Debt-Fueled Growth: Welcome to the World of Extend-and-Pretend

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Source: Jeff Yoders/MetalMier

We have a problem, by we I don’t mean we in the metals markets specifically, nor we in the US or UK, nor even we in the western world.

Why Manufacturers Need to Ditch Purchase Price Variance

I mean we all have a problem: too much debt.

The International Debt Pile

“Whoa!” you say. Hold on, wasn’t the last financial crisis all about too much debt? Haven’t we learned our lessons – corporations are awash with cash, dividends and share buy-backs are at record highs, austerity measures are curbing government spending around the world, household debt — after years of recession — are under control again, what are you talking about?

Quantitative Easing (QE), started in the US by the Federal Reserve, was taken up by the Bank of England, followed by the Bank of Japan, the latest is the European Central Bank at €60 billion-a-month and even the Bank of China is talking about some form of unconventional monetary support, which we can read as QE to support flagging growth.

The Swap

The fact is, we have swapped personal and corporate debt with government debt. According to an article in the Telegraph, the combined public debt of the G7 economies alone has grown by close to 40% to around 120% of GDP since the start of the financial crisis, while globally, the total debt of private non-financial sectors has risen by 30%,  far in advance of economic growth.

As a result of QE we have so much cash out there it can’t find a home and the once-unbelievable situation of negative interest rates has become widespread — where, in the search for a safe haven, lenders are paying governments for the privilege of lending to them. Today more than 30% of all government debt in the Eurozone — around €2 trillion of securities in total — is trading on a negative interest rate.

As the Telegraph points out, to the extent that growth is happening at all it is being fueled by rising levels of public debt, coining a phrase to describe our situation as “a philosophy of demand at any cost.”

It is not clear that persistently low interest rates — when the Bank of England first dropped rates to 0.5% it was expected to last at most a year… that was six years ago — are a result of QE or a global economy that has run out of productivity growth.

Not Stagflation… But

Sluggish growth and low inflation is the new normal. For all kinds of reasons, the Telegraph postulates advanced economies — and perhaps emerging ones, too — seem to have run out of productivity-enhancing growth and, therefore, need constant infusions of financially destabilizing debt to keep them going. Look at most of Europe, Japan, even the US is achieving weak growth with the support of record-low interest rates and almost the lowest energy costs in the world.

The asset bubble of soaring stock markets and the bond bubble will, therefore, have to correct at some stage, asset prices are not underpinned by growth. The longer it goes on the worse it will be, for now we live in an “extend and pretend” world.

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