Tuesday, June 28, 2016

Unsustainable Finances
In his latest missive, John Mauldin* highlights some of the escalating challenges in managing debt across the developed world - "The Japanese have placed 30% of their total government debt on the balance sheet of their central bank. It is going to 70–80% – count on it, says the true believer. That is a lot of yen to put into the system, and that is what I think drives the ultimate valuation of the yen." .. in the emerging markets: "They borrowed $10 trillion in dollars that they have to pay back from income earned in their local currencies. Dollar valuation can create serious problems for their debt. And it happens at the worst possible time, during a crisis or global recession when the U.S. dollar is the cleanest dirty shirt in the closet." .. in the U.S.: "When we next fall into recession, the deficit explodes to $1.3 trillion, even if we lose only the revenue we lost last time. If we have to add in the extra cost of safety nets, it’s $1.5 trillion minimum, plus the almost three quarters of a trillion dollars of 'off-balance-sheet' debt. US total debt will be rising at over $2 trillion per year in short order. All in, we are adding $2 trillion plus a year to an already huge total national debt. In five years we could be at $30 trillion debt. We are into 2020 and we are now facing $30 trillion in debt .. Lacy Hunt is right: debt constrains growth. It constrains nominal GDP; and if we don’t get nominal GDP, we won’t get wage growth; we won’t get the labor participation rate up; we’ll get more of the gig economy; we’ll get a recession where we are back to 8–9–10% unemployment. People are going to be upset. When it breaks, the result is a global recession every bit as serious as the last one; it’s just different in its causes and effects. But there is a common denominator in each of the weak links mentioned above: Debt. And I do mean debt with a capital D. You can’t just wish debt away or declare a jubilee, because there are banks and pension companies and you and me on the other side of that debt. Somebody owns that debt, and that somebody is you and I in our pensions, in the insurance we buy, in the bond funds in our portfolios, in our foundations, our banks, and corporations. Those bonds silently permeate every part of our lives. Kill them and it all goes pear-shaped."
Click "Mauldin June 25" to download Mauldin's letter (may need to provide your email address), or hit "View Fullscreen" at the bottom next to the Scribd logo to enlarge viewing .. John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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