Deferring Doom Doesn’t Work

Deferring Doom Doesn’t Work

Governments and central banks around the world are busy forestalling. The question is whether it’s the inevitable.

Job losses, bankruptcies, mortgage defaults, corporate bond defaults, austerity or sovereign debt defaults, and plenty more. Does delaying them lead to avoiding them in the end?

I’m not so sure, either way. But we’re going to find out the hard way. So, we better spend some time pondering about it anyway.

A big chunk of the upcoming issue of Jim Rickards’ Strategic Intelligence Australia is about how the unemployment situation is drastically worse than the government statistics suggest.

In the US, for example, they’ve lost about 30 years’ worth of employment gains in three months. But that’s the government’s version of the numbers. Adjust for a more accurate measure, by including those who aren’t looking for work, and you get a more drastic result. The US is back to the ‘70s when it comes to jobs…

And it’s not like the crisis is finished yet, especially in the US.

According to Jim Rickards, the recent market crash we’ve witnessed is just the beginning. A total financial collapse might be next. Learn how to protect your savings and investments before it’s too late. Download your free report now.

Here in the UK, a quarter of the labour force is on furlough, with the government paying 80% of their wages up to a limit. My sister-in-law is one of them. She’s been on holiday in Japan while getting paid…

Add in a similar scheme for the self-employed and you get almost a third of the UK labour force relying on the government. While ‘working’.

How many of these will be unemployed when the furlough scheme ends?

Can it end given the numbers of those people?

And what will the furlough scheme have achieved if the ranks of the unemployed swell to what they would’ve been anyway, or close to that number?

Is the marginal improvement worth the spend?

The banks are preparing for the losses to come

None of these things are known, let alone certain. But that hasn’t stopped the UK government from spending anyway.

In Australia, it’s the usual story that’s dominating the news — property. The Australian reports that the banks are preparing for the losses to come:

The value of loan deferrals for businesses and households has hit $250bn, intensifying the pressure for replacement policies to pull the economy back from a cliff in September when the deferrals expire.

The interesting thing here is that, if the assistance to borrowers ends, we hit what Australian Prudential Regulation Authority chairman Wayne Byres called ‘a cliff’.

[…] we don’t want to put pressure on a large group of customers at the wrong point of the cycle,” Mr Byres said.

We often talk of the cliff, which is when everything ends in six months’ time.

No one has an interest in going off the cliff, so we have to work out what the next phase is going to be and that will be dependent on the economic situation at the time.

The interesting thing to note is that the cliff here is policy imposed. And that’s the trap which the government is now in.

By providing assistance, it has created a group reliant on political generosity. Good luck rolling that back without the cliff Byres warns about. Good luck rolling it back at all…

Nothing is as permanent as a temporary government measure. There will always be another phase.

Again, the underlying question here is whether the government has bought little more than time with its measures. If we’re going to have a crisis, forestalling it is not particularly helpful.

And the cost of buying time could become the underlying risk. Because buying time is expensive.

You see, it’s tough to reduce risk.

You can shift it around. Which can be a good idea. Investors accept taking on risk in return for profit. That’s the basic concept of investing, after all. It’s why financial markets exist in the first place, to match people who want to take risk with those who want to offload it.

But what governments and central bankers are doing is shifting risks onto future taxpayers. And people who hold the currencies they’re printing.

The trouble is, this hasn’t reduced the underlying risk. And may not have reduced the size of the crisis.

It may have actually increased the risk, in a way. If a government goes bust, that’s a rather nasty situation to be in.

This is, by the way, one of the most underappreciated aspects of small government ideologies.

When governments fail, it’s a systemic problem. When companies fail, it’s a much smaller scale problem.

What we’re doing is transferring the risk of failure from localised to systemic. For an uncertain purpose and outcome — at a price.

And don’t forget the triple whammy nature of the crunch — something we have yet to process.

First of all, government debt is going up as spending surges. That one is simple.

Second, the GDP which is the denominator in debt-to-GDP ratios is falling, making the debt-to-GDP ratio surge as well.

But governments don’t use ‘GDP’ to repay their debt, they use tax revenue. And that’s crashing across the board as well. Lower income taxes, lower corporate profits, lower transaction taxes as asset prices fall.

Put all this together and it may well be that we’re increasing risks, not reducing them, by providing bailouts, furloughs, mortgage holidays, and all the rest of it. Buying time may be too expensive for already overburdened governments to handle.

If the next crisis is in sovereign debt, it’ll be far worse than a financial crisis. Especially for those the government is currently saving.

Oh, and one last thing. There’s a reason the word ‘save’ has two definitions:



keep safe or rescue (someone or something) from harm or danger.

keep and store up (something, especially money) for future use.

We should be saving the economy, not borrowing and spending.

There is of course a way to properly rescue the economy and our lives from COVID-19. And that’s to cure it…or vaccinate against it.

Below, Ryan Clarkson-Ledward lays out the potential for such a cure, due to a paradigm shift taking place in biotech thanks to the desperate attempt to defeat COVID-19.

He also explains how fellow colleague Ryan Dinse has spotted the lucrative investing potential of such a shift.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

PS: Jim Rickards warns that a total financial collapse is imminent. Learn how to protect your savings and investments…before it’s too late. Click here now.