Debt is the great palliative that has enabled the US and other major economies to escape reality, at least for a time. Ayn Rand described such behavior:
You can avoid reality, but you cannot avoid the consequences of avoiding reality.
It is possible to steal from tomorrow to improve today but only at the cost of having less of a future. That is what both nations and citizens have been doing. The ability to continue doing so has about run its course. The damage done to the future is real and will result in substantially lower living standards for those who foolishly believed that spending beyond one’s income was a miracle created by John Maynard Keynes.
The ability to continue the debt charade is nearing its end. As it slows down and reverses, the poverty and hardship that is covered up will surface. When that occurs, another Great Depression, likely to be known as The Great Depression or The Greater Depression in the history books yet to be written will emerge.
For those wanting to learn more about the emergence of debt as an economic palliative and its implications for markets, a refreshing interview with Fred Sheehan is available at The Daily Bell. Here is one of Mr. Sheehan’s observations:
All asset markets are disengaged from their foundations. They have been elevated by governments and their central banks. Central banks have done so by prodding savers into stocks and bonds. They have set artificially low borrowing rates. These artificially low rates are the source of so many perversities that are not immediately evident but have fractured the structure of companies, industries and the stock market. With Treasury rates so low, the issuance of investment grade, junk, covenant lite, PIKs and almost every other category of sloppy finance that met its maker in 2007 set new world records in 2013. The present and future consequences should be obvious.
Mr. Sheehan captures in one sentence my opinion of today’s markets:
The stock market is a mood ring for faith in the Fed.
Read this article if you want to learn some history and honest economics and understand the risks inherent in today’s financial asset markets.