What debt is doing to the world – and all of us

Recent comments by the head of the Organization for Economic Co-operation and Development (OECD)‘s review committee put the debt problem (about which we’ve spoken before in these pages) into stark perspective.  The Telegraph reports:

“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said.

“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,” he told The Telegraph on the eve of the World Economic Forum in Davos.

. . .

The next task awaiting the global authorities is how to manage debt write-offs – and therefore a massive reordering of winners and losers in society – without setting off a political storm.

Mr White said Europe’s creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed.

The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.

The warnings have special resonance since Mr White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis.

. . .

Combined public and private debt has surged to all-time highs to 185pc of GDP in emerging markets and to 265pc of GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007.

. . .

Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as “inter-temporal smoothing”. It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. “By definition, this means you cannot spend the money tomorrow,” he said.

. . .

Mr White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again. “It is a debt trap. Things are so bad that there is no right answer. If they raise rates it’ll be nasty. If they don’t raise rates, it just makes matters worse,” he said.

There’s more at the link.  Bold, underlined text is my emphasis.

I’d like to highlight two elements of Mr. White’s comments.  Both have direct and immediate implications for the USA as well as Europe.

  1. … this will be uncomfortable for a lot of people who think they own assets that are worth something.”  It sure will!  There are millions of people out there who believe that the value of their assets – particularly their homes – will in due course pay for a comfortable retirement when they ‘downsize’;  i.e. sell their no-longer-needed big, expensive homes, buy something smaller and cheaper, and bank the difference.  However, their ability to sell their homes depends on the ability of potential buyers to get mortgage financing.  Most people can’t afford to pay cash for such big-ticket purchases.  If there is no credit available . . . if no-one except the most well-heeled of consumers can get a loan . . . then no-one will be able to afford to buy the houses and other assets that these people must sell if they want to have any sort of worthwhile lifestyle in retirement.  They’ll end up asset-rich, but cash-poor . . . and you can’t eat your McMansion, or use it to buy food.  What’s more, if you don’t have enough income in retirement to continue to pay the mortgage each month, the bank will repossess your home anyway.  That’s ‘uncomfortable’ all right!
  2. … new ‘bail-in’ rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.”  This will also apply in the USA.  Federal Reserve Vice Chairman Stanley Fischer said in 2014 that “the United States is preparing a proposal to require systemically important banks to issue bail-inable long-term debt that will enable insolvent banks to recapitalize themselves in resolution without calling on government funding”.  I’m sure you can work out the implications of that for yourselves.  In case you can’t, please refer to the following links, which explain it more fully:

The Bail-In: How You and Your Money
Will Be Parted During the Next Banking Crisis

New Rules: Cyprus-style Bail-ins to Take Deposits and Pensions

Financial Meltdown and the Confiscation of Bank Savings

Fed Vice Chairman Warns:
Your Bank May Seize Your Money to Recapitalize Itself

The granddaddy of them all, the International Monetary Fund, issued a Staff Discussion Note (link is to an Adobe Acrobat document in .PDF format) in 2012, analyzing the issue and proposing new policies to implement a confiscatory solution.  Read it and weep.  It goes so far as to state openly and unequivocally:  “Debt restructuring ideally would not be subject to creditor consent”.  The ‘creditors’ are, of course, in “bank-speak”, those with deposits (for example, savings accounts) at that financial institution.  So, if the IMF has its way, you won’t have to consent to the theft of your savings – the banksters will just take it anyway.  I’m sure that makes you feel so much better . . .  Your pension won’t be any more secure.  There have already been suggestions that the US government should ‘nationalize’ private pensions (in so many words, to recapitalize Social Security).  Guess what will happen to that money if they do?  If you think you’ll ever see it again, I have this bridge in Brooklyn I’d like to sell you.  Cash only, please, and in small bills.
All this is going to happen because of the immense overhang of debt that’s already built up.  I’m sure the Federal Reserve and other central banks would prefer to be able to raise enough money to recapitalize their nations’ banks without robbing depositors.  However, their nations have already issued so many bonds – i.e. so much debt – that the market (those who’ll buy the bonds) is saturated.  It got so bad a few years ago that the Federal Reserve had to ‘print money’ (a.k.a. ‘quantitative easing’) in order to ‘buy’ bonds from the US Treasury, because no-one else would do so.  The Treasury then spent this ‘funny money’ to keep the US government running.  That’s why the deficit has doubled under President Obama – because he (and, to be fair, Congress and the Senate) have been spending money raised by issuing more debt, rather than through taxation.  The Treasury has issued so many trillions of dollars in US Government securities that it would be pointless to issue many more, because there aren’t enough buyers for them in the debt market.  Therefore, there’s no longer sufficient debt finance available to recapitalize any banks that get into trouble.  That leaves only one place to get the money needed to save them . . . the funds of their depositors.  That means you and I, whether we like it or not.
“But,” you object, “my savings account and CD’s are insured by the FDIC.  Even if the bank took my money, the US government would have to repay me!”  Oh, yeah?  Sure, there’s insurance on your deposits . . . but it says not one word about when you’ll get back your money, or in what form.  Say a bank needs recapitalization, and seizes your deposit(s) as part of the process.  You immediately apply to the FDIC for compensation.  After a long delay (during which you can’t access your money), that agency says loftily that yes, it’ll refund your money – but only in the form of bonds issued against the bank’s capital, or shares in the new entity that replaced it.  (That’s the ‘bail-inable long-term debt’ that Mr. Fischer was talking about – see above.) The FDIC or another government agency will determine the value of those bonds or shares, not you – and their valuation may have little or nothing to do with reality.  Furthermore, you’ll only be allowed to sell or otherwise convert them after a suitable period – say, five years?  Ten years?  Twenty-five years?  Whatever it is, you’re still S.O.L. and broke – but hey, the insurance policy worked!  By strict legal definition, it covered your losses!  You think the politicians are going to care that while you wait for your money in cash, you’ll starve?  If you die, they don’t have to compensate you, do they? – or, if they do, they’ll pay your estate (eventually) in dollars that have been massively devalued by inflation.  They don’t care.  Republican or Democrat, they’re all the same.  The ‘Establishment’ will make sure that it wins, and we lose.
How can we protect ourselves against that possibility?  There’s only one way I can see – keep as much as possible of your savings in a form that will be hard to confiscate.  I’m trying to slowly build up to the point where I have two to three months’ actual expenditure in the form of cash, securely stored in a safe place – but not in a bank account or deposit box, where the banksters can get their greedy hands on it.  I’m also putting what I can into precious metals – gold and silver coins.  I’m a very small investor indeed, which means I can’t get the best prices on such assets, but I do what I can.  If I had a hundred thousand dollars in savings today (I wish!), I’d have a quarter of it in precious metals, a quarter in cash, and the rest divided between savings accounts in two or three different financial institutions, just in case.  That way, if one or two assets ‘went bad’ or were confiscated, I wouldn’t lose everything.  YMMV, of course.


  1. I can't help but think of the tragi-comical scene in The Big Short where Steve Carell asks a stripper (while she's working!) about the mortgages on her oversized mansion. When asked what she'd do if her payments ballooned, she responds with a languid, "Oh, I'll just refinance."

    Are our economic leaders smarter than that stripper? I wonder

  2. Hello Peter, As a thought, the financial laws for "thrifts" and "credit unions" here in the states are different from the laws for commercial banks. Same for the insurance accounts on that money. I have tried to find out if the bail in is written for the thrifts, but have not been successful. As an immediate step, I suggest that readers TODAY move funds from commercial banks to thrift/credit union accounts.


  3. I remember a comment made by a blogger who had gone through the Argentinian society collapse of 2002. He had written (if memory serves) that the people who saw this coming had converted their Argentinan currency to American dollars before the collapse occurred, then banking back into the bank. Smart move.

    But when it came to cashing out the account, the bank paid them in Argentinian currency, thus insuring the bank kept the more valuable asset (back then anyway – no idea what current exchange rate is now).

    The House always has a trick up their sleeve.

    Thanks for the article – keeping your assets safe is becoming trickier by the minute.

  4. The best use of "spare" money I have been able to come up with is debt reduction- there is a guaranteed rate of return and zero risk.
    The downside, it does reduce available cash in hand for emergencies.

  5. Peter,

    There is precedent for the US Gov to prohibit ownership of precious metals in coins or bullion form. May I suggest you instead consider investing in silver flatware and serving pieces? Hallmarked silver can be sold for the weight of the silver, but is not in a form that has ever been confiscated by the USG.

  6. @Glen: There are two problems with that.

    1. What if the bullion dealer can't get his hands on enough cash to buy your flatware? You're stuck with it. It's not very negotiable in and of itself.

    2. Imagine trying to buy something with knives, forks and spoons. I imagine the dialog would go something like this:

    "Hey, I'll give you a spoon for that bag of rice and a knife for that tin of beef."

    "A spoon? A knife? Fork you!"

    So much for commerce . . .


  7. "1. What if the bullion dealer can't get his hands on enough cash to buy your flatware? You're stuck with it. It's not very negotiable in and of itself."

    That points the way to something else that's going on: the war on cash. Ever notice that the denominations of physical cash have not been updated to reflect inflation? Today, we still have $1 bills that are the equivalent of what would have been FIVE CENT notes in 1932. If you've ever seen the roomfuls of cash from a big drug bust, you get a hint of how inflation is eroding not just the value, but the practicality of physical cash.

    Add on the ongoing, step by step process by which we're all being forced into trackable transactions under the rubric of "money laundering" prevention (and sooner or later, some crackpot economist will declare the "knowledge problem" solved when every unit of currency can be tracked), and we're heading for a situation where physical cash itself won't be very liquid.

    Rest assured, *any* commodity that can function practically as a currency will be encumbered to prevent that – from regulation of possession to outright confiscation and bans. Such encumbrance need only be enough to increase the inconvenience relative to the easy-peasy mainstream system, such that nobody but fringe groups would bother.

    Can you imagine? A future where pot is legal but gold and silver get you five to ten?

  8. " Republican or Democrat, they're all the same. The 'Establishment' will make sure that it wins, and we lose. "

    I don't believe that. I can believe the differences won't make any practical difference, the problem is too large. I can believe that 1 in 20 Democrats are not such*, and that 1 in 5 Republicans are not such.

    *Not at the national level. Webb seems to be semisane, but is an utter singleton.

    The issue is one of trust among those who prefer a different outcome. The men at Lexigton and Concord knew they were alone there that day at that instant, but also that there were many more rallying all over where they could be seen. I'd like for history to rhyme with 1775, and I see no reason it must not. There are only 5000 or so people/offices in this country which must be for a better outcome, or consistently made vacant or placed under threat for the Establishment to flail in vain. How to arrange for it is the increasingly pressing question of the age.

    The cult of a society and economy managed by sovereign experts ruling over subjects dies hard, but has certainly been in place far longer than any good it has done could ever justify.

    -Tom D Perkins

  9. We are 7 years into Deflationary "Great Depression 2.0", and no one is willing to recognize the fact. In a normal inflationary economy the Fed's printing of a Trillion new Dollars every year would have created double digit or hyper inflation, but that has NOT occurred. Why not? The answer is because lenders have not created new loans and there by expanded the money supply of our fractionated banking system. So while the Fed has been printing huge amounts of new money, that has not resulted in an expansion of the money supply, the M3 money supply is unchanged from 7 years ago.
    Economies all exist in one of two states, either inflating or deflating. Of the two states inflating is by far preferable. As deflation is destructive, businesses that could stay in business during an inflation find their debts growing in value as the currency does during a deflation, and go bankrupt. This causes a snowball effect where people lose their jobs, can't pay their debts, have their homes foreclosed on, etc…
    Economies naturally rollover into the deflation trap when private debts reach unsustainable levels during a period of low inflation. People and Businesses stop borrowing money this causes a drop in the money supply. And according to the only Economic Law "Supply and Demand", combining less money with the increasing demand for money to service the debt, makes the value of money rise = deflation.
    Many people think it was government spending during WWII which got the world out of "Great Depression 1.0", but this is wrong. Rather it was the effect of the war causing the forgiveness, repudiation, of debts, as well as the many who literally "Bought the Farm" when the GI insurance paid off 500,000 here in America, and huge numbers more in places like Great Britain. So this is the KEY to getting out of a deflationary depression, "the Private Debt levels must be reduced" so that borrowing can expand the money supply.
    You fight "Deflation" with "Inflation", but the $1+ Trillion the Fed was printing for years was clearly insufficient to expand the M3 money supply, in the face of the high private Debt levels.
    Sometimes when you have several problems, one solution can work synergistically to solve them all, which leads me to the following solution.
    I think foreign countries purchase of US Treasuries in order to manipulate their currency and gain a price advantage for their exporters, presents an opportunity to reimburse the American middle class for all their sacrifices, by increasing their networth. Have the Fed payoff all foreign holdings of US Treasuries, about $6+ Trillion and put that with the Fed's $2+ Trillion in reserves from all the recent "Quantitative Easing". And create individual and inheritable Social Security accounts for every citizen of about $30,000. This would have the effect of increasing everyone's net worth by $30,000, fixing the stupid Ponzi Scheme Social Security system, and putting about $9 Trillion in capital into the Stock and Bond markets. It would also devalue the Dollar on world markets for the first time in 4 decades, reversing the trade deficit into a trade surplus for the first time in many people's lives. In addition, it would have the effect of kicking the economy out of its present destructive deflation, and back into a growing economy's inflation. And finally it would make America's export sector boom, which would suck foreign investment into America, while at the same time dragging the rest of the economy out of the ditch, creating jobs.

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