Black Swan Fledgling – The Debt Crisis Takes Flight

The debt based money system plods along according to plan.  The Fed offers unlimited credit.  Public and private entities borrow and spend it.

One of the more popular delusions of contemporary culture is disbelieving the money will ever have to be repaid.  There’s no logical thesis that we are aware of to support this misconception.  But it prevails across the general populace all the same.

Day by day, however, the bills come due.  They pile up like wrecked autos on the 405 freeway.  Over the last 30 years or so they’ve stacked up beyond what the economy can possibly support.

The breaking point was reached in 2008.  We are currently living through the interim period of suspended disbelief.  Many aren’t quite ready to accept their new fate.  This wasn’t what they’d bargained for.

Scientific management of the economy, as executed by the Federal Reserve System, was supposed to perpetually inflate away each generation’s debts.  Not too fast.  Not too slow.  But at just the right rate where a 30 year mortgage would be watered down to a car payment…and student loans could be paid back over a career with pocket change.

Delusions Breakdown

The politicians perpetuated the myth.  With the Fed’s support they could increase spending without increasing taxes.  Social Security.  Medicare and Medicaid.  Prescription drugs.  Defense.  You name it.  Grand promises and grandiose programs offering something for nothing became the means to get elected and then reelected again and again.

Earlier this week, for instance, Congress approved additional funding for government offices and services.  The last time we checked the U.S. federal government was $18.4 trillion in the hole.  How are the taxpayers supposed to repay this?  The answer to this basic question doesn’t matter, for now.  For the Fed will back government debt unconditionally…and the national debt can expand without limits.

On top of that, there’s the belief the Fed will make all investors rich.  A little monetary gas at just the right times will inflate assets to a permanently high plateau.  All one must do is defer part of their paycheck to their 401k and after 20 years they can retire a millionaire.

The rules are simple: Buy and hold.  Dollar cost average every two weeks.  Invest in growth mutual funds.  Getting rich is as easy as pie, goes the story.  You merely have to be in the game.

Nonetheless, these delusions are breaking down.  One by one they are going the way of the dodo bird.  Scientific management of the economy is proving to be a destructive flop.  Here’s some of the latest evidence…

Black Swan Fledgling

The wild swings in the stock market have received the most attention of late.  But if this is the only market you’ve been watching you are missing out on the real excitement.  For that, you must focus your attention on the 10 year Treasury yield.  Yesterday, it touched down at 2.01 percent.

Even more interesting, though, is the spread between Treasuries and corporate debt.  Namely, that it is getting wider.  Could this be foreshadowing recession and the next debt crisis?  The Wall Street Journal explains…

“Spreads in investment-grade corporate bonds—debt from companies rated triple-B-minus or higher—are on track to increase for the second year in a row, according to Barclays data.  That would be the first time since the financial crisis in 2007 and 2008 that spreads widened in two consecutive years.  The previous times were in 1997 and 1998, as a financial crisis roiled Asian countries, and a few years before the dot-com bubble burst in the U.S.

“Investors and analysts say they are closely watching the action to determine whether trouble is brewing once again.  Concerns are growing about companies’ ability to pay back the massive debt load taken on in recent years, as ultralow interest rates spurred corporate finance chiefs to sell record amounts of bonds.”

The Fed, of course, was the primary instigator of ultralow interest rates.  They thought they could induce an economic boom.  Instead they incubated the next debt crisis.

No doubt, somewhere a black swan has hatched.  Soon it will fledge the nest and take flight.


MN Gordon
for Economic Prism

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