The Grand Finale

The Grand Finale

We were on the ‘thread’ last week…our investment director, Tom Dyson, was leading a discussion, loosely, on what will likely happen to gold as the debt bubble pops.

Readers’ comments were impressive. Thoughtful. Intelligent. We could barely keep up.

But each one had us wondering even more…how does this amazing circus end? What is the Grand Finale?

Brian Hirschmann of Hirschmann Capital:

Since 1800, 51 out of 52 countries with gross government debt greater than 130% have defaulted, either through restructuring, devaluation, high inflation or outright default.

Government debt in the US went to 130% of GDP in 2020. It has since retreated slightly. But it won’t be long before it hits 130% again…and then 140%. And then what?

When we left you last week, we were just doing a little simple maths. What we discovered was that it was impossible to refinance the US’s enormous debt at anything approaching ‘normal’ interest rates.

Just to rehearse the numbers, we figured that a normal ‘real’ (after inflation) rate would be about 3%. With inflation at 7%, that means the nominal rate would have to be about 10%. Is there any way to refinance the US’s US$86 trillion in debt at 10%? Nope. It’s not possible…it would mean debt service payments of more than a third of GDP.

Between Scylla and Charybdis

Jerome Powell must toss and turn at night…visited, perhaps, by angry visions of demented clowns and hungry lions. Surely, he must feel some responsibility for what US ‘capitalism’ has become. His ultra-low interest rates made the rich richer than ever. But they also distorted the whole economy, causing businesses, households, and the government to borrow far more than they would have otherwise.

In an honest economy, debt levels are self-regulating. As people borrow more and more, interest rates rise; the EZ money disappears. But not when the Fed is actively buying up debt, driving down interest rates, and printing up money.

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And now, with so much debt, if the Fed tries to go back to normal rates, it will cause the whole Big Top to come crashing down. Even smallish increases in the inflation-adjusted Fed funds rate…say from MINUS 6% currently…to, say, MINUS 5%…hit the stock market like escaped baboons.

As we have seen many times, the US is trapped. Its rock is a US$86 trillion debt. Its hard place is rising interest rates. Its Scylla is the need to ‘normalise’ and reckon with its debts before they get any worse. But its Charybdis is an Elite Establishment that would lose US$35 trillion…and doesn’t want to.

In other words, as Hardy used to say to Laurel: ‘Here’s another fine mess you’ve gotten us into.

So what could happen? What should you be watching out for?

Mr Hirschmann laid out the possibilities — restructuring, devaluation, hyperinflation, or outright default.

But wait. Maybe there will be no need. Here at BPR, we rule out nothing. A bountiful, or mischievous, god may cut Mr Powell some slack. Maybe consumer price inflation will retreat…with no need to give battle.


‘[US Treasury secretary Janet] Yellen said she would closely watch month-over-month inflation figures, as they are more useful at revealing whether price pressures are subsiding. By that measure, she expects inflation will drop in the second half of 2022, and will reach “levels consistent with around 2%-2.5% by the end of the year.”

The economy is not booming…there are always new colds and flus to panic the public…and a market sell-off and/or recession are bound to come sooner or later. So, yes, maybe inflation readings will go down…giving the money-printers more ‘fiscal space’.

But then, what will they do? They will fill it up…like an empty closet; it will soon be chock-a-block with stimmies, boondoggles, and bailouts.

Hirschmann continues:

If central banks (CBs) could always keep interest rates low, no government would ever default. Yet, in 2020 alone, Argentina, Ecuador and Lebanon have defaulted despite their [central banks’] best efforts. Rich-country [central banks] have also been overwhelmed often (e.g. the 1965-82 US Great Inflation, the 1976 UK IMF bailout, Iceland’s 2008-11 crisis and the 2015 Swiss currency peg collapse). Worse yet, government debt is also currently at dangerous levels in other major economies, including Brazil, China, Japan, the UK and the eurozone. Further, the BOJ and ECB, among other major central banks, are executing reckless carry trades similar to the Fed’s. Thus, a government debt crisis in one country might easily ignite a global government debt crisis that pops the bubbles in China, US equities and US real estate.

Inflation? Deflation? Crashes? Busts? Blow-offs? Blow-ups? Blowdowns? Depression? Devaluation? New currencies?

Yes — strike up the band and bring out the fireworks! The elephants! The freaks! The high-wire act! It’s all ahead — the Greatest Show on Earth.

Let’s just be sure we’re watching from a safe distance!


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia

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