It’s a Steamroller, and It’s Headed for Us All

By Bill Bonner, Chairman, Bonner & Partners:

Yesterday, U.S. stocks ended in the green. Investors bent over to pick up a few pennies in the stock market. They didn’t notice the huge steamroller headed their way. The Dow rose 138 points – or about 1% – after the mainstream media reported that “macroeconomic obstacles” in the ongoing Greek drama were being removed.

By that it meant that the situation was calming down… with the Greeks and the Germans agreeing to work things out in an orderly way.

So Far So Good in Greece

Here’s a firsthand report directly from one of our dear readers:

Greetings from Greek islands. Although news seems bad from reading papers etc., life here is rolling along. I am vaca with family and pulled out 500 euro from ATM last night (Sunday, June 28) on island Hydra. Restaurant accepted Amex. So far so good.

Yes, so far, so good. But the steamroller is still rolling.

Americans aren’t really interested in what happens to the Greeks – unless they happen to be on “vaca” there. But the chief obstacle in Greece is the same one in China and in the United States: too much debt.

The Germans and Greeks can blab, hondle, and bluff all they want. It won’t go away. According to financial services company Credit Suisse, Greece has total debt – including households, businesses, and government – equal to 353% of GDP.

But U.S. debt is even higher at 370%. Germany, that supposed paragon of financial virtue, is at 302%. And China, with its state-controlled economy, is at 250%. All are in good shape compared to Britain. It has total debt equal to 546% of GDP. Japan is in an even worse state. Its total-debt-to-GDP is 646%. And if the Credit Suisse numbers are correct, Ireland is off the charts with total debt equal to more than 1,000 times GDP.

But the Greeks are feeling the heat because they can’t service their public sector debt right now. They can’t pay it for the very same reason they got it in the first place – false pretenses.

First, they claimed they met the guidelines for entry into the euro zone. Then they claimed they could afford to live in the style to which they became accustomed. Then they claimed they would pay back the money they borrowed to make payments on the debt they couldn’t afford. None of it was true.

Now, with their backs to the euro wall, they can’t “print their way out” of their predicament. Their creditors expect them to pay up. The Germans, in particular, see it as a moral responsibility.

“That’s the difference between beer drinkers and wine drinkers,” says a friend. “The beer drinkers pay.”

The Beer Theory of Credit Quality

Bond investors believed the euro promised stability and security. It was backed not by the wine drinkers, but by the beer drinkers.

We’re not sure how Ireland – a big beer-drinking country – fits into this story. But our friend notes that the countries of Northern Europe – where they also drink mostly beer – tend to repay their debts. Southern Europe – Spain, Italy, and Greece – are bad credit risks.

On the streets of London at this time of year, people stand on the sidewalks with barrels of beer in their hands. And on the Fourth of July holiday, more Americans will raise glasses of beer than wine.

Still, we doubt the “Beer Theory of Credit Quality” will hold up under the pressure of a generalized credit contraction.

In Europe, the beer drinkers of the north sold automobiles, for example, to the wine drinkers of the south. Then, when the winos couldn’t pay, the beer swillers gave them more credit. Now, when the Greeks still can’t pay, the Germans are getting huffy about it. And everybody is nervous. If the Germans put the screws to the Greeks, they invite problems with the rest of the wine drinkers.

What the Greeks owe is peanuts compared to what the Italians and Spanish owe. And if the credit stops, who’s going to buy the Germans’ BMWs, Audis, and Mercedes?

Nobody wants the credit to stop.

Star-Crossed Debtors

That is also true of another pair of star-crossed debtors – the Chinese and the Americans. Like the Greeks and Germans, the Chinese lent, and the Americans spent. And now, what a surprise… it’s the Chinese who seem to be in trouble.

Wait, what do the Chinese drink?

We don’t know. But the Shanghai index fell 17% in the last 18 days. And it dropped another 5% yesterday. According to the McKinsey Global Institute:

China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007.

Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.”

McKinsey says total world debt is now more than three times global GDP. That is a “macro obstacle” about as big as they get. It is a steamroller. And it is headed for us all… no matter what we drink. By Bill Bonner, Chairman, Bonner & Partners.

We’re not the only ones giving Neanderthal advice about holding on to physical cash. Read… When Bonds Go Kaboom!

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  15 comments for “It’s a Steamroller, and It’s Headed for Us All

  1. interesting says:

    “China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007”

    and now this:

    it seems to me that China is just printing yuan like mad and buying up the world with it and nobody seems to care….some even think the yaun will be the next reserve currency..which makes no sense.

    • robert h siddell jr says:

      A little sense when they got 10,000 tons of gold and we got nada at Fort Knox.

    • Vespa P200E says:

      “Wait, what do the Chinese drink?”

      Well the Chinese I partied with at vice KTVs (highest end in SHAGhai to gritty 3-star hotel in DongGuan near Foxconn factories) where literally anything goes with dates of your choice (as they say 1 for left and 1 for right arm, ones under monthly issue, ones who takes all their clothes off, etc.) are “beijuo” the local sorghum based liquor mixed with warm water and dried fruit and classic mix of lots of sweetened green tea with scotch (often J Walkers).

  2. Vespa P200E says:

    The world is drowning in more of FIAT currency based debt created literally out of thin air with faith in the governments run amok by politicians and their bankster handlers. It’s getting obvious these debts won’t be paid (unless print money like crazy feeding the inflation monster sure to bring riots everywhere) so here we go again – extend and pretend all is well even if debt is either paid or defaulted.

    BTW – anyone else noticed that US debt is “frozen” at 18.1 trillion for last 15 weeks? Call it hide the debt weenie from self proclaimed most transparent administration…

    • Wolf Richter says:

      The US debt hit the debt ceiling in March. Congress will eventually lift it. Until then, the Treasury is borrowing from government pension funds and the like. Same tricks they play every time the US debt hits the debt ceiling and Congress drags its feet in raising it. What Congress should do is spend less money. But no. Instead, they impose a debt ceiling for the Treasury so that it can’t borrow the money to fund the expenditures that Congress mandated. The whole thing is sad joke.

  3. Michael Robinson says:

    Could we please do this article over again using net debt figures instead of total debt?

    The fact that I have no income and I owe you $1m doesn’t say much about my ability to repay you if you also owe me $1m back, and much of the world’s total debt is like that.

    • Wolf Richter says:

      You’re missing an element: one person’s debt is another person’s asset (wealth). If you eliminate that person’s debt, you will also eliminate the other person’s wealth. That is what happens when credit collapses and defaults ricochet around the economy. Trillions go up in smoke. And everything comes to a halt. Of course, this is the steamroller Bill is talking about.

      • Michael Robinson says:

        No actually, I’m not missing that element at all.

        One person’s net wealth is assets minus liabilities. If I lend you $1 trillion, and you lend it back to me (under somewhat different payment terms), that’s $2 trillion total debt, which is an economically meaningless number. The actual net “wealth” (or net debt) on your books is whatever the market value happens to be of the difference between the payment terms.

        Much, maybe most, of the world’s total debt is like just like that: swapping of payment terms between parties with differing investment horizons. Look at Norway’s national debt structure for an excellent illustration.

        Calculating total debt as a percentage of GDP has little apparent value beyond a fear-mongering exercise for the rubes.

        • Mugsy says:

          The risks of a problem, or even a meltdown, are varied and very much dependent on gross debt as well as net…..swap risks are often greater than default risks for example. Asset quality and leverage and relative strength of the parties is where the risk lies, not in the net terms of non-performing loans.

  4. NotSoSure says:

    About time. It would be pure joy seeing the faces of the delusional.

  5. Jungle Jim says:

    A very large part of the problem is that bankers have convinced us that money and credit are the same thing. Nothing could be further from the truth.

    Money is stored wealth. If you have money, within law and reason, it is yours. You may spend it or not as you see fit, but if you spend incur no further obligation. You have a bit less money, and the thing you bought.

    Credit on the other hand is the conditional use of someone else’s stored wealth. It can be cancelled (as a line of credit) but if you use it, or any part of it, you must repay what you used to the original owner. Let me rephrase that, credit is “debt on offer”.

    I know that a lynch mob is forming as I write these words. They will tell me that I am antediluvian and unsophisticated. They will be correct, I am both. But, until we learn the difference between money and debt and learn to control debt, we will never get of of the mess we are in.

    • James in NY says:

      PM’s = Money (In a fair market)
      Currency = Not money / Toilet Paper > Also used as an instrument of TAXATION.
      Stocks, bonds, etc. = More shit paper
      Credit = Not someone else’s money, money created when signed for as a debt obligation (an IOU). Only after it fails is it someone else’s and that’s the tax payer, not the bankster criminal whom pocketed the service fee’s and closing costs, etc.

    • night-train says:

      Jungle Jim,
      As another from an apparent lost age, Right On! I believe that we lack one essential characteristic for understanding modern financial constructs………….the ability to suspend reality.

  6. richard halliwell says:

    The Chinese drink hard liquor – made from rice. Speak Chinese “bai jiu”. The “jiu” word applies to beer and wine (a recent fashion) as well. So whether bai jiu is wine or spirits is hard to pin down.

  7. Julian the Apostate says:

    Speaking as one of the rubes, which is funny because rubes are barefoot pilgrims and I am not, Reality will be the court of final appeal. In Reality matter and anti-matter destroy each other in a 100% burst of destructive energy. The looters governments and their enablers the banksters have been piling up anti-matter for decades and now they are losing containment. The resulting explosion will rip away the financial world’s atmosphere and leave a dead hulk in its place. The True Believers in the current system cannot use logic to debate us so they call us rubes and doomsayers and make snide comments about being accurate in our defining terms and pretend that debt and credit and fiat are MONEY. Shortly before Goring committed suicide at Nuremberg he was asked if he was surprised that the Thousand Year Reich only lasted ten years. He said, “I’m surprised that it lasted as long as it did.”

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