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Debt Surge Producing Fake Recovery

What do the following headlines have in common?

US wages grow at fastest pace since 2009

Euro area economy ended year with strongest growth since 2011

Surge in home prices is beating the one in mortgage rates

Manufacturing in U.S. Expands at Fastest Pace in Two Years

German Inflation welcomed back

Obviously they’re all favorable, with the possible exception of German inflation – though even that is “welcome”. Taken together they paint a picture of a global economy that’s finally returning to the kind of solid growth and steady, positive inflation that most people consider both normal and good.

Unfortunately, the reason for the improvement is emphatically not good: In 2016 the world borrowed a huge amount of money and spent the proceeds. The result is “growth,” but not sustainable growth.

Consider:

Federal Debt in FY 2016 Jumped $1.4 Trillion, or $12,036 Per Household

(CNSNews.com) – In fiscal 2016, which ended on Friday, the federal debt increased $1,422,827,047,452.46, according to data released today by the U.S. Treasury.

At the close of business on Sept. 30, 2015, the last day of fiscal 2015, the federal debt was $18,150,617,666,484.33, according to the Treasury. By the close of business on Sept. 30, 2016, the last day of fiscal 2016, it had climbed to $19,573,444,713,936.79.

According to the Census Bureau’s latest estimate, there were 118,215,000 households in the United States as of June. That means that the one-year increase in the federal debt of $1,422,827,047,452.46 in fiscal 2016 equaled about $12,036 per household.

The total federal debt of $19,573,444,713,936.79 now equals about $165,575 per household.

————

Corporates Lead Surge To Record $6.6 Trillion Debt Issuance

(The News PK) – Global debt sales reached a record this year, led by companies gorging on cheap borrowing costs.

The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.

Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.

Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.

“The low cost of financing with record-low interest rates simply made building up leverage tempting,” said Scott Mather, chief investment officer for core fixed income at Pimco.

————

Total global debt tops 325 pct of GDP as government debt jumps: IIF

(Reuters) – Global debt levels rose to more than 325 percent of the world’s gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed on Wednesday.

The IIF’s report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase.

Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

To sum up: Emerging market borrowing in 2016 was triple the year-earlier level. Corporate borrowing was the highest since 2006. And the US somehow managed to add another $trillion of government debt in the late stages of a recovery, when tax revenues are usually strong enough to shrink or eliminate deficits.

Since every penny of that new debt was presumably spent, it should come as no surprise that the latest batch of headline growth numbers have been impressive. Which is the basic problem with debt-driven growth: The good stuff happens right away while the bad stuff evolves over time – in the form of higher interest costs that depress future growth – making it hard to figure out what caused what.

That’s bad for regular people who have to live through the resulting slow-down or crisis. But it’s fine for the people who made the borrowing decisions because they get credit for the growth pop but won’t be around – having retired with huge pensions and high prestige – before the secondary effects really kick in.

This time, however, the cause-and-effect dynamic is being accelerated by a spiking dollar and rising interest rates, both of which raise the cost of debts that are denominated in dollars and/or have to be refinanced in the year ahead. So the mother of all financial crises that has been inevitable for a couple of decades has, thanks to all this new debt, taken a giant step towards “imminent.”

29 thoughts on "Debt Surge Producing Fake Recovery"

  1. I’m wondering where the 1.4 trillion borrowed money went to, because my impession is that most people haven’t seen much of this money. Is it possible that this debt is to cover loss in tax revenue

      1. I was paid 104000 dollars previous year by working online a­n­d I did it by wo­rking part-time f­o­r few hrs /daily. I’m using a business model I found online and I am so amazed that I was able to earn such great money. It’s newbie friendly and I’m just so happy that i found this. This is what i do… http://statictab.com/owgxpdb

      1. The US represents only 5% of world population. China can always sell to the other 95% and refuse to accept US dollars.

        1. problem is no one wants their junk except guess who (ussa),Chinese won’t even buy their own crap,only gringos interested in that cheap junk

          1. That is an outdated misconception of China. You are so completely wrong it’s not even funny. China is a leader in high tech manufacturing, prototyping, solar power. They do make some junk, but only to client specs. They make extremely high quality goods too..

            China has invested heavily in emerging markets, and provided power and infrastructure solutions. They are 3 trillion in reserves,the USA is nearly 20 trillion in debt. Where does the arrogance come from exactly???

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