by Peter St. Onge, Activist Post:
Sovereign debt is eating the world. Lining up a financial crash that could make 2008 look like a picnic.
How did we get here?
In short, governments and central banks deluded themselves into thinking that unlimited deficit spending financed by unlimited money printing won’t do what they’ve done for literally millennia — plunge the economy into stagflation.
They are, of course, wrong. And we’re seeing the catastrophe unfold before our eyes.
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From Nixon to $33 Trillion in Debt
The story begins in the 1970s when Nixon broke the global gold standard, unleashing permanent deficits worldwide. But the latest chapter starts in 2008 when central banks bailed out the financial system by effectively printing trillions of dollars.
At the time, everybody knew that much printing would cause inflation, perhaps with a 12 to 18-month delay. But it didn’t. Why? Banks held on to the free trillions to plug the trillion-dollar-sized holes in their balance sheet. Combined with a freebie, China’s manufacturing miracle lowered the cost of consumer goods.
Central bankers concluded that the impossible was now possible.
Meanwhile, a second useful myth was shattered by Japan: that national debt was deadly. Again, everybody knew that public debt above 100% or 125% of GDP would end the world. But Japan crossed that line 25 years ago. And nothing happened.
Now, there are idiosyncratic reasons for Japan — largely the proportion of debt that is domestically held. But the lesson was learned: debt doesn’t matter. So, deficits don’t matter.
So printing doesn’t matter, and debt doesn’t matter.
Both are contrary to literally millennia of economic history. In fact, printing money not only leads to inflation, it is literally the only thing that leads to long-term inflation. We have hundreds of defaults as evidence that governments will always default when the debt gets big enough. In fact, we’ve had 14 sovereign defaults since Japan crossed 100%.
Still, 2008 and Japan gave them confidence that maybe this time would be different.
Unfortunately, this dangerous confidence went from belief to reality worldwide with COVID. To bribe voters into lockdowns, countries around the world spent money as fast as humanly possible. And central bankers financed those deficits as fast as humanly possible.
It all came to roughly $10 trillion in new money in just a few years. In the US, by 2021 roughly one in three dollars had fresh ink on it.
Alas, this time was no different. Inflation took off. So much had been printed that it soared right past those $8 Chinese toasters, right past those trillion-dollar bank reserves, and poured out into the Consumer Price Index.
This scared central banks, who know that out-of-control inflation puts their independence at risk — Congress will take it away if voters get too angry. They first responded by crushing the real economy with rate hikes to bring down private spending so the government could keep spending.
But now we’re seeing the second shoe to drop from terrified central banks: they’re actually pulling back from financing government deficits. The Fed has already reduced its balance sheet by over a trillion, selling off federal debt to try and rein in inflation.
This is effectively taking central banks out of the game because they can’t finance government deficits if they’re simultaneously trying to drain money from the economy.
Put it together and debt-to-GDP ratios over 100% in basically the entire world — nearly 150% for the US — are running into paralyzed central bankers. This is driving investors to fear that maybe major governments can’t handle the debt and that maybe they will default.
