Coming into focus is a fuller picture of the worldwide financial crisis.
Last week, we began looking at Turkey, but only because Donald Trump sent an extraordinary tweet last Friday.
In it, the president broke with tradition and common sense in a remarkable way. He used a crash in the Turkish lira to justify a new attack in the trade war.
Instead of soothing words that might have calmed the crisis situation, his tweet made it worse. And instead of coming to the aid of an ally in difficulty, he piled on.
We had never previously spent even two minutes thinking about Turkey or its finances. But then, after the president roused our curiosity, we saw what we think was a glimpse of the future.
In it, we see huge defaults… stock crashes… chest-pounding… threats and counterthreats… populism… betrayal… trade wars… and currency wars… as the world reckons with $115 trillion in excess debt.
Turkey has only 1% of the world’s GDP, and less than 5% of America’s. Small potatoes, in other words. But a great wall always develops a small crack before it falls down.
The great wall we are looking at is one built by $250 trillion of debt, laid up, a billion here, a billion there, over the last 30 years.
The foundation stones were put in place in 1971, when the final tether between gold and the U.S. dollar was severed… and the greenback was cut off from the real world of time and resources.
Previously, borrowings were more or less limited by savings; savings were more or less limited by earnings; and earnings were more or less limited by the number of hours in the day.
There was plenty of room for excesses and extraordinary popular delusions in the pre-1971 world. But there was also a feedback loop that tended – however imperfectly – to prevent things from getting too far out of whack.
At the end of the day, so to speak, mistakes were corrected.
That feedback loop was made of gold. Number 79 on the periodic table, the quantity of gold couldn’t be readily increased.
Credit may be created by the financial industry. But it is Main Street output that services debt. And as long as money was linked to gold, neither cash nor credit could get too far ahead of the real goods and services the economy could produce.
But then, in 1971, Nixon cut the final thread between gold and the dollar. And the cornerstone of today’s great wall of debt was laid.
After the foundation was in place, it took a few years for people to realize what they had to work with – an almost unlimited supply of credit.
Once people realized that “money” could be gotten readily, their inhibitions about spending it gradually fell away.
“Deficits don’t matter,” said Dick Cheney. “It would be a good thing if we didn’t have [a federal debt ceiling],” chimed Ben “Courage to Act” Bernanke.
“And don’t worry about the stock market,” added Alan Greenspan (or words to that effect). In 1987, he made it clear that the world’s most important equity market would not be allowed to correct excess debt or speculation.
That was the meaning of the “Greenspan Put.” If stocks went down, the central bank would push them back up again.
How? By making more ersatz credit available on even friendlier terms.
And so it was… off to the races!
Communists… crackpots… people who lived in caves and had yet to stand fully upright… were suddenly able to cadge millions from lenders who never earned the money, never saved it, and never really worried much about losing it; after all, there was plenty more where that came from!
Why else would any sane person lend money to a Turk… an Argentine… or Elon Musk?
Why else would anyone lend at negative rates? If you lend at 20%, it takes only five years to break even. If you lend at 10%, it takes 10 years. And at 2%, it takes 50 years. The lower the rate, the more future you need.
But at negative rates, the future becomes meaningless. You’ll never break even.
This is not the real world; this is the phony world concocted by the U.S. dollar and its quack managers.
That is also why lenders – apparently compos mentis, wearing no ankle bracelets, and with no court orders putting their affairs in others’ hands – bought Argentine bonds with 100-year maturities.
One year? One hundred years? It didn’t matter… The future had gone missing.
That’s what happens when a money system gets perverted by fake money. Normally, you do things in anticipation of the consequences.
You save for a rainy day. You turn down a second dessert because you know you will have to get on the scale tomorrow. You leave the pretty woman next door alone because you know her husband has a license for concealed carry.
Actions have consequences! Tomorrow comes. And the neighbor comes looking for you.
The fake dollar distorted the connection between actions and consequences. People could reap what they had not sown. They could invest savings no one had ever earned. They could borrow – big time! – knowing the future (when they would have to pay it back) would never come.
But in the real world, the future does show up… eventually.
And it rolled into the ancient capital of the Eastern Empire last week.
The Turkish lira fell as foreign investors fled and the sun rose over the Bosporus. And Donald Trump added insult to injury with further trade barriers.
Turkey has a GDP of only $900 billion. It has external debt of only $500 billion. These numbers are so small – compared to a $90 trillion world economy… and $250 trillion of debt – that investors shirk it off.
The problem is “contained,” they say, echoing those famous words of Ben Bernanke in September 2007.
Then, it was Lehman Brothers that was in trouble. That crack was tiny, too; Lehman had only $619 billion in debt.
Then, too, there seemed little reason to worry. Ben Bernanke had taken over from Alan Greenspan. The Greenspan Put had become the Bernanke Put. The future could jolly well wait.
And Bernanke did come through. With nearly $4 trillion in extra central bank credit, he succeeded in reviving the wildest fantasies of the bubble era… But not before the wall had come down and the stock market had been crushed under the rubble.
More to come on how Turkey… China… and the USA will reckon with unpayable debt.
Editors note: Clearly, there are many strange things afoot in the world. Distortions of markets, distortions of culture. It’s wise to wonder what’s going to happen, and to take advantage of growth while also being prepared for crisis. How will you protect yourself in the next crisis? See our PDF guide that will show you exactly how. Click here to download it now.