President Trump: The NEW one and only politics thread

In a vacuum, even $1.25 trillion of auto debt, as staggering an amount as that is, is not something that could sink the economy. This isn't like the mid 2000s, when the debt mess was concentrated really in one particular area. But add that to more than $1.5 trillion in student loan debt. And more than a trillion dollars of credit card debt. And it's not insignificant.

Thing is, this isn't simply a consumer debt situation. The debt levels that have built up over the last decade are much worse at the corporate and sovereign levels. 2008 was essentially a consumer credit crisis that spread to a financial industry that had leveraged itself to it. And even though the monetary mandarins answered their debt crisis with more debt (rather than allowing a deleveraging to happen, in which case we could have been in a very healthy economy by now, instead of one propped up on life support and dependent on more and more debt), the "lessons" of 2008 contained the new debt creation at the consumer level a bit -- just a bit. To the extent you see things like the massive growth in auto loans, student loans and credit card debt over the last 10 years, it has largely been an unintended consequences of flooding the world with cheap mispriced credit -- it spreads everywhere and you can't control where the misallocations of capital end up. This has really been about allowing governments that have accumulated debt levels of 70, 80, 90, 100 or more percent of their GDP to keep borrowing and put off having to be fiscally responsible for as long as they can. I know my posts get tedious, but I posted more than a year ago when Argentina, which was only one year off a default and had defaulted twice in 13 years, was able to sell a 100-year bond and borrow $2.75 billion. How? Why would anyone lend money for 100 years to a country that has made a sport of defaulting on its obligations? It was offering a yield of 7.9 percent. Not 107.9 percent. Not 1007.9 percent. 7.9 percent, which historically is ridiculously low for a risk like that. But borrowers were so desperate for yield in the suppressed and administered environment of the last decade that the offering was 3X oversubscribed. That is what happens when you rob savers to reward crazy amounts of debt. And forget what that does to the global economy in the aggregate, because you don't get savings and investment. You get debt and wasteful spending.

It was less than a year. ... until Argentina needed $30 billion from the IMF to try to rescue a sinking economy and a plunging currency. The owners of those bonds are way under water and are going to take huge losses -- they are unsellable. These things matter. And it is going to matter much, much more when it is Spain or China or Italy or Japan (all in massive debt) or the first major chip to fall. It's not a matter of if. It's who and exactly when, and what contagion chain event it starts.

At the corporate level, also, it hasn't remained unchecked either. Just in the U.S., we are at a record level of just less than $6.5 trillion of debt, and that debt has gotten junkier and junkier. Even at the investment grade level, it is way more concentrated at the BBB- level (which is just one rung above junk) than it has ever been. The first sign of recession, and what happens is that debt is going to get downgraded to junk, which will force the funds that own it (and need to be investment grade) to sell it. ... into an environment in which there are no buyers. And yields are going to shoot through the roof. That happens, and there is a chain effect and defaults up and down the economy. All those people with big variable rate car loans and modest incomes? They are going to default. Junk debt right now, the riskiest borrowers, are more leveraged than they have ever been. To put it into perspective, they are holding $8 of debt for every $1 of cash they have in reserve. There are so many businesses that should have never been able to borrow at any rate, let alone for peanuts in interest payments, essentially for free in real terms. They don't make any money.

This is what the central bank did -- calling it "stimulus" and pretending like that debt-feuled spending has created a health economy. The global economy they have saddled us wiht can't stand up on its own without all of that debt. Which is why 10 years after the crisis, rates are still hundreds of basis points below the neutral rate and it is free (or you are being paid) to borrow in much of the world. And in bizarro world the president of the United States is representing the Federal Reserve as "loco" for being TOO tight in that environment. And people have no fucking clue how ridiculous it is. I have tried to personalize the corporate junk debt on the Tesla thread we both have posted on. Tesla is the poster child for the mess that people are only going to begin to understand when things unravel. There are zombie companies out there -- and this is a global problem, because it is even worse in Europe, Japan and China -- that make no money and have been just surviving on more and more borrowing, for the last 5, 6, 7 years.