The Coming Supercyclical Crisis - Mauldin
Most of the country, investors, politicians, and the general public assume that the fabled bond vigilantes us old folks talk about are really and truly dead, if they think about it at all.
When the people find out that they are indeed not dead, it will be the most startling resurrection in 2,000 years.
“It truly was an unfettered laissez faire economic world back then. Booms and busts in the economy and the markets tended to be violent because there was not much in the way of government interference. Human nature being what it is, the booms were associated with all kinds of excesses just as they are in modern times. However, these excesses tended to get completely washed out in the downturns. Debtors went bust, banks failed, and balance sheets were cleansed.
“Things changed dramatically after the 1930s’ Great Depression when the government decided that it could not let such a severe contraction happen again.
John here again. It’s important not to sugarcoat the past as somehow ideal. Before modern central banks, the economy resolved imbalances with financial panics, bank runs, and depressions. The Fed and other institutions like the FDIC were founded to soften these wild swings, and they succeeded.
But it’s now clear this stability has a cost. In trying to smooth the cycle with ever easier monetary conditions, the “solutions” allowed enormously destabilizing debt to build. Now the bill is coming due.
The Great Financial Crisis of 2007‒2009 marked an important yet under-noticed shift in this balance. Here’s Martin again.
“Consumers took on an extraordinary amount of mortgage debt between 2000 and 2007 on the mistaken and naive assumption that house prices would keep rising. The inevitable bust in house prices was brutal for over-indebted homeowners and over-exposed lenders. As the collateral for debt evaporated, loan delinquencies and foreclosures soared.
John here. Going deeper, it’s quite insidious how what would once have been private debt is now government debt.
Mortgages are probably the best example. Federal loan programs (Fannie Mae, Freddie Mac, VA, etc.) either directly own or guarantee most mortgage debt.
The credit risk ultimately falls on taxpayers, not the original lenders.
Here’s Martin again.
“The limit to government debt is reached when investors will no longer purchase a country’s bonds at yields that the economy can tolerate or when debt servicing costs crowd out other critical spending.
There are several examples of developed economies that have hit such a debt wall such as New Zealand in the mid-1980s, Canada [and Sweden—JM] in the early 1990s and Greece in the years after 2009.
We saw it again just last year in the Silicon Valley Bank and Signature Bank failures.
Remember bank “deposits” are actually loans from you to the bank.
The decision to pay off depositors in full including big businesses who kept accounts far above the FDIC limits was really a kind of loan forgiveness.
Everyone got bailed out of what should have been losses.
https://www.mauldineconomics.com/frontlinethoughts/the-coming-supercyclical-crisis
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