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Drowning in debt and much more to come

Passing the buck to future generations.

It won’t be the first time I have been castigated for maintaining that fuller context can change perspectives around economic issues. I was once ridiculed by a newspaper cartoonist who drew me as a helper in the corner of a boxer called Rand against his opponent called Dollar. I was telling my guy not to worry because it was not that he was so weak, but that his opponent was so strong.

The satire was clearly based on not seeing any difference between the two statements. But I would argue that they are more than simply seeing the glass half full or half empty. It’s about seeing the glass itself and what goes into it.

South Africans generally seem to suffer from a chronic context deficit disorder.

We are an integral part of the global economy and world finance, but are so obsessed with our own issues that we could easily be caught flat-footed again, as we were in the 2008 meltdown. There are things we can do and indeed are doing that are beyond the scope of this article, but certainly exclude allowing our parochial obsession to drive us to despair and hopelessness. 

South Africa’s debt position is such an issue where informed debate seldom draws in the far more serious global situation that threatens to overwhelm us.

Read: Tackling concerns about rising debt levels by way of a rugby analogy 

This is not to argue that our 60% or projected 70% government debt to GDP and private debt levels are not a cause for serious concern, especially because of global distrust, our redemption capacity, and debt servicing impact on government spending. It is simply saying that we may be obsessed with the wrong things against the global background.

Total global debt is set to exceed a record $250 trillion by the end of this year, according to a Reuters report based on Institute of International Finance (IIF) research. That’s about three times gross world product (GWP) or $32 500 per person. And it shows no sign of slowing.

IFF, Bank for International Settlements, International Monetary Fund

While the increase has been largely driven by an increase in government debt (now at about 100% of GWP), private and financial sector debt is still the largest and most threatening part of global debt.

In practice, governments don’t go bankrupt: they have the capacity to simply print more money, but as we saw with Lehman Brothers, a single collapse of a major financial institution can trigger a global meltdown. Unorthodox economist Steve Keen has consistently highlighted private debt as the real Achilles’ heel.

Debt outpacing the global economy

American Federal Reserve board chair Jerome Powell, who can only be described as the greatest ditherer the board has had, has finally admitted that “debt is growing faster than the economy and that is unsustainable”. It confirms too that consistently increasing debt levels and forcing interest rates down to ridiculously low, even negative levels ultimately does little to promote economic growth. It has removed the one option the world has relied on to pull it out of a global recession.

This month, credit rating agency Moody’s issued an unprecedented debt downgrade warning to the entire world.

Ironically, it bases this assessment on political unrest, ignoring the turbulent financial conditions that arguably have exacerbated inequalities which in turn are fuelling global unrest. Our own obsession with credit rating agencies is misplaced. In the end, the global capital markets (which in themselves are often not so rational) may be informed by what these agencies have to say, but they will make up their own minds where to invest. It is not unheard of to have some junk bonds with lower interest yields than investment graded bonds. Indeed, according to this report by Quartz, some European junk bonds carry negative yields.

It is too much to expect that our looming junk bond status can enjoy a similar fate. But it is not too much to expect continued downward pressure on our bond yields in the low interest rate environment. We would do far better by paying less attention to credit agency ratings and focusing more directly and regularly on what is happening in the global capital markets and wooing investors directly there.

Who we owe the debt to

And then there is the famous theory of distinguished American Nobel prize-winning economist Paul Krugman, who recently tweeted again that “Debt is money we owe ourselves”.

This may explain why many orthodox economists, including our own, are quite comfortable in their belief that debt, as an instrument of creating money and essential to the economic construct, can simply be passed on and on and on … . It is the ultimate expression of the modern economist and academic trend of seeing things as a collective; to aggregate and create abstracts. I leave you to have fun with that mind-twister, as many others have had.

But I cannot help but think about the legacy we are leaving future generations. The short-termism of the last few decades has created something far more ominous.

In information technology they call it technical debt, which means investing in cheap and outdated software or hardware, only to be faced with much higher costs in future replacement.

We can call it future debt – an unknown, unquantifiable debt that will face future generations simply because we did not have the foresight to provide for it in the present.

Maintenance neglect is just one, and we have seen how our failure to provide for future electricity needs has virtually crippled our economy. There are many similar to that – huge investments that have to be made to provide for future generations, including dealing with the effects of climate change.

Every time period has a mix of at least three generations. In that time the younger will always call the older to account – at times with great disturbance and even violence. We are seeing that now.

I can see Greta Thunberg pointing at my passing generation and saying: “Shame on you!”

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This country needs FINANCIAL FITNESS TRAINING

Will never happen.

The entire education system is designed to produce labour that is dependent on debt so as to retain them in slavery for 40+ years building empires for the rich.

It is up to private investors to teach unselfishly how to get out and stay out of the debt trap.

Unfortunately, these people are often attacked & belittled by mainstream media, big corp, banks and the like in order to perpetuate the misery they sew, the sad part being that those caught in the system believe them.

I hear you, but in reality, it is much simpler than that.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein”

Do you see? Very simple.

Compound interest works in reverse for 99% of South Africans because they are in debt up to their eyeballs through no fault of their own.

In any event, there is a distinct difference between saving and investing.
No-one can save themselves into wealth even with compounding interest.
People need to be taught how to invest and delay gratification until the assets generate sufficient income to cover expenses.

Myricals,
When you say that “People need to be taught”, you are actually insinuating that you are in the business of teaching people…..for a fee. So, as long as “people” pay you for your insights, they will become wealthy. This sounds like a Caratbars sales pitch to me. Now, all of a sudden, your comments start to make sense to me.

Sensei, I teach for Free and have never charged a Fee for teaching.
I am not a financial adviser that charges fees and do not wish to be one.

Sensei

Those that have followed my FREE teaching for 5 years or more have outperformed every traditional investment SA has to offer over the same period; Equity, Bonds, Cash, ETFs, Funds, Unit Trusts, any kind of policy out there; you name it, they beat it!

I do not teach investments; I teach people how to establish offshore businesses & property portfolios.

Don’t touch their money and don’t make money off them because I don’t need to.

Sensei, as an experienced Troll, you should know better by now that making wide sweeping assumptions will get you burnt more often than not.

“Whom we owe money to” or “To whom we owe money”. One should not use the word “who” in the objective sense. Be that what it may, there are some inescapable facts: we all understand the magic of compound growth but debt grows in exactly the same way. The debt is irredeemable: the money to repay it in full simply does not exist. All money is created as an act of borrowing, hence if Greta criticizes the debt bequeathed to future generations, then she is really criticizing the monetary system. As an avowed statist (“the government must…”), I doubt she would criticize fiat money which, after all, is one of the pillars of the communist manifesto. This is why we find that the sentiments of the likes of Goldman Sachs and the extinction rebellions perfectly aligned. One can only but marvel at the deception. A mass wealth transfer from the poor to the rich aided an abetted by the useful idiots.

It is quite logical to note that as more and more money is sucked into the great global debt ghoul, interest rates can only fall further leading to further deflation and concomitant economic collapse. There is after all, only so much debt one can kick upstairs (read books of the treasury) before it all comes tumbling down. And tumble down it will.

How do we know the end is nigh? watch the gold basis not the price of gold (POG): the difference between the spot and near future price. The POG is suppressed with issuance of paper gold – promises to pay physical gold at a later date. When this goes into permanent backwardation paper gold promises are no longer trusted. Backwardation implies the spot price is higher than the near future price (in a normal situation an arbitrage opportunity). Central banks know this and have been buying gold with gay abandon since 2008, I kid you not. IMHO China will lead the way by backing the Remnimbi with gold. Gold is the only form of money that is nobody’s liability hence the debt will become redeemable. The dollar will lose its status.

Protect yourself and your family buy monetary metals (gold or silver).

It is common knowledge that a centrally planned economy cannot deliver what it promises to deliver. Central planning always fails, because the messenger in the economy, the cost/benefit ratio, the price signal, is absent. The central planners can never have all the information that is distributed among various participants in the economy. The price mechanism is the only reliable and efficient method to convey the needs of the consumers to the entrepreneurs who supply the products and services. This method, or message, between consumers and producers, does not exist in centrally planned economies, because the planners hijacked this most important messenger. Eventually, people broke down the Berlin Wall because they wanted the price signal back.

A Central Bank has exactly the same problem. What should the price of money be? How much money should circulate in the economy? What should the bank capital ratio and liquidity ratio be? Who should have the money? Who can add the most value to it? Which agents will serve the needs of the consumers best? What are the needs of the consumers?

Just like the planners in the USSR failed to deliver, the Central Bank planners are failing to deliver. Although like in the USSR, they have access to a multitude of signals, analyses, learned academics, quantitative models, forecasts and questionnaires, in the end, it comes down to a thumb-suck exercise for Central Bankers. When they are shocked by the destruction they have caused, they solve their own problem by causing more destruction. They kick the can down the road, for the next generation to solve.

Eventually, citizens will break down the “Berlin” Wall again, like they have done so many times before. People will fight to get the price signal back.

A lot of text book economic wishful thinking,

No “free” economy can parallel what China accomplished in the last decades.

there is no single economic truth, that is a myth ideologs like to preach.

“free” markets do need some measure of control, just look at all mayor financial crisis’s the last few decades.

Everybody betting on Japanese economy to crash the last few decades went broke.

One of the biggest mistakes we make is taking it for granted that there are highly intelligent, experienced and qualified people directing world economic affairs. In truth it’s all just a giant ponzi scheme.

It is a giant Ponzi scheme.

Nothing about our modern industrial societies is sustainable.

Without exponential economic growth the debt is unrepayable, and a global credit crunch will terminate economic growth.

Hence the bankers will do “whatever it takes” to keep the ship afloat which is more QE or money printing.

But economic growth will stall no matter what the bankers do. Climate change and energy crunches (only enough fossil fuels to keep us going at the needed rate for the next 10 to 20 years) guarantee that economic growth is unsustainable. Not to mention all other manner of resource constraints.

So the whole system comes crashing down in a flurry of Zimbabwe like inflation, only with negative interest rates and climate destruction to boot. Negative rates (an insanity) are your canary in the coal mine and they are here already.

But the real economy …energy, steel, cars, food, land, gold, etc…cannot be printed.

And so there is less to go round. Ultimately, far less. We’re in early days here but already we are seeing signs of global unrest and a universal fixation with inequality. Meantime, the world’s population continues to grow at about 100m people a year. It’s like adding another United Kingdom to the planet annually.

Again, the real things can’t be printed, any more than we can print co2 out of the atmosphere. And so we are given huge doses of denial and magical thinking to placate the masses. It’s a strategy that’s been working for a while, but it’s really on borrowed time. Like global warming, the penny will soon drop and we’ll realise that we’re in an impossible corner.

Then all hell could break loose.

If the population stayed the same or reduced by 100m per annum the real economy could easily provide increasing prosperity, and the creditors would have to take a haircut.

I think Jerry hasnt looked at the intergenerational transfers in this country, the thing is we are using too little debt and leaving too much assets to future generations. I think people like Greta is probably wondering why arent we using more debt to clean up the economy, invest in green technology.

Its people who couldnt use debt and savings to grow their own economies who created this global mess. People who cant get savings, loans and insurance provide for contingencies by having more children.

This has been proven in muslim communities who have access to family planning but have poor financial systems. Yet who have incredibly high fertility rates even today. Environmental Economics teaches that the biggest driver of environmental degradation is population growth with technology in the developed world offsetting lifestyle growth. IF we turn to debt in the correct manner it can solve a lot of the worlds problems (e.g. the Hindus believed in freedom and prevented slavery by developing financial services (SAMSARA), can the rest of the world learn from 15000 year old philosphy?)…..om tat sat — we are all bonded past present and future.

To continue the fantasy of debt; the “total global debt is set to exceed a record $250 trillion” and is owed to whom? Who originally loaned this collective amount of dollars?

One would presume “the banks and national treasuries/reserves like the Fed,” a collection of mythical entities.

But the “banks etc” don’t own $250 trillion of which they have loaned amounts to various countries, states and corporates. The $250 trillion is really virtual debt. Extrapolate that in the way your local bank dispenses home mortgages. To be mundane: I’m in a bar and a broke Prince Andrew can’t pay his bar bill; he asks me to pay the $200 dollars which I do with two $100 notes. He now owes me that sum and if he defaults, I claim a piece of his art collection which I sell for $1million, take my $200 and return the balance less auctioneer’s commission.

So far so good as his art collection has value in a normal market. But what happens when everything collapses and everything loses it’s intrinsic value, like the current Cape Town real estate. OK, I exaggerate but you get my point ..

So when it gets to that, there is no actual “debt” only virtual book entries. There is the story of a wartime sardine shipment which got sold over and over at increasing prices until one smart Alec opened the crates only to discover rotten fish. He complained to the dealer who had sold him the shipment and got the response: “You’re not supposed to look inside, you’re supposed to sell it on.”

Leaving us with the realisation that there are two kinds of “debt” minor debt – the Prince Andrew style predicament which can actually be settled with tangible assets, and major debt – the debt of countries, corporates and banks to each other which are impossible to settle with tangible assets and are simply virtual.

So the end of the fairytale is that as long as the fantasy of “debt” remains, the ones who tell the best story keep buying the drinks, but once the Prince Is revealed as having no clothes, it all collapses to zero and we all start off with a clean sheet.

But as we all know from the excellent “Animal Farm”, in the real world, some countries and people are “more equal than others.”

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