Leading US economists, including Noble Economics Prize winning Paul Krugman, claim that debt in an economy, especially the world’s most debt-bloated economy, the United States “doesn’t matter.” Just keep the borrowing cycle growing and all will be fine. Krugman argued in his New York Times column, “…this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; US debt is, to a large extent, money we owe to ourselves.”
Debt doesn’t matter?
Come again, my ever-so-learned professor? There is a sly rhetorical trick in your language and dishonesty in your argument: “We owe to ourselves?” Does that mean I and my creditor bank are just part of the same happy family? Is “ourselves” the Peoples’ Bank of China to whom “we” American taxpayers, through our government in Washington, owe trillions in debt? Or the Japanese Central Bank?
Are you telling me that it doesn’t matter if I run up so much credit card debt charging 25% annual interest to pay my monthly living costs as millions of Americans are forced to do? It doesn’t matter if I borrow $100,000 from my bank to finance a college education so I can get a job that doesn’t anymore exist in the USA because so many companies have out-sourced to Asia? It doesn’t matter if I incur mortgage debt on a home I bought in 2006 at the peak of the sub-prime real estate bubble? It doesn’t matter that I got the loan by lying to my local bank about my ability to pay the huge mortgage because he didn’t care so long as he could turn around and sell that worthless mortgage risk to Goldman Sachs or another Wall Street bank that “bundled” my high-risk home mortgage with hundreds of other mortgages around the country, creating what the bankers call collateralized mortgage obligations?
Debt implosion of 2007
In the summer of 2007, the more that $4 trillion debt pyramid in the US real estate mortgage-backed securities sector began to implode. That implosion triggered the largest collapse of credit in world history, a collapse which has left the economies of the USA and of the European Union in their worst condition since the creation of the dollar system at Bretton Woods, New Hampshire in 1944.
On July 29, 2007 the head of the German banking regulator, Bafin, and the German Minister of Finance, Peer Steinbrück, held a press conference to announce that the German State, together with leading private and public banks, was organizing an emergency rescue of Germany’s IKB Deutsche Industriebank. IKB was a bank originally set up in 1924 to facilitate payment of German industrial war reparations under the Dawes Plan.
That 2007 crisis marked the second time in its history that the IKB played an historic role in the context of unsound American banking practices. IKB had been convinced by Deutsche Bank head, Josef Ackermann, to buy new, exotic high-yielding securities issued by New York banks, securities known as sub-prime mortgage-backed securities. Sub-prime as in high-risk. Ackermann openly admitted he knew about the IKB problem because his own Deutsche Bank had unloaded the high-risk US bonds onto a naive, incompetent management at IKB. That event, the collapse of IKB, triggered a global financial Tsunami that weighs the world economy to the present.
What is debt or money?
Ultimately money, especially in a world where money is a pure paper commodity—fiat money so-called as it is not tied to gold or silver or other tangible values like land—is a question of “confidence.” The confidence in this case is ultimately in the “full faith and credit of the Government of the United States of America.” And that confidence has been backed always, ultimately, by military power, political power, power to buy or control the lawmakers and administrators—Presidents, Congressmen, judges.
Today, in the first months of 2016, the US is almost nine years into that debt implosion process with no end in sight. The Federal Reserve, the privately owned watchdog for the large Wall Street banks, timidly raised key US bank interest rates from zero by a mere 0.25% on December 15, 2015. They did so after months of cat-and-mouse games with financial markets, hinting that things were returning to “normal.” A month later, that same Fed indicated it had miscalculated. Today the US financial economy is going into a new downward spiral led by debt.
US Oil Junk Bond Crisis
The implosion of the US debt pyramid today is led by energy companies facing impossible conditions in a market where oil and gas prices are lowest in 13 years with no recovery in sight. On February 25, Bloomberg reported that the US oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, could not pay interest on their bond debts.
If we listen to Paul Krugman, that doesn’t matter because “we owe the debts to ourselves.” They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy.
The US shale oil companies over the past seven years became the new “saviors” of Wall Street banks desperate to find new areas of profit in a collapsing economy. They literally threw money at the booming US shale oil industry. Much of the debt the shale companies took on was what is known in Wall Street as “junk bonds.” The term is a reference to the fact that if the borrower company, say SandRidge Energy, goes bankrupt, the holders of their junk bonds are holding just that–junk.
The nearly four million barrels a day rise in USA oil production since 2009 came overwhelmingly from unconventional, high-cost shale oil ‘fracking.’ It has been held up until now by Wall Street bankers willing to keep adding new credit to the distressed companies, hoping against hope for a rise in oil prices. Since June, 2014, however, US oil prices have gone from $103 a barrel to around $30 today. Most shale companies need at least $60 a barrel to break even. Now the day of reckoning is fast approaching as the Wall Street banks, led by JP MorganChase, are deciding to cut credits, to stop throwing good money after bad as the saying goes.
Since the deal between the foolish US Secretary of State John Kerry and Saudi King Abdullah in September, 2014 to flood the world with cheap Saudi oil to create a crisis in the Russian ruble amid US sanctions, the worst hit in the unfolding crisis has been the US oil and gas industry, mainly unconventional, costly shale oil and gas. They have sold off hundreds of oil fields, eliminated an estimated two hundred fifty thousand jobs and slashed billions of dollars from capital spending and stock dividends.
As more shale energy companies go bankrupt in coming weeks, there will be no new lending for unconventional oil for decades. Oil Price.com, a trade newsletter notes, “JP Morgan was first to finally get defensive and is ready to start serious oil credit redeterminations, without waiting for the traditional examination period in April. The banks are finally feeling the risks of unrestricted lending to the shale…The US shale industry is changing forever and there won’t be this kind of “free money.”
The collapse of the US energy junk bond market is spreading like a cancerous metastasis to the entire US junk bond market that includes borrowers like Toys R’ Us to high-tech IT borrowers. US companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor’s. That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018, according to a report in the Wall Street Journal of February 21.
Consumers of debt…
A further indicator of the true state of the US debt-bloated economy is the fact that the world’s largest retail group, WalMart, just announced it will close 154 of its giant stores that sell everything from food to garden equipment to toys. Over the past two years hundreds of America’s giant shopping malls have been abandoned as store chains like J.C. Penney, Kmart, Radio Shack and Sears close thousands of outlets.
Indebted American consumers are the main reason. A recent study showed that in 2015 the average American household had $129,579 in debt — $15,355 of it on high-interest credit cards. Just because the Federal Reserve has a zero interest rate policy doesn’t mean Chase or other Visa card issuers charge zero. They still charge from 13% to 25% depending on the credit history.
Total consumer debt today is a staggering $11.91 trillion, almost 70% of GDP. It is even worse than the bare statistics. The American household is forced into debt increasingly because the rise in the cost of living has exceeded income growth over the past 12 years. Median household income has grown 26% since 2003, but household expenses have outpaced it significantly — with medical costs growing by 51% and food and beverage prices increasing by 37% in that same span. The average US household pays a total of $6,658 in interest cost on home, cars, credit card debt per year, 9% of the average household income of $75,591. That is being spent on interest alone, not on new shoes for the kids or dining out with the family. This is the real reason the Federal Reserve is in a gigantic pickle regarding raising interest rates to “normal”—it would blow up the near $12 trillion consumer pyramid of debt along with corporate debt.
‘Students of debt’
With jobs in the oil and gas sector vanishing, companies going bankrupt, households choking in debt, real unemployment not the mythical 5% declared by the US Labor Department but more like 23% according to John Williams’ Shadow Government Statistics, another source of debt is assuming alarming dimension. That is student debt, a new factor that 25 years ago was almost negligible. Today students must borrow to finance college.
Today total outstanding student loan debt in the US is $1.2 trillion. Only home mortgage debt is higher. About 40 million Americans hold student loans and about 70% of bachelor’s degree recipients graduate with debt. Those who graduated in 2015 left college holding an average of $35,051 before earning their first paycheck to pay that debt off. One in four student loan borrowers are either in delinquency or default…
Are we still to believe that such debt doesn’t matter because “we owe it to ourselves” Professor Krugman. With such professors claiming to teach economics, it is no wonder that the American Hegemon is going bankrupt. Debt is a strategic factor in the existence of any national economy, and has historically been the factor that ruins nations, the United States included.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.
