Forgive me tonight for relying more heavily on other people’s material than usual, but 1) it’s good stuff, 2) it’s an end of summer weekend, and I’m suffering from diminished productivity (the Olympics haven’t helped), 3) I foolishly wasted a lot of time and energy corresponding with a reader who was mightily unhappy with my last post on the Fed. 3) perversely kept me from getting to a post I intend to write on Bernanke’s speech on Friday. Stay tuned.
I’m particularly keen about this post from Cassandra because it addresses, in typical colorful style, a pet theme: we have way way way too much debt out there, and the party is over. Weirdly, despite the appearances of a credit crunch, the flow of fund stats as of end of March showed that US debt outstanding was still increasing, and on a near vertical trajectory. The continued indulgence of our friendly foreign funding sources is a big factor (Brad Setser has called it the quiet bailout, and it comes so far to about $1000 per capita. Yikes). So the real squeeze has yet to begin.
Note that Peak Credit is also one of Mish’s themes.
Cassandra, who has seen deleveraging up close via living in Japan, riffs on what America has in store. Where else would you see a coinage like “wreckitude”?
From Cassandra Does Tokyo:
Does Peak Credit inevitably follow piqued credit? Well if you’re my age, and you thought so and positioned accordingly, you’d have been bankrupted a very long time ago – possibly as early as the late 1980s. And if you were a glutton for punishment, you’d have been toasted again in 1994, another time in 1998, yet again in 2002, and rubbing one’s nose in it, perhaps every year after that until midsummer two-thousand-and-seven. Dog days indeed for those bearish on the ability of the financial system to manufacture, distribute, and service debt, whether in real or nominal terms, or in relation to any measure of the economy or change in the growth thereof.
Yet as pessimistic on its sustainability (and wrong!!) as one would have been in the past, one should now be as optimistic one’s assessment that this is The Big One, that we’ve smacked head-first into the boundary of the maximum amount of debt that can be assumed by households, corporates and governments in our economy and be reasonably sustained with the fruits of our labour, and investment. Actually, I would posit that we long-ago pierced any reasonably sustainable threshold, and only through sheer inertia and the fortuitiousness of pulling of rabbits-out-of-hats have we lasted this long. But it is the anchoring of popular belief in faith and absent solvency from days long passed combined with the extrapolation a series of non-extrapolatable macro income streams which could cause any sensible human being believe or have believed that the boundary lay somewhere in front of us and not far behind us.
Culpability is not singular. Stern-Stewart, investor short-termism and systemic mono-focus, along with greedy managers replete with agent/principal dilemmas must assume blame on the corporate side. Selfish American Voters repeatedly demanding representatives requite incongruous financial goals with cynically lame and unsustainable fiscal policies, along with a near complete detachment from reality in regards to present consumptive desires in relation to both incomes and longer-term savings requirements are just as at fault as the monetary wrecktitude resulting from an unwillingness to accept mild deflation and cyclical recessions where required for reasons that – to this day remain inexplicable given that Continental Europeans seemingly had little difficulty distinguishing a bubble or accepting that both taxes and economic brush-fires are not inherently bad in The Big Picture.
So IF what we are currently witnessing, commonly termed as The Credit Crunch, is in fact, an expression of what I will term Hubbert’s financial equivalent – “Peak Credit” phenomena , and IF as I posit, we long ago untethered the financial wagon from the real economic train, what does this mean?
Many things, but first and foremost, that we are at a major and painful inflection that will impose a real Kunstleresque austerity upon Americans converging their desires with their means. In a word, this means “revulsion”, a somewhat arcane and long-forgotten term for large-scale write-downs and/or economy-wide elimination of outstanding debt(s). For this reflects the implausibility of servicing, let alone paying off obligations, and the consequences to those whose capital and assets were/are/will be vaporized. It will, undoubtedly, be fought by authorities, with certain costs borne by the state and socialized upon unwitting voters.
Japan wallowed in their own debt-shite for more than decade, and in the US it is (in present political climate of denial) even more natural that attempts to band-aid and stave off the inevitable reality will likewise be tried. In another time and another place, natural growth and demographics might have met inflation somewhere in the middle and the cycle would resume again without massive dislocation.
But this time it is different. This time, the encumbrances are too large. This time, there is competition for markets, and their value propositions are surpassing Americas. This time the patient is too soft, obese, relatively uneducated, faux-faithful, weak, politically compromised, and cronily corrupt. This time, the business cycle is turning dramatically for the worse, wealth effects are only beginning to bite, oil has peaked with a generation of adjustment between any remotely plausibly cost-effective replacement. And competition is even heating up in the emerging world for the remaining high-margin business. This does not sound like an environment that will assist households or government to rebuild balance sheets and make good on obligations without great sacrifice from ordinary people and even greater sacrifices from the monied class. This sounds like an environment where creditors and debtors will be required to sit down and negotiate what can and might plausibly be paid, or converted into equity, or stretch maturity with lower rates – anything to keep it as an “asset” and a performing one.
“Peak Credit”, like Peak Oil, thus forlornly reflects the necessity of increasing demand for credit from borrowers to sustain the unsustainable, at precisely the time when supply is constrained and shrinking, for suppliers are squarely confronting the reality that new sources are limited, and in any event, the demanders (even if supplied) have diminishing hope in the current environment of returning what was lent.
Some will think that these ruminations border on the insane. And I will admit that when I walk out of my office door to the local trendy coffee bar, there is scant evidence where I live that Peak Credit is anything but a financial phenomena – limited to the flippers in Vegas or the spec developers in Fla. or CA. But perhaps that’s because the most insidious aspect of Peak Credit is its disruption to the chain of dependencies that bore its hallmark over the past two-and-one-half decades.
So inexorable and complete has the rise of credit been in its permeation of every crevice of life that no one blinks when multi-trillion dollar GSE balance sheets are supported by but the thinnest veneer of equity – even AFTER large potentially (no, probably) impermanent increases in underlying asset values; when dogs receive pre-approved credit cards by mail; that its sheer ubiquity produces persistently negative rates of saving; when corporates use leverage in lieu of a margin of balance-sheet safety on the enterprises they are meant to steward in order to conform and placate the markets’ twisted short-sighted ideal of optimal capital structure leaving them woefully exposed to cyclical fluctuations; where data-mined models themselves based on limited data replace good common sense; where leaders defer to unsustainable plebeian notions of what constitutes prudent fiscal policy producing errors in judgment that make the trench warfare of the first world war appear sane. If this is what God’s country resembles, imagine the financial horror in hell…
“Peak Credit” will wreak as monumental changes upon American consumptive life as Peak Oil, and these cannot help but exert a massive deflationary pull – at least until such time as the parties agree to squarely face reality that confronts them, and in an interconnected world, everyone else.