The Debt Bubble

There are two ways to conquer and enslave a nation. One is by the sword.. The other is by debt.  - John Adams 1826

I wanted to revisit an older post in order to unload a massive source of irritation.  This was triggered by commentary by the widely read Charles Hugh Smith, who was speculating on whether or not "derivatives deleveraging" is causing a rally in the stock market.  In addition, since my last discussion of this topic, I have seen several news reports which referred to system "deleveraging" and "consumer deleveraging."  Hmmm....

This was yesterday's headline on Marketwatch after the consumer credit report was released:

Consumer credit surges again in December  U.S. consumers increased their debt in December by a seasonally adjusted $19.3 billion, the Federal Reserve reported Tuesday. The increase is just below November's $20.4 billion pace which was the biggest gain in a decade. Monthly debt rose by a 9.4% pace in December, after a 9.9% pace in the prior month. The increase in consumer credit in December was much larger than expected by Wall Street economists  LINK

Where the hell is the deleveraging to which everyone alludes?  For the year, consumer credit rose 3.7%, the largest increase since 2007

Here's a chart of total non-financial/non-Government debt in our system (this would everything but banks, insurance companies, etc, Treasury debt and State/local Govt debt):

The last time around on this topic I showed Federal Govt debt and total consumer debt.  The consumer debt for sure showed a very small decline over the 2 years but it was more than offset by the increase in Treasury debt.  It can be argued convincingly that a majority of the consumer debt "decline" was simply an accounting game in which the banks wrote down some of the mortgage debt that was ultimately transferred to the Government and the Fed.  The Fed transfer is of course back-stopped by the Treasury.  In other words, consumer debt in Truth never really declined.   I'm still scratching my head over why all these analysts and media morons keep referring to "deleveraging" in reference to the consumer...

Here's a timely quote from the latest issue of the Privateer: 

From October to November 2011, US household borrowing on credit cards, car loans, student loans etc jumped 10 percent. This burst of “consumer spending” was welcomed by many as a sign of returning economic “health.”  In reality, it is an infallible sign of growing desperation in the US middle class. This spike in borrowing, which includes a huge increase in borrowing from retirement plans, is being done simply for day to day expenses. The result so far has been the biggest one month increase in US consumer indebtedness in a decade. Without income growth, this cannot continue.

As for Charles Hugh Smith's reference to "derivatives deleveraging,"  it's utter nonsense and results from sloppy due diligence.  By the last figures I saw, the amount OTC derivatives being held by Too Big To Fail banks increased by over 25% since the 2008 financial crisis.  Supposedly the Dodd-Frank abortion was supposed to make the bank derivatives business more transparent and less risky, but the big banks are already finding ways around it - as predicted by this blog.  In fact, I said at the time Dodd-Frank was being finalized that the legislation would actually enable more bank risk-taking because regulators and the public in general would carry on as if Dodd-Frank provided needed protections - which is does not.  Dodd-Frank will ultimately end up costing the middle class taxpayer $100's of billions if not trillions after the next big round of bank bailouts from debt and derivatives disasters ensues.  Do your god damn homework, Charles.  I stopped reading him several years ago because I think his commentary has no value-added and his analysis and fact-checking sucks.

The Truth of the matter is that both domestically here in the U.S. and globally, the amount of outstanding obligations is going up at an increasing rate - it is accelerating.  When you unwind all of the gimmicks being employed to mask part of this increase - like asset hypothecation/rehypothecation - the rate of increase is going parabolic.   A global debt/liability bubble.  It's truly frightening.  The tautological "offset" to this frightening rate of debt accumulation will be BOTH the parabolic increase in the "de facto" money supply AND a parabolic increase in the price of gold/silver.  I say "de facto" because I am referring to both the currency in circulation plus the amount of money made available by credit.  The ECB balance sheet has spiked higher than the Fed balance sheet.  Make no mistake, the Fed will correct that shortly in order to devalue the dollar in relation to the euro.  That's why the big banks are record short the euro via futures.  Japan is printing to infinity, as is China.  It's going parabolic.

Given that we are now in the serious "bubble" phase of money printing and debt accumulation, it makes sense that the serious "bubble" phase for the rise in the price of gold and silver is still ahead of us.