Something “Big and Stupid” Is Coming...

It’s Unavoidable [The Daily Reckoning] October 03, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Something “Big and Stupid” Is Coming… - “The debt crisis may not be imminent, but it is unavoidable”… - Nice and easy did it, but not anymore… - Japan, only bigger… [You have (1) item on hold at our warehouse:]( Item #: [51987]( Status: On hold Value: Approx. $300 Claim by date: 10/06 at 11:59 PM Our Head of Customer Experience will show you what you need to do. [Click Here Now]( Las Vegas, Nevada [Brian Maher] JIM RICKARDS Dear Reader, With debt levels reaching all-time highs in major developed and developing economies, and with debt-to-GDP ratios also in record territory (not including contingent liabilities such as Social Security, health care and other entitlements, which make matters worse), it seems time to consider just how nations will deal with this problem. The debt crisis may not be imminent, but it is unavoidable. When it happens, it may present the greatest financial disaster of all time. It’s never too soon for investors to consider the fallout. When you issue debt in a currency you print, there's no need for default in the sense of non-payment. You can just have the central bank buy the debt (by printing money). This is the situation today in the U.S., Japan, the U.K. and the European Monetary Union (the countries that use the euro). They all have huge debt burdens, but they all have central banks that can simply buy the debt by printing money to avoid default. Non-Payment Is Not the Issue There are many bad consequences to printing money and storing up debt on central bank balance sheets, but non-payment of debt is not one of them. This is the mantra of the Modern Monetary Theorists (MMT) and their thought leader Stephanie Kelton. In my view, MMT is garbage as economic policy, but the no-default tenet is valid. George Soros says the same thing. That said, we are well past the point where the debt can be managed with real growth. That threshold is about a 90% debt-to-GDP ratio. A 60% debt-to-GDP ratio is even more comfortable and can be managed. Unfortunately, the major reserve currency economies are all well past the 90% ratio as are those of many smaller countries. The U.S. ratio is 134%, an all-time high. The U.K. ratio is 102%. France is 111%. Spain is 112%. Italy is 145%. China reports a figure of 77% but this is highly misleading because it ignores provincial debt for which Beijing is ultimately responsible. China’s actual figure is over 200% when provisional debt is included. [Your Credit Card: Declined?]( [Click here for more...]( Take a moment and picture this scenario: The line at the gas pump is getting longer as you insert your credit card for the second time. You decide to head in and ask the cashier what’s going on. There’s a long line inside. The woman in front of you looks frustrated. Everyone does. “There’s nothing I can do. You’re declined,” the cashier says to the man at the front of the line. It’s not just you. Everyone is declined. Something doesn’t seem right. A sinking feeling sets in as you realize something has gone terribly wrong. [Click Here Now For This Urgent Prediction]( The champion debtor is Japan at 261%. The only major economy with a halfway respectable ratio is Germany at 67%. It’s Germany’s misfortune that they are probably responsible for the rest of Europe through the ECB Target2 system. All these countries are headed for default. But we must consider the different ways to conduct a default. There are three basic ways to default: non-payment, inflation and debt restructuring. You can take non-payment off the table for the reason mentioned above — you can always just print the money. The same goes for restructuring. Inflation is clearly the best way to default. You pay back the money in nominal terms, but it’s worth very little in real terms. The creditor loses and the debtor countries win. Nice and Easy Does It The key to inflating away the real value of debt is to go slowly. It's like stealing money from your mother's purse. If she has $50 and you take $40, she'll notice. If you take one dollar, she won't notice. But a dollar stolen every day adds up over time. This is what the U.S. did from 1945–1980. At the end of World War II, the U.S. debt-to-GDP ratio was 120% (about where it is now). By 1980, the ratio was 30%, which is entirely manageable. Of course, nominal debt and GDP soared, but nominal GDP went up faster than nominal debt, so the ratio fell. If you can keep inflation around 3% and interest rates around 2% and exert fiscal discipline (which we did under Eisenhower, Kennedy, Nixon and Ford), the nominal GDP will grow faster than nominal debt (due to the Fed capping rates). [Biden’s 2024 Presidential Run Doomed To Fail – Thanks To New Inflation Surge?]( [Click here for more...]( Biden has given America its worst inflation crisis in over 43 years. But if you think the worst of inflation is over, think again… A deadly new “Second Wave” of inflation is coming – one which could send the price of food, gasoline, housing and more skyrocketing much higher than they are today. Will this new crisis mean Biden’s 2024 Presidential run is doomed to fail? [Click Here To See My Urgent Warning]( If you improve the ratio by, say, 2% per year and keep it up for 35 years (1945–1980), you can cut the ratio by 70%. That's what we did. The key was to do it slowly (like stealing from your mom’s purse). Almost no one noticed the decline in the real value of money until we got to the blow-off stage (1978–1981). But by then it was mission accomplished. So there are two ways to deal with excessive debt: fiscal discipline and inflation. From 1945–1980, the U.S. did just that. If you run inflation at 3% and interest rates are 2%, you melt the real value of debt. If you exert fiscal discipline relative to GDP, you decrease the nominal debt-to-GDP ratio. We did both. The reason the debt-to-GDP ratio is back up to 134% is that Bush45, Obama, Trump and Biden ignored the formula. Since 2000, fiscal policy has been reckless so the formula doesn't work. The problem isn't really "money printing" (most of the money the Fed prints just comes back to the Fed as excess reserves, so it doesn't do anything in the real economy). The problem is that nominal debt is going up faster than nominal GDP, so the debt-to-GDP ratio goes up. This dynamic will be made much worse by the huge increase in interest rates over the past 18 months. You can't borrow your way out of a debt crisis. We have also been unable to generate much inflation. Inflation ran below 2% for almost all of the 2009–2019 recovery. Japan Writ Large Looking at the global picture, it’s important to understand that Japan is just a bigger version of the U.S. They don't have fiscal discipline and they can't get inflation to save their lives. The only way out for Japan is hyperinflation, which will come but not yet. Japan can probably keep the debt game going for a while. The crash will come when the currency collapses. When I started in banking, USD/JPY was 400. Those were the days! A debt crisis is on the way. Something big and stupid (in the words of the brilliant analyst Stephanie Pomboy) is coming from policymakers to address the issue. But the solution won't be a policy and it won't be a plan. A crisis will just happen almost overnight and seem to come from nowhere. But it will come. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. Take a close look at this photo: [click here for more...]( What you see here is a new [“alternative” currency]( that’s taking America by storm. It could ruin Biden’s CBDC plans. It’s already popping across the nation… including in Utah, New Hampshire and Nevada. Most shocking of all, this new “alternative” currency is made of REAL GOLD… making it the perfect money. [If you’re worried about Biden Bucks then you must check out this new “alternative” currency immediately…]( Watch this [short two-minute video]( where Jim Rickards breaks down how it works… and reveals a FREE offer to send you this new gold currency. [Click here now for all of the details.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. 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