Tuesday, February 10, 2015

Financial Times: Global Debt Still Rising

This will not come as a surprise to most people (especially readers here) but global debt just continues to grow at unsustainable levels. This interview on the Financial Times web site explores it

It's just another example of the surreal world we live in these days. We manage to avoid all this debt imploding to create a sudden crisis for the most part. But we never make any real progress towards reducing the debt (or even reducing the debt to GDP ratio) even with the lowest interest rates in modern times. We can only imagine what will happen to all this debt if interest rates really do rise any significant amount.

We all know inside that this situation is not going to end well. Even in the US where a recovery is being touted, everyone knows we are still on an unsustainable debt path. We talked about here last December in this article.

We are now fully in a "Catch 22" situation. Central banks are in a death match with deflation and the overwhelming overhang from all this existing debt. The only tools they have left are to just keep ramping up more and more debt to try and get some kind of GDP "growth". But what we are seeing now is that even the creation of tens of trillions of dollars all over the world does not generate the level of GDP growth needed to escape the black hole pull from the existing debt. All it has done so far is just postpone the day of reckoning.

The strange thing about this situation is that we now have the US Fed trying to insist that it will move forward with raising interest rates. Even some of the coolest of heads are expressing fear about what they may do as we noted in this article. Jack Welch, the former head of GE, even said the Fed would be "crazy" to raise interest rates.

Somebody really has this wrong. Either the Fed is right and all the naysayers are wrong or the Fed is about to take steps that could trigger the debt implosion we have managed to avoid since 2008. 

If the Fed really does start raising rates and nothing bad happens by mid 2016, perhaps they will prove the naysayers wrong. But if we plunge into another crisis, the Fed will really look bad and probably take a severe beating in public opinion. We need to follow that because we know that Jim Rickards prediction for the future is that there will be another crisis much bigger than 2008. He says it will overwhelm the Fed and then the IMF will step forward as "the only clean balance sheet left in the world" to try and deal with the crisis.

It still looks like to me that by the time we get to the November 2016 elections in the US, we will have our answer. All we can do is try to stay informed and make a plan in case there is another crisis. There are more signs of stress showing up which makes it all the more important to stay alert and informed.

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