Debt and More Debt.

Debt and More Debt. The world is running record levels of debt — see this graph of total US debt to GDP, and know that the situation is roughly the same in all western counties.

The financial authorities are desperate, and central banks are warning of impending crisis. They have forced interest rates to 5,000 year lows. They have printed trillions. They have raised taxes. They have built up more debt than they can ever repay.

At this stage all they can do is delay the collapse of our failing financial system. The biggest theme in finance and investing is “reversion to the mean” — the fundamental ratios, sooner or later, return to their long-term average values. When debt levels inevitably revert to their mean (last seen in 1982), whether by inflation, jubilee or default, there will be a major financial crisis that will dominate the front page for months or years.

They are delaying the crisis with more debt. But you can’t fix a problem of too much debt with more debt.

In Japan the central bank is buying all current Japanese government bonds issued, and already own 40% of all Japanese government bonds ever issued. The Japanese Central Bank is also now a top-10 holder in approximately 90% of all the companies that make up the Japanese stock index (the Nikkei 225). If interest rates in Japan rose to 2%, all Japanese taxes wouldn’t be enough to even pay the interest on the government debt. Japan was the first country into this debt quagmire when its debt bubble burst in 1990; the rest of the world saw the bubble halted but not pricked in the GFC in 2008. All our economies are currently headed towards the same moribund Japanese-like future.

Increasingly central banks, and their agents the commercial banks, are manipulating interest rates, stock market indices, housing prices, and commodity prices, in an effort to prevent deflation and restart the bubble. So investors and market analysts increasingly are merely trying to anticipate the public servants and manipulators who heavily influence prices.

The free market is breaking, sending false signals about the value of money and capital, and the whole world is the poorer for it. Capital is being mis-allocated and wasted on a massive scale (nowhere more than China). Everyone loses, except for the financial elite who are in on the manipulation and benefit the most from the creation of new money — they are profiting mightily by it, which is why measures of economic inequality are rising swiftly in the West.

hat-tip Dan Denning and Mike Savage