There's a worse crisis on the way unless we get serious about tackling debt … For all of the talk of austerity, Britain is still drowning in debt, private as well as public. 'Together, families and non-financial firms' debt is still worth 208pc of GDP and is merely back to levels last seen in mid-2007, a time when leverage was already utterly unsustainable. – UK Telegraph
Dominant Social Theme: Don't worry, be happy.
Free-Market Analysis: We've warned about a deleveraging bond market. When Western economies are seen as weak and their currencies weaker, then investors around the world don't want to buy bonds and rates rise. This makes the bonds that people and institutions already hold worth less.
A bond crash is in the making. And this Telegraph article does us the favor of pointing out that it will extend to private debt, as well. That is, a bond crash is symptomatic of a larger economic sickness, which is bound to be widespread and individual not just sovereign.
The real issue is simply too much money and interest rates that are too low. Western economies, revved up despite the lack of industrial support, are unsustainable. Eventually, rates will rise and markets will inflict even more pain on tottering governments and hapless investors and debtors.
Families and companies have only just started down the long road towards fiscal responsibility, with the belt-tightening likely to continue until the end of the decade; and the sector is still adding more to the national debt pile every week than the private sector is repaying. We still aren't remotely living within our means and – for all the genuine pain in some quarters – still haven't made a decisive break with the irrational exuberance of the 2000s the cultural delusions that accompanied it.
The political establishment remains unwilling to admit to itself, let alone to the public, that the welfare state is going to have to be massively pared down, and that individuals need to consume less and save more. Instead, it's still largely business as usual in Westminster: George Osborne's plans to subsidise another credit-fuelled housing bubble are terrifyingly reckless, and Ed Balls' policy to cut pensioner benefits amounts to £105m a year, saving 0.01pc of the £720bn in government spending.
… Nobody knows what the "right", sustainable level of private sector debt is, and it depends crucially on expected productivity, wage and jobs growth, as well as on inflation, but certainly far lower than today's levels. A fair bet is that the private sector's debt to GDP ratio will have to fall back by another 50 percentage points or so; even if nominal GDP grows by a highly optimistic 4pc to 5pc year over the next few years, net borrowing will also have to fall every year until 2020.
Debtors will actually have to repay loans, not merely assume that a growing economy will bail them out. This will depress consumer spending as well as corporate investment, unless the rise in the stock market continues, unlocking alternative sources of finance for companies. Inflation won't bail us out: with private sector wage growth now almost higher prices reduce household incomes just as much as they cut their debt, making no real difference.
… At some stage, the bond markets will pop, house prices will plunge, another large economy will implode, the cost of borrowing will soar and we will suffer another recession. moment, neither the private nor the public sector would be able to cope. Unless we become serious about tackling private and public debt, the next crisis, when it eventually comes, will be unimaginably devastating.
Note the article points out what we have often written, that no one "knows" the right price for money or rates. Central banks pretend to do so, but in reality that knowledge is surely lacking.
One thing we do know is that central bankers and government officials will continue to tamper with money and as a result we could end up with various bubbles, mostly in real estate, before yet another crash. The article is correct to present the idea that many are living in a kind of fantasy world and need to pay down their debts as soon as possible.
There is, after all, no recovery. The money metals bull market is still in effect and people in the stock market will have to be very careful about their timing because there is yet another leg to the current economic malaise.
The Great Recession has not yet subsided and there are more surprises in store.