Caleb Lawrence – KPIG-KPYG Radio – Share the Wealth – February 13, 2017
Another day of little news and another set of new market highs as the fundamentals remain weak and arguably deteriorate. The parade of market pundits warning of the future was joined by the Bank of International Settlements or BIS as they came out with a report noting that debt was at new record highs and had reached bubble proportions. The BIS is the central bank to the world’s central banks and one of the precious few, perhaps the only one that has reached the conclusion that in fact deficits and debt matter a great deal. The last 20-years or so is a story of utter failure by mainstream economists and central bankers worldwide to spot the various destabilizing, socially and economically ruinous assets bubbles even when they stared them in the face. Some economists in the new millennium, Steve Keen, others, and recently joined by the BIS have proven with economic models that debt does matter and that the idea that one person’s debt is another’s liability effectively cancelling each other out is demonstrably false in the face of new credit and money creation along with fractional reserve lending. Keep in mind that one of the recurring themes was that consumers had deleveraged and paid down debt since the 2007-2009 financial crisis and this was the foundation of the recovery as a new credit cycle was beginning, never mind the Fed’s Flow of Funds report. Back to the BIS report released Friday. Over the last 16 years it noted that debt, public, private, and corporate had increased by 63% in the USA. The Eurozone, Japan, U.K., Canada, and Australia averaged debt growth of just over 50%. In emerging markets, led by China, leverage is up 85% much of that compliments of the Chinese that blew a debt bubble in the post crisis period since 2007 the likes of which the world has never seen. Reaching new record highs in the process. It’s worth noting that debt in the USA actually decreased from 2008-2010 during the depths of the crisis. Modern economic models are increasingly showing that debt matters a great deal. Conversely the last 20-years or so have shown that traditional economic models and central bank policy have produced spectacular bubbles and devastating busts. Not only did they fail to see any of it coming, various pundits and policy wonks in the process of tripping over the beginnings of crisis loudly proclaimed that everything was fine and contained. Debt and leverage is certainly beneficial on the way up enhancing returns, if you time the top correctly good for you. If you don’t, watch out below as mathematically that which helped you on the way up now becomes your greatest peril as the sword cuts deeper on the way down, basic high school math.