The Next Recession Will Be About Sovereign Debt
cassandracapital.net
cassandracapital.net
I'm not sure that's true - what made it big was the epic borrowing to buy property that pushed up prices to record levels before hand. The Lehman thing was just the pin that popped the bubble. It was going to burst big one day because of the size of the thing.
It makes you doubt the rest of the reasoning if the first sentence is incorrect.
One bankruptcy should not cause a collapse.
People argue that if it wasn’t Lehman Brothers it would have been something else,” ….“I don’t buy that. I don’t mean everything would have been great if we had bailed out Lehman. We were in a financial crisis before Lehman. But it had a shock value that just caused everything to fall off a cliff. If you look at data on almost anything – consumer spending, investment spending, car sales, employment – it just drops off the table at Lehman Brothers and I don’t think we needed to have that.
The broader point here is that events like Lehman's collapse and its aftermath (or the invasion of France) are essentially defined by their unpredictability. If we could predict them, they wouldn't even be events.
And even if, somehow, these events were predictable, does anyone really think that economists have some theory that lets them make decisions like "who to bail out" or answer questions like "what will the consequences will be if they don't bail X out?" I believe that economists make better calls than a man on the street (me), but I have my doubts.
Unpredictability is a dangerous word because it has two meanings here.
On the one hand, you are using it to mean nobody could possibly know ahead of time that it would be Lehman and even if they were told that fact it would still have been impossible to pick the date (or the year for that matter). Nobody could argue.
On the other hand, billions to trillions of dollars of wealth that everyone thought existed turned out not to be there. It didn't disappear; it was discovered in the financial crisis that it never existed and the crisis was when that fact became uncontroversial in the mind of the general money manager.
That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see. Much like government debt-to-GDP in today's article. The people profiting cheer-lead bad long term decisions and everyone else sits quiet hoping that they won't have to pay for it. Which would be fine if the responsible people were made to pay in the end, but 2008 showed that not to be the case; taxpayers stepped in. The financial bloodbath was not matched by an equal sack-everyone-involved-and-bankrupt-the-investment-banks bloodbath of sufficient magnitude. A failure like that should have reamed out the entire sector; if they weren't ready for it replace them with new blood and ideas.
I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.
> That part was clearly predictable in an emperor-has-no-clothes fashion and probably years in advance as well. It seems highly likely that if the people with power didn't see it shaping up then they were choosing not to see.
I don't think it was predictable in any useful sense. First, I don't think anyone knew that (or when) "the general money manager" would "become aware of the facts". Second, I don't think anyone knew that would happen if they became aware of the facts.
So maybe it was predictable in a "there will definitely be a recession...sometime" sense, but that's not helpful.
Even if some people did identify "billions to trillions of missing wealth" and predict the crisis (and apparently some people did), there wasn't any way to know which of those predictions was correct. There is no one who predicts things who is always right and there is no agreed-upon theory to tell us when these things are going to happen before they happen with any precision.
To put it another way: there are smart people who predict financial crises that never happen all the time.
> I suppose the point I want to make is that there is a frame here that 'saving Lehman' would have been a win. It wouldn't be a win. They were complicit in mis-allocating resources; 'saving' them just gives them more time to redirect real effort into bad causes, and makes the final reckoning more painful when people need to call on real resources that turn out not to be there. The books were misleading; protecting them would just have let more people make bad decisions based on misleading figures. Markets work best when people don't do that, and I understate by an order of magnitude or two when I say that.
This is a different argument. I guess there are two things to worry about:
1. Making the responsible parties pay for their malfeasance (justice)
2. Making decisions that will benefit the economy (pragmatism)
It's entirely possible that bailouts ticked the second box but not the first. But, as you argue, in the long run, not bailing out the lenders might tick both boxes because it will teach them a lesson. However, that's a hard sell for Americans living between 2008 and 2012, who probably did benefit from the bailouts, even if they were unjust and even those bailouts only deferred some larger, inevitable crisis.
I don't envy the people who have to make these decisions.
Lehman Brothers was the only bank that refused to take a haircut on the bailout of LTCM in 1998.
CEO Dick Fuld told Paulson "to drop dead".
https://dealbreaker.com/2018/09/hank-paulson-killed-lehman-b...
So who exactly was to blame considering there are various rating's agency's from around the world commenting on matters, various banks from around the world lending to US markets, US legislation and the US population? The buck stops with the president, so which president do you blame considering they all played a part in this as well?
Why are you so eager to pin it on one person, in this case, GW Bush?
I think it goes well beyond a single person, and in many cases, the group of people behind the scenes who benefitted from the conditions that caused the 2008 recession did not suffer, but instead are around to create the 2019/2020 recession (but bigger this time!) Like clockwork.
huge debt is once again a symptom to the main problem of people unwilling to let the market decide the winners and losers.
- peacefully firing the entire government
- crowdsourcing a new constitution with the help of the Internet
- putting the white collar criminals in corrections where they belong (instead of giving them $25M bonuses)
- getting women on equal footing in government and business leadership
— transitioning to 100% green energy
Seems the global economy tried to vomit up all the banksters and corporate corruption but the governments all took a pill to suppress the purge and stay ill.
It is a terrible idea but quite common in history, you can also read history to learn why its terrible.
Plato wrote in The Republic, “And so tyranny naturally arises out of democracy.”
The US was created as a Constitutional Republic with the constitution binding the govt. The govt has used its powers to erode that binding and in doing so created the federal reserve which has been the problem causing most of the financial issues.
When you have a group of people who can create currency replacing money ( a store of value ) then you have a group of people who are unstoppable.
I will leave you with this...
William Pitt made this statement: "Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom." He realized the maxim that Rothschilds laid down as fundamental: "Let us control the money of a country and we care not who makes its laws."
The most popular ideas should win, not the most popular people. We have no real need to require representation anymore, we should have a fully auditable, direct democracy.
As a woman, I really can't think of any women I know who would want such a thing. Pursuing power is a never-ending rat race for tenuous prizes, and having a family will take several years out of a woman's career. For what, some ill-conceived notion of equality? If you want to treat women with respect, treat them as women with their own dreams and desires and not just as if they were men-in-womens-clothing.
I think the GP has clearly stated her sample.
A stay at home mom does not contribute to cheap workforce, does not pay for daycare and takeouts thus tanking the economy.
An ideal woman should work hard (preferably in STEM) until she's forty and then spend all the money she earned on fertility services.
The Iceland example works because its such a small part of the global economy.
Anyone that put Japan, Italy and Greece in the same page and fail to point that Japan is using its own currency, and the other two are not, don't understand what he is talking about.
>>" [..] if the BOJ or the ECB was to simply buy bonds directly from the treasury without removing an equivalent amount from circulation by holding it as reserves it would be massively inflationary. [..]"
Why it would be "massively inflationary"? He fail to tell us.
>>" As tax revenues fall, debt to GDP ratios will rise. Rating agencies will downgrade nations debt and investors will demand higher interest rates to compensate for the risk. "
Why this has not happened to Japan already? They have been done this for years and years.
Edit - recommended lecture: "Building bank reserves is not inflationary" (1)
Having a central bank by bonds directly from the treasury is the very definition of monetization. It would add a substantial amount of currency to the economy and is very different from what is happening with QE.
As for how Japan has been able to build up debt to their levels without seeing bond yields rise and sparking a crisis - it’s because the Bank Of Japan has used just about every outstanding government bond for QE. But they Japanese in particular are reaching the limit of QE. I go more into this argument here: https://www.cassandracapital.net/post/quantitative-easing-ha...
First, reserves are not inflationary (1). The quantity of reserves in the system is not important if that money is keep in the Central Bank and it's not spent. As the current QE exercise has show, adding reserves to the system don't make firms and households ask for more credit. If the real economy don't want to spend, you can add all the reserves that you want and nothing will happen (except lowering the interest rate that it's already at minumum).
Now, fiscal policy, it's the right tool if you want to stimulate the economy, but, for political reasons, it's not done.
Second, please, explain through what mechanism banks don't owning a quantity of bonds equivalent to the reserves in the system will create inflation. All the point of selling bonds (by the central bank to the banks) is to retire reserves from the system.
Monetization of the debt don't cause inflation. What causes inflation is spending in the economy. That it's precisely what the politics in, for instance, the Euro-area refuse to do.
However, monetization if the debt (which is very different from QE) is definitely inflationary. Would you suggest that every country could simply print fresh currency and pay off the national debt without causing inflation?
You probably agree with me that what create inflation is the spending in the economy.
One thing is the public deficit and another is the public debt. The deficit happens when the government spend in the economy. If the government (or the private sector) spend too much in the economy inflation will happen. The other way inflation can happen is by some kind of supply shock.
The public debt is just the accumulated of the money that has been already spent in the economy. So, the public debt can't be inflationary. That money is already in the economy!
Paying the public debt it's just not emitting new debt and waiting until all the debt mature.
Could that be done (if we forget for a moment the rules currently in place)?
Yes, the government just could spend what they need without emitting bonds. The real restrictions in the government spending would be the same: don't spend more than the economy can provide or you will get inflation.
The public debt number is basically irrelevant. This is true for countries with its own currency and the debt denominated in its own currency, otherwise the issue it's very different.
We are not going to see a crisis created by a public debt problem of countries that have their own currency, but the public debt, of the countries in the Euro, is a good candidate for the source of the next crisis.
Japan has truly been the pioneer here. Its stock market went supernova first. It experienced deflation first. It implemented QE first. At each stage, Japan showed the rest of the world how this descent from free markets into something else works.
Japan was also the first industrialized country to realize the vast potential of direct stock purchases by the central bank. Today, the BOJ is a major shareholder of Japanese stocks:
> The BOJ held over 28 trillion yen ($250 billion) in exchange-traded funds as of the end of March [2019] -- 4.7% of the total market capitalization of the first section of the Tokyo Stock Exchange.
> ...
> The BOJ has likely also become the top shareholder in 23 companies, including Nidec, Fanuc and Omron, through its ETF holdings. It was among the top 10 for 49.7% of all Tokyo-listed enterprises at the end of March.
https://asia.nikkei.com/Business/Markets/Bank-of-Japan-to-be...
There's always money in the banana stand.
Argentina defaulting would not affect any other countries significantly: but it holds over 60% of IMF's financial assets and has the will to default on this debt.
The IMF losing more than half its holdings means that there wouldn't be a lender of last resort for sovereign debt issues.
BOJ has been buying ETFs for so long they are the majority of shareholders in a large percentage of stocks in Japan. I don't think you can do that with swaps so I am pretty sure they had to "print" money to do that.
Additionally I have heard that ECB buys corp bonds. Apple can go over to Europe whenever it wants and sell a couple Billion in debt and it will be bought immediately.
The question is when does it pop?
If you want to look at debt, look at yields; just the other day we were discussing negative yield bonds in some Western countries. You can't have a sovereign debt crisis and negative yields in the same country at the same time!
The most obvious trigger event for the next global recession is sovereign idiocy. The UK's own prediction documents for no-deal Brexit show 5-10% GDP loss within a year or so. The war in Syria rumbles on. The wave of tit-for-tat tanker seizures could continue. Or the trade war with China could escalate.
I mostly agree with you. But I seem to recall reading that US Treasury auctions had been recently failing, and only appeared not to fail because the dealers stepped in and bought the rest of the bonds. That's what they're supposed to do in that situation, but in a normal auction, they don't have to.
So I worry that all is not as it appears in the bond markets, and therefore that your logic might not work. In particular, it might not work for long, because the bond dealers can't keep buying half the issues for long - especially not at the rate the US is having to issue bonds to fund the deficit.
My guess is it won't be about one specific thing, because there are so many interlinked ways for things to jack up at this point.
What might kick off the recession will be the austerity measures countries impose as an over-reaction to debt worries.
One could argue that the problem started with the market believing there were such things as an institution too big to fail… Or maybe even earlier, when bankers decided they could lend money to any insolvent guy because the risk was going to be born by others through CDS…
https://www.blackrockblog.com/2019/08/20/how-central-banks-m...
Direct stimulus (through universal basic income) may emerge as the best, if not only, innovation for stabilizing aggregate consumer demand.
Banks still end up with the money but people would not be screwed quite so during the process.
Not saying that the upcoming recession will be caused by one of these things, just that I doubt sovereign debt has the power (like overreactions or financial mishaps) to move global markets.
Consider - each country can either: a) mutually agree to cancel all debt (or some large portion to mitigate the situation, say 50%) or, b) continue to demand the debt, thus perpetuating the downward spiral of the global economy, thus ushering in an era of civil unrest and large civilizational changes.
I'm not trying to sound all doom and gloom, but I think a large part of the economy is very much "pretend money" that works fine with high levels of productivity and economic output, but can very much just be done away with if the alternative is total collapse.
The GFC wasn't a total collapse. It was just the loss of large amounts of profit for some large bankers. This had severe consequences for some people (mortgage foreclosures, jobs etc), but wasn't on the scale this article describes, or anywhere close.
It's a bit like the worries people (rightfully) have around foreign ownership of land, especially farmland. Yeah it's not ideal now, but you think private property laws will be upheld in war time? If a country ever goes to war with say, China, (a large owner of foreign farmland), you can bet that country will simply seize it all and repurpose it for the war effort before you can say "world war 3". Private property is nice on paper, but when push comes to shove it's just that - paper. Easily rewriten.
Sovereign debt doesn't mean that countries owe money to each other. Most of the debt is owed to private investors (banks, funds, etc).
I'm just describing the nature of the debt, and pointing out why countries' debts don't "cancel each other out" because it's a common misconception.
I think that the larger the world economies get, the closer we get to totalitarian policy being the only thing that works to mitigate disaster. Think economic collapse, climate change, viral epidemics. None can be solved by individual initiative, slow moving government policy, etc. They require large scale, immediate, dictorial action by large nation states.
Totalitarian policy is a disaster all its own.
More importantly: it is perfectly possible to implement totalitarian policy while maintaining the aesthetics of freedom. There is a famous book about this, 1984 something... Sorry for the cliché, but here we are.
Let's say, for example, that you convince the population of the most powerful economy on earth that they are the most free, most amazing society ever, while the rest of the developed world actually enjoys affordable health care and vacation time. Meanwhile, most of your citizens not only spend the vast amount of their time in an endless rat race that only benefits economically the top .001%, send their sons and daughters to stupid wars, while aggressively demanding the continuation of this state of affairs.
Another important trick to maintaining this state of affairs is to create very violent political debate about a very narrow and irrelevant set of topics (e.g. bullshit topics such as "cultural marxism", "red pill", "cucks and soyboys", "cultural appropriation", the corrupt blue guy vs the corrupt red gal... you get the picture).
What do you mean "mutually"? the government is the debtor and the banks/funds/citizens the creditors. There's no mutuality.
> Send in military, seize all assets, wipe the records.
No need for such drama. If a government says they won't pay back, that's pretty much the end of it. Maybe check out UN Charter Article 2 (4). Of course such unilateralism is quite stupid so governments tend to avoid it
No, it's not. Public debt is all debt held by entities other than the issuing government, which includes lots of debt held by things that aren't “private individuals”, including foreign governments.
> Agreeing to cancel debt means seizing assets at a global scale.
No, it just means causing the realization of a risk whose perceived likelihood was already priced into the asset.
On the other hand of any debt there is a creditor that has an asset in their balance sheet, and it has to be a human being, however obscured by beaureacracy.
> No, it just means causing the realization of a risk whose perceived likelihood was already priced into the asset.
And debt has collateral, to get ready to sell governments by parts to the creditors that will demand them.
This will not manifest as a revision of the system but rather the changing of who is pulling those levers. The funny money will go to Workers not Bankers and Shareholders and Homeowners next decade (which starts in four months btw!)