THE QUESTION: How Long Does This Go On?

THE ANSWER: Until Creditors come to realize they will never get their loans repaid at the real rate that new and existing loans are based on.

WHEN DOES THAT OCCUR? For most credit this usually occurs in stages. Credit ratings are reduced as credit risk increases and loans become more expensive for the borrower. Eventually the loans become too expensive for the borrower to sustain and thus he is forced into default and bankruptcy proceedings. However, it is different for Sovereign Debt where the country controls its currency.

In the case where the currency is not trusted, the loans are normally issued in a currency the lender can trust and rely on to achieve the expected return. This is the case in many Emerging Markets where loans are denominated in US dollars, Euros or currency that both parties can agree on. The default currency for the past 75 years has been the US Dollar.

But what happens when it is the US itself who is the risky debtor with loans denominated in US dollars, which can be easily printed? It is called the Exorbitant Privilege. However the US debt is no longer AAA rated since it was downgraded in 2011 to AA. Is there another downgrade coming?? Frankly there is now too much government “Suasion” to rely on this. So as a consequence the level of the Twin Deficits is the sole measure watched to assess the risk of repayment.

TRIGGERING EVENTS

The triggering measures of major concern to lenders vary but are most often considered when:

1. The rate of the growth increase in the Twin Deficits is 4-6% larger than the growth in the GDP (advanced by 18 months).
2. Sovereign Debt is larger than 90% of a country’s GDP. Then Sovereign Economic Growth can be expected to structurally begin to deteriorate and impede productive investment which will make loans repayable.

We currently have both situations occurring in the US.

CURRENT ACCOUNT

• Goods trade deficit widened sharply.

• The Services Trade Surplus shrank to the lowest level since 2012.

The U.S. current account deficit deepened to $195.7 last quarter from $175.1 billion in Q4’20, revised from $188.5 billion. The Action Economics Forecast Survey anticipated a $207.0 billion deficit. As a percent of GDP, the deficit grew to 3.6%, its deepest since Q4’08. During all of 2020, the current account deficit deepened to $616.1 billion, revised from $647.2 billion.

TRADE DEFICIT

• Trade deficit is the second largest in 29-year history of series.

• Services led by gains in travel, both exports and imports.

• Imports of goods from China fall 11.3%.

The U.S. trade deficit in goods and services widened moderately to $71.24 billion in May from $69.07 billion in April. The earlier month was revised slightly from $68.9 billion. The May deficit was the second largest in the history of this series, which goes back to January 1992; the largest was just in March, $75.02 billion. The Action Economics Forecast Survey expected a $71.4 billion deficit.

Both exports and imports increased in May. Exports rose 0.6% m/m (41.0% y/y) following April’s 1.0% advance, while imports were up 1.3% m/m (+37.9% y/y), basically reversing their April 1.4% decrease. Both petroleum and non-petroleum imports increased in May.

FISCAL DEFICIT

The Washington Political Class presently geared up to borrow and spend on a scale that America has not seen since we had to fight and win World War II. Our debt burden would break all records, eclipsing even the 1940s (Interactive Chart: right, and Biden’s Budget below).

The nonpartisan Congressional Budget Office (CBO) estimated in January 2020 that annual budget deficits will exceed $1 trillion, and that the debt—then hovering at $17.2 trillion—would more than double as a share of the economy over the next 30 years. These numbers don’t take into account $65 trillion of unfunded liabilities for Social Security and Medicare. The CBO now projects that, under current law, the deficit will reach $1.9 trillion in 10 years and the debt will skyrocket from 102% to 202% of GDP within 30 years.

The words “current law” are critical as the CBO forecasts only what will happen should government make no changes in spending and tax policies. But President Biden has already proposed $5 trillion in additional spending over the next 10 years, much of it for new or expanded entitlements, labeled “infrastructure” and “investment.”

THE US DEBT

$26.51 trillion

As of July 20, 2020, debt held by the public was $20.57 trillion, and intra-governmental holdings were $5.94 trillion, for a total of $26.51 trillion.

So we properly understand what the above number means, let me explain:

• 1 Million Seconds = 12 Days
• 1 Billion Seconds = 32 Years
• 1 Trillion Seconds = 32,000 Years

Think this will ever be paid back? Don’t you think buyers of long term US Debt don’t understand it better than you, since it is their job to know! How much of a haircut on the US dollar do they need to even buy US Debt and still be confident there will be another lender available when they want to exit??

CONCLUSIONS

As bad as all the above is (and getting worse), the smart lenders are already recognizing that the US is quickly becoming energy dependent again.

Prior to the recent Presidential election the US was energy independent.

It was the price of oil and the US dependent on foreign energy suppliers that was central in fostering the Stagflation of the 1970s!

THEY SAY THEY DON’T RING A BELL AT MARKET TOPS!! WELL, WHAT WOULD YOU CALL THIS???

Wells Unexpectedly Shuts All Existing Personal Lines Of Credit, Hinting US Economy On The Edge

Wells Fargo just announced that it’s shutting down all of its existing personal lines of credit – a popular product offered by the retail-focused Wall Street giant – a move that will likely infuriate legions of customers.

The revolving credit lines, which will be shut down in the coming weeks, typically allow users borrow $3K to $100K, were pitched as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts attached to the loan.

Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments, according to the statement.

EXTRACTED FROM,