At the beginning of the year (2018), on my Facebook and Twitter, I indicated that that US stock market would crash soon, and that it would be a symptom of a larger problem. In the following days I also clarified my reasons for saying so. As it happens, recently the US stock market crashed under fears that the US Federal Reserve might raise interest rates. It might recover for the time being, but in the longer term a crash is inevitable. The situation suggests that about $65 trillion of wealth will soon be disappearing from the global economy. The problem here is that we are in a credit bubble, quite possibly the worst ever in history. One that is even worse than the one we experienced during the Great Depression (1929).
Summary: Stock markets are propped up with borrowed money, making them a symptom, and not ‘the’ problem. The question that comes to mind here is whether the bubble is bursting right now. To answer this, we’ll need to put everything into context. If we consider the latest market conditions, the logical flow of a crash would go start with the crashing of the US Stock Markets, followed by the Asian Markets, and further followed by real estate, and other assets and in the short term by commodity markets, such as gold and other precious metals, as well. After these have occurred, the final symptom would manifest with a string of banks going bankrupt, at least the smaller ones and possibly some of the medium-sized ones, the great depression saw 9000 banks fail in just the US.
If we take the thought to it’s logical conclusion, the deteriorating situation will lead to quite a lot of people losing their jobs, which would probably also be unprecedented, and so any estimates that I could come up with right now would be moot. This doesn’t appear to be great news for people who are currently unemployed and hunting for jobs either. Companies are set to lose a lot of business in the coming years, and hence lose a lot of money, so there is no easy way to put it: they will be firing more than they will be hiring.
An important question to ask here is that for it to be a ‘credit’ bubble, we should see some evidence in the ‘credit’, right?
Correct, according to bloomberg the global debt is currently well over $233 trillion, est. $270 trillion.
That is a lot of debt, but if you earn more than what you owe, debt should not be a problem, right? What we produce and earn is our GDP, and if the GDP was more than our debt, we’d be able to pay it back eventually or at the least it would be manageable. So, let’s have a look at the global GDP indicated by the world bank.
Currently, global GDP is at about 75 trillion. A GDP of $75 trillion makes it quite clear that there’s no way for us to pay back $233 trillion with $75 trillion produced every year, considering most, if not all, of it goes into sustaining current levels of production. That doesn’t sound good, right?
The more we look into it, the worse it gets. We might think that a possible way out would be if the governments could buy out the debt, but they can’t; they own $70 trillion of it!
Moreover, according to data from the World Bank, the national debt to GDP ratio for the world was 94% in 2015. We may want to extend that to the year 2018 to have a more realistic picture. This means that most of the governments are basically insolvent, and this time, if the system is to hold, a couple of the governments will probably go bankrupt as well. On US debt clock, ‘external debt to GDP’ ratio will tell you how much a country owes to how much it produces, and anything over 100% tells you that the country owes more money than it produces.
There’s only one way that this kind of asymmetric debt disappears from a system, and that is when the person who owes it (debtor) files bankruptcy because there are no regular means for the debtor to pay the money back. That’s obvious in the in this scenario as for the past 2 decades our debt ratios have only gone up, meaning that we have systematically failed to generate enough to pay back our debts. This suggests that the only way to resolve the bubble is a bankruptcy chain. The recent stock market crash was just a harbinger of what’s to come, people who had borrowed money to buy stocks, won't be able to pay it back to the banks. There might not be enough of these people right now, but eventually they will pile up.
Another interesting thing to note is that the stock market crashed because of fears of interest rate hikes, which is quite telling in itself — people who borrowed money at lower interest rates are pulling their money out before the eventual hike in interest rates takes their debt to unmanageable levels.
Similarly, people who borrowed money to do every other thing, will be in a fix too. When that happens, the banks will eventually become insolvent because they will have to write off more debt than the assets they have on their books, which of course is a gradual process. However, if you think of it, it isn’t really all that gradual. All you need is some filed bankruptcies and maybe one failed bank for people to panic enough to do a couple of bank-runs. Pop goes the bubble.
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