Debt doesn’t matter — right up until it does.
So goes the chestnut.
In actual practice, however, it’s much worse: Increasing debt tends to make equity valuations go up right until it matters, then it makes them crash.
There is exactly zero attention being paid to this. But the truth of it is found in every recent, and in fact all the nasty historical drawdowns in the market.
. . .
If you look at the actual GDP of the country — that is, what it really produces, you would not count net new borrowing that is unsecured by an asset (that is, for which an asset’s title was not exchanged.) All government borrowing is unsecured. It was obvious in the mid to late 1990s that the health care monster would devour sufficient funds that net income could not support the expansion in cost; even then I was seeing >10% annual increases in health insurance expense for our employees, and on a compound basis what was due to happen was obvious. Ten years later it happened, and from that point forward we have never actually had any economic expansion at all in real terms because government emitted credit, all of it borrowed, has canceled all of said “growth.”
The Federal Government has emitted approximately 7% of economic output per year in new debt since the 2008 crash which is far greater than any economic expansion recorded. In other words the net-net economic output of the nation has been negative each and every year since that time.
In point of fact this means we are today in a nearly 10 year old economic depression that we are papering over — and have been continually since the 2008 crash. We are doing it via the same mechanism we did it the last time — through emitting unbacked credit just as was done with liar loans in the housing market and bogus sales of worthless stock certificates in the 1990s. It’s just much larger and done by the government, aimed at a different sector.
The problem isn’t the cost of insurance. It’s the cost of health care, which continues to go up at double-digit annual rates and that must not just stop it must be collapsed by a factor of 80% or it will destroy the economy, our markets and our way of life.
Again this has already forced the federal government into borrowing enough to literally cancel all economic growth since 2008; we have not printed an actual positive figure adjusted for said borrowing since the crash!
WE HAVE BEEN LIVING A BALD-FACED AND INTENTIONAL LIE, CONTINUING TO COMPOUND THE ECONOMIC DAMAGE, FOR NEARLY TEN YEARS AT THIS POINT IN TIME.
There’s more at the link.
Mr. Denninger writes in the context of health care, and foresees a future in which it will simply be unavailable at any price to many Americans. I can’t fault his logic or his mathematics. He’s right, too, in that politicians are “papering over the cracks” rather than tackle the real, meaningful, systemic reform that will be necessary to fix the problem. They daren’t, because if they did so, it would mean an immediate and very serious economic recession while the problem sorted itself out. They know they’d be held accountable for that by the voters – so they keep on kicking the can down the road, trying to ensure their own re-election for now, and hoping that it won’t explode like a depth-charge under the economy until they’re safely retired.
Of course, the economic problems go much deeper than health care alone. David Stockman, whom we’ve met in these pages many times before, has just forecast a 40% to 70% decline in stock prices, although he blames that on the Federal Reserve’s monetary policies rather than debt. In reality, of course, they’re the same thing. The Fed’s monetary policy is what’s allowed the government to carry on issuing debt, in particular because the Fed bought billions of dollars in Treasury securities (thereby financing the debt) when no-one else would.
My urgent recommendations to prepare for emergencies aren’t just for natural disasters. If the economy goes to hell in a handbasket, such preparations can help all of us cope with the fallout. If you find yourself suddenly unemployed or under-employed, or your wages or salary reduced, you can always live off your stored supplies for a while, if necessary; and if you can’t afford gas for your car this week, it’s awful useful to have a couple of cans of gasoline stashed away, just in case.