In September 2017, legislators will meet to try to raise the national debt ceiling….
which currently stands at just under $20 trillion ($19.809 trillion to be exact), before the September 29 deadline. Regular readers who have been following this blog will be well aware of the true scale of America’s debt situation….
If the United States fails to raise the national debt ceiling, the potential consequences could be punishing. Fitch Ratings has warned that such a failure could threaten the United States’ sovereign debt rating. S&P stripped the US of its AAA sovereign debt rating right after the 2011 debt ceiling debacle.
Of course, it is highly unlikely that legislators will fail to raise the debt ceiling. But consider that while raising the debt ceiling may solve immediate issues, it does nothing for the long term. In October 2013, gross national debt jumped by $328 billion in one day and continued to increase. In November 2015, it jumped $340 billion in one day after the ceiling was increased again; two weeks after the increase, it had soared by $520 billion.
Figure 1: Note the highlighted areas showing the increase in debt after debt ceiling increases
So how much will our national debt increase once the debt ceiling is raised yet again in September? $300 billion? $500 billion? $1 trillion? If historical trends are anything to by, the increase will happen fast, and it will only keep growing from there.
Of course, while short term disaster may be averted, the increase in debt will only serve to further inflate our asset bubble. Should the bubble pop, its magnitude will also be amplified.
And there is real cause of worry that our asset bubble may not last much longer. Across the ocean, America’s biggest creditor, China, is facing almost similar problems.
Its corporate debt has reached $18 trillion, or 169% of GDP. It’s the largest corporate debt pile in the world. The New York Fed warned back in February that China’s credit boom “has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy.”
The IMF recently released another report (PDF) warning again about China’s debt situation noting “that the current trajectory of the economy could eventually lead to a sharp adjustment.”
And Charlene Chu, a top China analyst whose previous outlandish views such as Chinese banks concealing risky credit off-balance sheet have become consensus among analysts, is sounding the alarm at China’s bad debt levels. She estimates that real non-performing loan levels will reach $7.6 trillion by end-2017 more than five times official estimates and implying a staggering bad debt ratio of 34%, compared to official figures of 5.3% at end-June 2017.
Of course, Chu’s estimates rely on the assumption that an economic crash will eventually occur in China. Without it, credit losses would be far smaller than her estimates. Nevertheless, we should all be cautious of the dire consequences should China’s debt bubble pop; considering that their debt bubble inflates America’s own.
And now the Chinese authorities are clamping down in three key areas; real estate, hotels, and entertainment. In an effort to tamp down on their growing debt, China’s State Council has issued guidelines for overseas investment and notes that real estate, hotels, and entertainment investments have been moved to the ‘restricted’ list.
How big of a deal is this, you ask?
Dealogic notes that Chinese outbound M&A targeting US companies has declined by 65% in 2017 due to increased regulatory scrutiny. China has acquired $17 billion in US commercial real estate over the past 24 months but that pace is not expected to keep up. Cushman & Wakefield, a commercial real estate services company, noted that China was the number one foreign investor in US commercial real estate in 2016 (PDF).
Even without China’s debt bubble bursting, the increased regulations might mean the sinking of our commercial real estate industry. And if China’s debt bubble does indeed burst; the repercussions would affect America and the entire world.
With two of the world’s largest economies caught in an unending cycle of increasing debt, intelligent investors are making strategic investments to hedge their bets. One method of doing so is via precious metals investments, which act as a natural hedge to the economy as a whole. And unlike the dollar or yuan, you can’t just print them off the printing press.
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