeds their ability to pay, and everyone knows it, except for negative interest rates. The inducement to spend is far too strong. Like a drunk with access to a liqueur warehouse, why stop, until their livers fail? The key is negative interest rates. The governments of the world can continue to spend future earnings and ramp up debt to astronomical levels, because the higher the debt earning negative rates, the more income to spend and cash flow to drive further borrowing. Central banks are totally responsible for negative interest rates.

It is not in the majority’s immediate self interest to reign in spending when so many get the benefit. Although in the long term it is everyone’s interest to stop deficit spending. Tangentially at least everyone appears to gets the benefit of government borrowing and spending. Bankers get to print more money from thin air, the dole grows ever larger, the masses have been taught nothing but Keynesian economics and corporations get to rent seek. That is the nature of government borrowing and spending. It is like feeding the deer in a park. The deer become dependent on the given food and will do anything to keep it. Those deer that are dependent have no concept they would be better off feeding on their own, and thus be free, because they have never seen that way of life. We are the same.

All this appears fine, but everyone knows in our own hearts, such a system is not sustainable. Those of us getting some benefit figure why rock the boat. Ours are mere dingys and so will take on water first. Government’s boats are like the Titanic and Lusitania, which are far larger, and many believe them to be unsinkable. Yet history shows that no matter the size, nothing is unsinkable. All it takes is a well placed iceberg, or in the economic sense, a long tailed event. Since all economies are in essence complex systems, long tailed events are inevitable. Moreover, the bigger the debt the larger the impact of a long tailed event. Remember how upset so many were when government shut down for a few days, imagine the outcry, fear and actual violence when government is forced to stop spending? Venezuela is a good example of what we can expect.

So we demand more government largess, even as we know it will all collapse someday, when interest rates normalize, because… they must someday normalize. You can only punish savers for so long before they will take their money elsewhere. We see crypto currencies like Bitcoin and Etherium starting to take hold as an option, to get wealth out of the rigged system. Gold and silver have always been options, but are expensive to hold at an institution, are manipulated and dangerous to hold at home. Cash in the mattress is an option that is practiced by more people than you might think. There are many more ways to get your wealth out of the bond and banking system than you might realize. No matter if you do, others will, and eventually a normalization of interest rates has to occur. Once government’s have to start paying real interest on debt that they had been getting interest on… governments across the planet will fall. It has got to the point that all it takes is a single domino. I wonder if that domino tipped over last weekend?


John Pepin

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