Juggling Dynamite

The same investment banking types educated in the same schools have been advising the same reckless leveraging practices all over the world over the past 15 years. They have taken the same textbook strategies that rapidly grew, and then blew up Enron in 2001, and scaled it over the rest of the planet.

No surprise then, that the same debt disease has now inflicted households, companies, cities, states and countries. No blood from stones, the revelation of unpayable debts is spreading. Of course, since the first wave of crisis hit in 2007, the architects of this disaster have in large managed to download much of their own exposure onto taxpayer-backed government agencies; maniacally brilliant for them. Devastating for everyone else.

In the next phase of the crisis, it will become clear that global debt is today many trillions bigger than 2008, and our governments and central banks are completely out of bailout ability.

Puerto Rico’s Gov. Alejandro García Padilla told the NYT his island nears a “death spiral” economically, with CNBC’s Kate Kelly. Here is a direct video link.

Also see, Seniors going bankrupt in soaring numbers:

According to Statistics Canada’s most recent numbers, in 2012, 42.5 per cent of people aged 65 and over still had debt. That’s a stunning increase of 55 per cent since 1999.

Bankruptcy trustee Doug Hoyes blames the lingering debt largely on our addiction to low interest loans.

“If you’ve got decent credit, you can go out and get a mortgage for 2.5 per cent. So why not be buying the bigger house?” he says. “Today we don’t need to save because we all have a line of credit.”

The Chinese economy has been deflating since the US consumer debt bubble peaked and burst in 2007.  In the first quarter of 2015, official growth averaged 7%-less than half the 2006 peak–while real life indicators like energy and freight use suggest that actual growth in China might be 3%.  As the economy has swooned, policy makers have turned to the usual debt tricks seeking to entice borrowing and speculating as a way to add ‘liquidity’ and soak up excess capacity.  It has not worked, but it has seduced many Chinese workers and companies down a time worn path to financial demise.

Greek default news this morning is further reason to rattle the Chinese stock market which was already crazy fragile.  Bubbling Chinese stocks had fallen 20% in the past couple of weeks, and lost a further 3% today.  About 10% of Chinese households own some amount of stocks (compared with 50% in America).  Still in a population of extremely modest means and perilous, world-record-financial-leverage/debt, the hit to sentiment in recent losses is no small matter.  See:  China’s economy not immune to market sickness.

All of which is particularly damaging because home prices have already been falling in China for over a year, and working people have lashed themselves to the debt-rack there in epic proportions. Only the Chinese can make Canadian households look stable in comparison.  An article this weekend in the Globe, summed the situation poignantly, see: China’s middle-class dream on shaky ground:

Among the many ambitious but debt-burdened Chinese millennials I met this week, one of them, a 28-year-old air-conditioning engineer named Li Hongyan, is pretty much the living and breathing embodiment of the new, post-export Chinese economy: Ambitious, highly risky, mildly panicked, tumultuous and impossible for his authoritarian government to predict or manage.

I met Mr. Li in the claustrophobia-inducing dormitory room he shares with his fiancée in northern Beijing, taking part in the suddenly popular Chinese activity of worrying about real estate.

It has been five months since Mr. Li used years of savings to buy his (and his entire extended family’s) first house – a 650-square-foot apartment in a slightly worn-out building.

His flat cost him the until-recently-unthinkable sum of $519,000, or 22 times his salary. On top of that, he borrowed most of the 40-per-cent down payment from a variety of friends and relatives; he, like many of China’s millennials, is leveraged up the wazoo.

His mortgage payments on the little apartment, at 5.3-per-cent interest, are $2,400 a month; his salary is $2,000 a month, which should make him comfortably middle-class, except that he really can’t afford the property that goes with it. So he’s renting it out, but can only get $940 a month for it, so is still paying the largest share of his earnings to support a house he cannot afford to live in.

Masses of people the world over are steadily awakening to the reality that ‘get rich quick’ schemes sold to them the past few years as the path to prosperity, have brought them only bankruptcy–fleeced by the bankers, salespeople and politicians that they looked to for advice.

The Supreme Court of the United States ruled today that same-sex couples have the right to marry in America, at long last.  As with all major social evolution, early advocates attracted anger from all sides.

After new Supreme Court rulings on gay marriage, Fareed Zakaria interviewed Andrew Sullivan about gay rights, then & now.  Here is a direct video link.