The Corruption of Debt
Editor's note: For the first time in decades, a Jubilee is coming to America.
And while some will cheer, what happens next will quickly become a nationwide nightmare.
In this weekend's Masters Series, we're featuring a pair of essays from Porter's newest book, The American Jubilee. Today, he explains how our country's debts have grown to never-before-seen heights... and what to watch for...
The Corruption of Debt
By Porter Stansberry
The only way the government can give away something is by first taking it from someone else. This is critical. The government taking what it wants is exactly what has created the crisis we face.
Taxes are the most obvious way the government takes what it wants to redistribute. But our government is reaching the limits of what it can generate from new or higher taxes. When the government realizes it can't take any more from you through taxes, it uses debt to take from your children and grandchildren.
And our government has taken advantage of that option to a historic degree...
Today, the U.S. government owes more than $20 trillion. The number is so large, it's meaningless. No one can comprehend how much money $20 trillion really is. A better way to think about it is each American taxpayer owes roughly $175,000. That's like a whole additional mortgage for most people.
A 2014 Harvard study put it in this way (we've since updated the numbers):
If the federal government spent its yearly revenues exclusively on debt reduction and ceased all of its operations, it would take three of four years to pay down the debt. Or, the government could pay down the debt in one blow if it simply took more than $65,000 from every person living in the U.S., including children, the elderly, and the unemployed. If this one-time "debt reduction fee" were levied only on those in the workforce, the cost would be over $175,000 per person.
And it's not just the federal government that has become addicted to debt. If you add up all of our government, corporate, and consumer debt, America owes roughly $70 trillion.
As the next chart shows, that adds up to about $836,000 per American household...
This massive amount of national debt cannot be financed at any real rate of interest.
If the government had to pay even 6% interest on its debt, it would cost roughly $1.2 trillion a year. And that's just to pay the interest on the debt. The entire government brings in about $3.3 trillion a year in taxes.
The next chart shows what would happen in that scenario...
This debt addiction has filtered into three critical areas of the economy. Instead of learning from the mistakes that crippled our economy in 2009 when the mortgage bubble burst, we have created three new bubbles that could soon blow up...
The largest threat is the U.S. corporate bond market, particularly junk bonds.
When this crash occurs, it will be the largest destruction of wealth in history. There has never been a bigger bubble in U.S. bonds.
How do I know? It's simple. Historically, "junk" bonds (aka high-yield bonds issued by less-creditworthy companies) have never yielded less than 5% annually. But they hit that low in mid-2014, and today, they're not much higher than that.
Likewise, in 2014, the difference between the yields on junk bonds and the yields on investment-grade bonds had almost never been smaller. That means credit was more available than almost ever before for small, less-than-investment-grade firms. The last time credit was that widely available – and at such low costs – was in 2007. And that ended badly.
Throughout 2015, the spread between low-quality corporate bonds and high-quality corporate bonds began rising. That indicated a growing fear in the market as people reduced the amount of risk in their portfolios and shifted to higher-quality and higher-rated assets.
During the first half of 2016, the high-yield spread began declining. It's now close to the post-crisis lows of 2014... indicating complacency in the high-yield debt market.
But it won't last. It never does.
The coming collapse in the bond market will be far worse than it was last time, too. The Federal Reserve's twin policies of keeping interest rates near zero and buying tens of billions of dollars in Treasury securities and mortgage-backed debt have driven the huge bull market in bonds. As the Fed buys bonds, it pushes bond rates down and forces the other buyers of bonds to buy riskier debt that historically offers much higher yields.
I believe we'll see a real panic in the corporate bond market at some point soon. I expect the average price of noninvestment-grade debt (junk bonds) to fall 50%. Investment-grade bonds will fall substantially, too. (I'd estimate something around 25%.) This is going to wipe out a huge amount of capital... and believe me... it's almost 100% guaranteed to happen.
Junk-bond guru Martin Fridson has projected $1.6 trillion of bonds and loans will default. That means three times as many debt issuers will default than the last recession.
This would have already happened, according to Fridson, but the government has kept interest rates artificially low, making it possible for many at-risk debt-issuers to refinance their debt at a lower interest rate. This delayed an inevitable wave of defaults in the junk- bond industry, but only temporarily. The government can't keep interest rates low forever...
Meanwhile, student debt is forming another looming bubble.
Over the past 10 years, students (most of whom have virtually no income) have racked up enormous debts. As of 2017, student debt totals more than $1.5 trillion – the second-largest source of household debt after home mortgages.
Incredibly, that's what our entire federal government owed a little more than 30 years ago. Virtually all of this money was borrowed in only the last 10 years.
The average college student graduates with more than $30,000 in debt... and by his late 20s has racked up more than $6,000 in credit-card debt. Meanwhile, median earnings for Americans aged 25-34 are $36,000-$40,000.
Can you imagine starting out your adult life with a personal debt- to-income level at close to 100%? What does this say about the state of our economy? What does this say about the state of our culture?
All the signs show that the debt piled on our youth will become another catastrophic bubble in the American economy.
Student debt is at record levels. Total indebtedness doubled from 2009 to 2016. The burden is causing borrowers to cut spending and other forms of borrowing. About one in every four borrowers is delinquent or in default. And 42% of federally owned student loans aren't being repaid as expected or on time.
Jim Rickards, the author of Currency Wars, calls the student debt market the "next subprime crisis."
According to the Wall Street Journal, 33% of student loans are held by subprime borrowers – the riskiest folks.
What does it say about our economy when the youth have become saddled with so much debt that one-third of college graduates will likely default on their loans?
And it's not just college kids who have buried themselves in debt...
U.S. consumers now owe more than $1 trillion on their credit cards. These debts carry interest rates as high as 28% annually.
The third subprime lending bubble poised to cripple the economy is the automotive sector. Most people have no idea how pervasive subprime loans have become in auto lending.
As with mortgage lending, car lending used to be a simple and safe business. Local and regional banks (or finance companies) would provide loans to customers with good credit and a substantial down payment.
The term of the loan didn't exceed the useful life of the car. Under these conditions, auto loans were extremely low-risk. Losses on auto loans have historically been extremely low – less than 2%. Auto loans even performed well in the Great Depression.
Then things got out of control in 2011, after Wall Street firms started buying up auto-lending groups. They changed the terms: extending auto loans up to 84 months (seven years), lowering the down payments (on leases they're next to nothing), and radically lowering the credit scores required to qualify.
Now, more people than ever before are borrowing money to buy cars. Americans now owe more than $1 trillion for auto loans. More than 40% of the adult population has an auto loan, and some of the rates are as high as 20%.
Unbelievably, 37% of this debt is owed by either nonprime, subprime, or deep subprime credits.
We've also seen a big uptick in the amount of subprime auto loans that are being securitized and sold to other investors. These securitizations move credit risk away from the car companies and finance companies and onto investors – the same thing that happened in the housing bubble.
As we know from the recent housing bust... when subprime lending goes too far and becomes too large a percentage of total lending, it can cause overall credit quality to collapse. In the car business, that could cause huge problems going forward, problems big enough to harm our entire economy.
The debt situation in this country has gotten so bad, 73% of Americans now die in debt... leaving behind an average total of more than $60,000.
This debt will create a depression that will be worse than it was in 2008. This time, the government has allowed massive amounts of debt to be piled on the weakest in our society. The poor – and especially the young and poor in our country – have no hope of being able to afford the American dream anymore.
When this bubble breaks, it will be an entire generation of young Americans who will suffer.
Here's what's critical to understand: This kind of debt burden for the poorest Americans is new. The debt load for the poorest 20% of Americans is up nearly 300% in the past 20 years.
Debts of this magnitude cannot be financed normally. Debts that can't be paid won't be paid. In other words: It's not just the size of Americans' debts that's the problem... It's who owes the money that's the bigger concern.
When the rich – a tiny percentage of the population – get in trouble with debt, it's an economic problem. But when the poor and middle class get in trouble with debt – a huge percentage of the population – it's a political problem.
That's what makes a national "Debt Jubilee" inevitable.
The United States has become the largest debtor in human history. It's disgusting that we would leave a burden like this for our children and grandchildren.
The obvious question is: Why on Earth did so many people borrow so much money they have no hope of ever repaying?
You might assume it stems from a lack of personal responsibility or a decline in moral standards in recent years. And that did play a role... There is always a segment of society that wants something for nothing.
But this doesn't explain how this problem could grow so large.
The real reason is something else: the final corruption of America...
Ignore for a moment how impossible it is for us to pay off the debts we have accumulated. We are fast approaching the point where the government cannot even afford to pay the interest on this debt. And that leaves it with one last tool to perpetuate its power...
Regards,
Porter Stansberry
Editor's note: No one believed Porter when he said Fannie Mae and Freddie Mac would go bankrupt... Or when he said General Motors would fall apart... Or that oil would fall from more than $100 a barrel to less than $40. But in each case, that's exactly what happened.
And now, Porter says something new and terrible is unfolding in America.
The "enslavement" of millions of Americans is leading to a political event that is unlike anything we've seen in more than 50 years. We've prepared a presentation where he shares this whole story in detail. Watch it here.