Ten Years Ago

October 6, 2018

Do you remember what you were doing when Lehman Brothers failed and Congress failed to pass the first TARP bill? I clearly remember what I was doing. Ten years ago, I was managing investments, which was really trying to manage clients' fears, during the worst economic crisis since the Great Depression. It was way more interesting than being at Bastrop Federal Satellite Camp, but not as much fun. 

 

It all began with a debt crisis. These occur when markets underwrite and buy too much bad debt. That's not rocket science. Oddly, almost nobody saw the crisis coming, even though the signs were clearly visible. With the credit markets on the brink of collapse, Congress, with it's partisan bickering, failed us. Thankfully there were talented people at the Fed and Treasury Department who put together plans to save the US credit markets and the economy. They went back to Congress and scared them enough that they ultimately passed the second TARP bill. 

 

To create the necessary liquidity in the credit market, the only effective tool available to the Fed and the Treasury Department at that time was to borrow. But solving a debt crisis with more debt is...well, just crazy in the long run. Try that at home and see what happens. Even an inmate knows that ultimately debt has to be repaid, refinanced, defaulted on, or forgiven.

 

In the case of US sovereign debt, forgiveness is not an option. So we can default (not a great idea), or we can keep refinancing and try to hyper-inflate our way out of it (paying it back with cheaper dollars like a second-rate South American socialist/dictatorship), or we can start spending less while increasing our revenue, paying it back with budget surpluses in an expanding economy. 

 

But in the last 10 years, according to a McKinsey report, total global debt has grown about 75%. Sovereign debt has more than doubled. The US federal government alone owes $21.5 trillion, the majority scheduled for refinancing in the next 8 years at higher interest rates. We also face another $100 trillion of unfunded entitlement spending ahead. On top of that, the Fed still owes another $2.3 trillion it bought from banks as part of quantitative easing. That will need to be refinanced as well.

 

While Trump supporters like to brag about GDP growth of 4%, they're conspicuously silent about the current ever expanding budget deficit in the midst of this growth. In fact, for the FYE 09/30/18, we spent considerably more while federal revenues were flat. Numbers for the last 9 months look even worse because of the tax cuts enacted last year. Real Republicans know that periods of higher economic growth should yield shrinking deficits or, even better, budget surpluses. But these aren't real Republicans. With all due respect, the current leading man and cast of supporting characters seem to be a made for cable TV assortment of crude, lewd, whining, fear mongering, tribal-populists who don't seem to understand the benefits of classic Republican policy like free trade or a sound balance sheet...with all due respect. 

 

The US debt balloon will burst. It's not if, it's simply when; and it won't be pretty. When credit turns south, stocks aren't far behind, followed by the economy. Chances are it will be at it's worst in 2020 when I leave my temporary involuntary home here in the outskirts of lovely Bastrop, Texas. Thanks Obama.

Please reload

© 2016 by Charles D. Jones