In the first post in this series, we looked at the bubble in asset classes around the world which artificially low interest rates have created. In this piece we look at what might happen when the whole thing goes bang.
The cartoon image in the foreground above is from Puck magazine in 1901. The figure seated is Wall St banker J. P. Morgan as either a bull or perhaps the devil himself, blowing asset bubbles which the everyday people chase after. Some things never change.
The business cycle has been with us since farmers first borrowed against their future harvest in Babylon 6000 years ago. There are historical records of financial panics in ancient Rome, and economic busts have led to wars, revolutions and massacres throughout recorded history. The future, including our own, will be no different.
And although calling an end to the Great Australian Property Boom has been a fool’s errand for decades now, there are some even in the mainstream who are now saying that the oldest bubble in the world may have found a pin.
House price growth seems to have stalled, anyway, and there are already accounts of reckless lending emerging. We’ll see.
Most Australians expect, and many have bet their future on, global debt growth expanding forever and blessing them with low interest rates in perpetuity.
Nothing can, though, and despite central banks around the world doubling down on every strategy in a vain attempt to keep the debt supernova expanding forever there is trouble on the near horizon. There are at least three huge pins waiting to pop this bubble of the ages, and any one of them could start at any moment.
The first is a default by the European Central Bank (ECB). Like the US Federal Reserve and the Bank of Japan, the ECB has around US$4.5 trillion on its balance sheet. That represents bad debt which the ECB has bought from the member nations of the EU. The problem for the ECB is that, unlike the Fed and the BoJ, the ECB is not the central bank of a united political entity. The sovereign nations of Europe retained their own central banks when the EU was formed. This means that, as interest rates rise, it will be impossible for the ECB to co-ordinate a strategy for how to manage all that bad debt. This is particularly the case as the Germans are obsessed with the dangers of hyperinflation from currency oversupply, and so are pushing deflation onto the rest of Europe. Something is going to break, as the usual pressure release mechanisms can’t function for political reasons.
This flaw in the design of the ECB makes it almost certain that the ECB will default over the next few years in the face of rising global interest rates, and the Euro will collapse.
What does a central bank default look like, you ask?
The second pin is a looming pension fund crisis in the United States. The Zero Interest Rate Policy (ZIRP) of the post-GFC central bank regime is designed to transfer wealth from savers to borrowers. Anyone who used to rely on term deposits has felt this over the last ten years, and it has forced reluctant punters into risky investments they would have preferred not to undertake. It has also meant that pension funds in the US, most of which are required by law to invest in government debt, have been made insolvent. Already many cities and states in the US are starting to default on pensions promised to police, firefighters and other public servants.
There are millions of mainly older Americans whose paper wealth has been determined by the promise of government pensions to the grave. As those promises disappear, the value of that paper wealth will also disappear. It’s not going to be pretty.
The third pin is geopolitical risk, which is a wildcard but also can’t be dismissed. There are hotspots in the Middle East, Eastern Europe and East Asia which could flare at any time between the major powers. Should a global war break out, all bets are off. This happened in the 1930’s, and many wealthy families lost everything when the bonds or currency their wealth was denominated in went to zero overnight.
How much is your house worth when soldiers turn up, kill you and take it? Hopefully we won’t find out.
Any one of these three pins would pop the bubble in everything which is supported by ultra-low interest rates. Once that happens, central banks will lose control of interest rates and they will spike dramatically. All of the suppressed energy which central banks have kept hidden through financial repression will explode upward, and governments will quickly begin to default on their promises.
This is the collapse of Western socialism which is on the horizon. There will be no way for governments to maintain the illusion of sustainable borrowing and spending once the debt supernova implodes.
Mainstream economists would respond to my argument by saying that Australia’s public debt levels are low. This is true, relatively speaking. The problem, however, is contagion. This is what always drives financial panics.
Our gold-plated welfare system in Australia relies upon the government being able to access debt via the bond markets. The government bonds of rich countries have been classified as ‘risk-free’ for investors for decades now. This is madness. History is full of examples of governments defaulting on their debts. In fact, it’s what always happens.
You could count on one hand the number of governments throughout history which have ever paid off their debts. It’ll never happen today, but all global risk is calculated based on the false belief that it always will.
When the debt markets begin to demand unserviceable interest rates from the Australian government to keep the lights on, taxes will go up. This will be happening just as millions of Australians begin relying more on government relief from their own debt problems. All three levels of government will keep squeezing the people until finally there’s a revolt.
The Marxists will be screaming that it’s the failure of capitalism. That’s a lie. What’s coming won’t be a failure of capitalism. It will be a failure of socialism.
The only solution throughout history which has worked when the banquet of consequences arrives is a debt jubilee. This was the practice in ancient Israel; every 7 years all debts were cancelled and every 50 years all land went back to its original owners at the foundation of the country.
Another, similar, model was that adopted by the ancient Athenians when they faced a debt crisis early in their history. Small-scale farmers had become indebted to the aristocracy and it was fuelling social tensions. The people feared a tyrant would seize power, so they handed the aristocrat Solon absolute power to reorganise the economy.
Solon’s solution was called the seisachtheia – the ‘throwing-off of burdens’. All debts were cancelled, all debt slaves were freed and all aristocratic families were limited by a maximum amount of land which they could own in future. Solon then sailed off to Egypt, and a tyrant took over shortly after anyway. Typical Greek story.
By imposing a maximum amount of land which aristocrats could own, however, Solon’s reforms had the unintentional effect of promoting market capitalism. The over-centralisation of wealth, such as we have today, is inimical to fair and honest trade. It creates a system more akin to feudalism.
Julius Caesar also imposed debt relief for the people of Rome, however in a slightly more sophisticated manner. Under Caesar’s reforms, again after he became dictator, all debts were recalculated according to asset prices prior to the civil war and rampant asset inflation. This managed to avoid bankrupting the oligarchs while still ensuring that the common people were not wiped out.
Imagine if a man came to power in Australia and declared that all mortgages were to be repriced according to the value of each house in the year 2000, and whatever payments had been made would be taken off that amount?
I can’t either. Only a Caesar could do it. Is there an Australian Caesar waiting in the wings, perhaps? If so, he should beware the Ides of March.
Western socialism, as we have known it, will not be around in a decade’s time. Either we will have an enlightened leader who will bring a debt jubilee, or this country will rip itself apart. The current crop of bankster-owned puppet politicians will serve only the money power. They won’t serve us.
It’s not the barbarians riding over the horizon which destroys civilisations, or the debasement of morality, or a downturn in the climate. Those contribute, but in the final analysis the destroyers of a civilisation are elite corruption, greed and debt.
The barbarians just finish you off.