The Phaserl


Global Debt Hits All-Time High of $152 Trillion; Billionaire Warns of “Big Squeeze”

by Simon Black, Sovereign Man:

“This is a global problem,” said billionaire hedge fund manager Ray Dalio yesterday to a packed audience of central bankers.

“Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States.”

I can only imagine the mood in the room was a bit tense after that comment.

Mr. Dalio, founder of the $160 billion investment firm Bridgewater Associates, was invited to speak at the Federal Reserve Bank of New York’s 40th Annual Central Banking Seminar yesterday.

Rather than gush about how wonderful the Fed’s zero interest rate policies have been since the financial crisis, Dalio gave them a fire hose of reality.

His primary thesis was that the debt supercycle that has lasted for decades is coming to an end, and that there’s going to be a “big squeeze”.

“The biggest issue,” he said, “is that there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”

The largest economies in the world– Japan, Europe, the United States, and China are racking up record amounts of debt and absolutely nearing those limits.

Just this morning the International Monetary Fund warned that global debt has hit an all-time high of $152 TRILLION.

That’s an astounding figure that’s nearly TWICE the size of the world economy.

But it’s more than that, because in addition to nominal debt, there are further obligations that must be paid– like healthcare and pension programs which are largely underfunded.

We’ve been discussing this a lot lately; in the US, Social Security is completely underfunded and will become cashflow negative in just a few more years.

Soon after it will entirely run out of money.

Dalio summed it up by telling his audience, “There are too many promises that can’t be kept, not only in the form of debt, but also in the form of health care and pension costs. . .”

In other words, not only is government debt, corporate debt, and household debt at record levels worldwide, but pension and healthcare obligations have become impossible to pay.

Bear in mind that all of this is happening at a time when economic growth and productivity are slowing.

This means that while debt is piling up, the ability to service those obligations is actually decreasing.

Central bankers have been desperately trying to hold the system together by keeping interest rates at record lows and printing trillions of dollars.

But as Dalio pointed out to his audience of central bankers, their strategy is also “approaching its limits.”

Yesterday we discussed why central banks are between a rock and a hard place.

If the Fed doesn’t raise interest rates quickly, they’ll be forced to make interest rates negative in the next recession.

But if the Fed does raise interest rates, they’ll cause a massive decline in asset prices, and potentially even engineer the recession that they’re trying to prevent.

Dalio again: “[I]t would only take a 100 basis point [1%] rise [in interest rates] to trigger the worst price decline in bonds since the 1981 bond market crash.”

So no matter which direction central banks go, i.e. to raise or not to raise interest rates, there are severe consequences.

This is why Dalio expects a “big squeeze.” And it won’t be pretty.

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1 comment to Global Debt Hits All-Time High of $152 Trillion; Billionaire Warns of “Big Squeeze”

  • rich

    The Overlords of Finance
    John Mauldin | October 7, 2016

    We keep having to find inventive new ways to describe the ever more extreme antics of our central bankers. In today’s OTB, good friend Danielle DiMartino Booth draws an interesting historical parallel in a valiant attempt to place post-Great Recession central bank activity in a comprehensible context.

    She takes us back to the 20th-century era of World Wars and draws upon the thinking of Liaquat Ahamed, whose seminal work The Lords of Finance is said to have been inspired by that unforgettable 1999 Time magazine cover story titled “The Committee to Save the World” – you know, the one that splashed the lovely mugs of Alan Greenspan, Robert Rubin, and Larry Summers up there, grinning like the Cheshire Cat (well, except for Larry, that is).

    Ahamed’s treatise, says Danielle, is “a study [of] the perils of devaluing stores of value by force, the dangers of runaway debts, and the menace of monetary myopia.”

    Franklin Roosevelt devalued the Depression-weighted US dollar by forcing up the price of gold. Germany’s inability to pay its World War I debts set off an explosive chain of defaults among US allies, compelling the US to effectively bail out Germany’s debt. And the stubborn orthodoxy of Depression-era central bankers led them into competitive interest rate rises that would let their countries to hold onto their dwindling gold supplies, even though the floundering global economy desperately needed lower interest rates.

    But today, says Danielle,

    If anything, the power of the kings and queens running the world’s central banks has become even more concentrated. In a reversal of economic fortunes, today’s economy is in desperate need of higher rather than lower interest rates, of a normalization of policy to put a floor under the bloodletting in pensions, insurance companies and among retirees worldwide.

    And yet, the powers that be insist they know that better than the unwashed and uneducated masses that suffer at the hands of their misguided policies. Of course the benefits of negative interest rates outweigh the costs. And whose business is it anyway if central bankers impinge on the ability of capital to determine the value of a given entity?…

    That brings us to the parallel between then and now, to the conflagrations smoldering under the surface of the world economy that have a similar source of kindling as the World War era. That is, debt, a huge overabundance of debt. The latest figures out there suggest that global debt now eclipses $200 trillion, or about three times the global economy.

    And unlike in the late ’90s, when Indonesia, Thailand, and South Korea jacked up their debt loads and then Russia’s default forced Al, Bob, & Larry to ride to the rescue, today “the debt is simply everywhere, at least to the extent we can see and measure it. Corporate and sovereign debt, of both the developed world and emerging market varieties, are at record levels. China’s debts certainly add to that record but who really knows to what extent? It’s the ultimate black box of leverage on Planet Earth.”

    Read on to see why Danielle doesn’t think “a perverted gentlemen’s agreement” among central bankers, politicians, and investors will stave off a quadrillion-dollar reckoning.

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