Looming debt bubble crisis watch

[Leonhard]

From what I understand, you don't live here in the states, correct? Either that or you're wealthy, and so you're unaffected by inflation and debt burdens.

Try talking to common folks who live here that are struggling right now, and I bet you'd get a different opinion. And it's going to get worse for them. This subject sort of takes us to this thread, where I talked about the have-nots becoming angry and desperate, thus is why we're having these unusual looting crime sprees here in the states. All of that stems from economic conditions.

Yeah I'm sympathetic to people having a hard time. Just saying that it takes a bit more for it to reach over here. We did feel the 2008 recession though, there were quite a few years after I graduated where I couldn't get a job. Thankfully that's over and done with. The recent inflation due to the Ukraine war made things a bit more expensive for a while, I compensated by doing what my parents did - potatoes, potatoes potatoes.

[seanD]

Yeah I'm sympathetic to people having a hard time. Just saying that it takes a bit more for it to reach over here. We did feel the 2008 recession though, there were quite a few years after I graduated where I couldn't get a job. Thankfully that's over and done with. The recent inflation due to the Ukraine war made things a bit more expensive for a while, I compensated by doing what my parents did - potatoes, potatoes potatoes.

The rising prices wasn't caused by the war, it was caused by a combination of central bank money printing and disrupted supply chains (due to covid not Ukraine), which is the very definition of inflation (i.e they were "inflating" the money supply). This created more demand than supply could handle. All the western central banks were doing it in 2020, and now they're paying the price.

[Leonhard]

The rising prices wasn't caused by the war, it was caused by a combination of central bank money printing and disrupted supply chains (due to covid not Ukraine), which is the very definition of inflation (i.e they were "inflating" the money supply). This created more demand than supply could handle. All the western central banks were doing it in 2020, and now they're paying the price.

It definitely made milk three times more expensive.

[Chaotic Void]

Personally, I'm wondering how hard the looming Student Loan Crisis will affect the economy. Thankfully, I paid mine off back in 2017, but I was also INCREDIBLY fortunate (I had a cheap living situation and I leveraged a rather hefty Tax Credit).

[Sparko]

Personally, I'm wondering how hard the looming Student Loan Crisis will affect the economy. Thankfully, I paid mine off back in 2017, but I was also INCREDIBLY fortunate (I had a cheap living situation and I leveraged a rather hefty Tax Credit).

What? Canada doesn't pay for your college?

[Chaotic Void]

What? Canada doesn't pay for your college?

Where do you think I got my loan from?

[Sparko]

Where do you think I got my loan from?

I thought Canada paid for all that stuff. Healthcare, education, maple syrup.

[Chaotic Void]

I thought Canada paid for all that stuff. Healthcare, education, maple syrup.

Nah, you still gotta pay for all that... Sometimes out-of-pocket, sometimes via taxes.

[Thoughtful Monk]

Personally, I'm wondering how hard the looming Student Loan Crisis will affect the economy. Thankfully, I paid mine off back in 2017, but I was also INCREDIBLY fortunate (I had a cheap living situation and I leveraged a rather hefty Tax Credit).

That is the question we're struggling with at work. No impact is certainly not the right answer. A total economic catastrophe isn't correct either. Since payments are only just restarting and the Biden administration is all in on alleviating the impact, it's going to be a bit before we see the impact. I predict it's not until December or January before we start seeing it.

This whole economy doesn't play by the previous rules. I read multiple articles from different sources, and I get different answers. I will not claim to be an expert. For what it's worth, here's my take.

First, an underreported story is the increase in corporate bankruptcies. I think that will continue as corporations discover they can't manage their debt anymore at these higher interest rates. They may also have trouble finding someone to refi their debt with as banks cut back on lending. I think there will be some more bank failures but not on the scale of 2008-2012. This eventually will turn into more unemployment and a drag on the economy.

Next, what is the Fed going to do about rate. I'm going against consensus here, but I see a rate increase at their next meeting. Many people are looking at a cooling employment picture and think the Fed will hold off. I think they see the jump in inflation and increase rates. I don't see when they are going to start lowering rates. I'm also convinced that rates won't come down as fast as they went up. I'm in the camp that the Fed will raise rates longer than they should and hurt the economy as a result.

Government will have their impact. I think they will start sucking more money in to fund themselves. The government is spending which helps. However, I'm not convinced government spending is as economically beneficial as consumer or corporate. There is going to be a lot of noise about this, and in the end little impact.

That leaves us with the consumer. As discussed, they are going to be somehow impacted by student loan debt. I think the bigger impact is the raising rates making their credit card debt (now at a record level) harder to maintain. Higher loan rates in general are going to cut back their spending as they have to service the debt or not take in to say, buy a car. Money that could have gone to discretionary spending is now going to debt service. Personal bankruptcies are probably going to start rising. If unemployment starts going up, that's less income. I've read differing views on how much stimulus money is still in the bank. My take is it's probably mostly gone. I think the consumer is going to lose their ability to carry the economy.

I think over the next few months, we are going to slide into a recession.

[rogue06]

That is the question we're struggling with at work. No impact is certainly not the right answer. A total economic catastrophe isn't correct either. Since payments are only just restarting and the Biden administration is all in on alleviating the impact, it's going to be a bit before we see the impact. I predict it's not until December or January before we start seeing it.

This whole economy doesn't play by the previous rules. I read multiple articles from different sources, and I get different answers. I will not claim to be an expert. For what it's worth, here's my take.

First, an underreported story is the increase in corporate bankruptcies. I think that will continue as corporations discover they can't manage their debt anymore at these higher interest rates. They may also have trouble finding someone to refi their debt with as banks cut back on lending. I think there will be some more bank failures but not on the scale of 2008-2012. This eventually will turn into more unemployment and a drag on the economy.

Next, what is the Fed going to do about rate. I'm going against consensus here, but I see a rate increase at their next meeting. Many people are looking at a cooling employment picture and think the Fed will hold off. I think they see the jump in inflation and increase rates. I don't see when they are going to start lowering rates. I'm also convinced that rates won't come down as fast as they went up. I'm in the camp that the Fed will raise rates longer than they should and hurt the economy as a result.

Government will have their impact. I think they will start sucking more money in to fund themselves. The government is spending which helps. However, I'm not convinced government spending is as economically beneficial as consumer or corporate. There is going to be a lot of noise about this, and in the end little impact.

That leaves us with the consumer. As discussed, they are going to be somehow impacted by student loan debt. I think the bigger impact is the raising rates making their credit card debt (now at a record level) harder to maintain. Higher loan rates in general are going to cut back their spending as they have to service the debt or not take in to say, buy a car. Money that could have gone to discretionary spending is now going to debt service. Personal bankruptcies are probably going to start rising. If unemployment starts going up, that's less income. I've read differing views on how much stimulus money is still in the bank. My take is it's probably mostly gone. I think the consumer is going to lose their ability to carry the economy.

I think over the next few months, we are going to slide into a recession.

Inflation was slowly but surely dropping these past several months but that appears to have changed as well. FWIU, it went up 1.4% in the past month.

[Thoughtful Monk]

Inflation was slowly but surely dropping these past several months but that appears to have changed as well. FWIU, it went up 1.4% in the past month.

I remember something like that. It's why I said the Fed was going to see rising inflation and up rates.

[Chaotic Void]

That is the question we're struggling with at work. No impact is certainly not the right answer. A total economic catastrophe isn't correct either. Since payments are only just restarting and the Biden administration is all in on alleviating the impact, it's going to be a bit before we see the impact. I predict it's not until December or January before we start seeing it.

This whole economy doesn't play by the previous rules. I read multiple articles from different sources, and I get different answers. I will not claim to be an expert. For what it's worth, here's my take.

First, an underreported story is the increase in corporate bankruptcies. I think that will continue as corporations discover they can't manage their debt anymore at these higher interest rates. They may also have trouble finding someone to refi their debt with as banks cut back on lending. I think there will be some more bank failures but not on the scale of 2008-2012. This eventually will turn into more unemployment and a drag on the economy.

Next, what is the Fed going to do about rate. I'm going against consensus here, but I see a rate increase at their next meeting. Many people are looking at a cooling employment picture and think the Fed will hold off. I think they see the jump in inflation and increase rates. I don't see when they are going to start lowering rates. I'm also convinced that rates won't come down as fast as they went up. I'm in the camp that the Fed will raise rates longer than they should and hurt the economy as a result.

Government will have their impact. I think they will start sucking more money in to fund themselves. The government is spending which helps. However, I'm not convinced government spending is as economically beneficial as consumer or corporate. There is going to be a lot of noise about this, and in the end little impact.

That leaves us with the consumer. As discussed, they are going to be somehow impacted by student loan debt. I think the bigger impact is the raising rates making their credit card debt (now at a record level) harder to maintain. Higher loan rates in general are going to cut back their spending as they have to service the debt or not take in to say, buy a car. Money that could have gone to discretionary spending is now going to debt service. Personal bankruptcies are probably going to start rising. If unemployment starts going up, that's less income. I've read differing views on how much stimulus money is still in the bank. My take is it's probably mostly gone. I think the consumer is going to lose their ability to carry the economy.

I think over the next few months, we are going to slide into a recession.

Yeah, the economy has been flipped on it's head and it's anybody's guess as to what will happen next. I definitely agree the incoming Student Loan Debt problem isn't going to be the Economy Imploding event a lot of people think it is, but it's going to hit pretty dang hard regardless. I think Debt Forgiveness was a step in the right direction, but Biden's plan didn't go far enough (and would be executed poorly if it actually passed).

The Middle Class, if it hasn't already, is going to become non-existent as long as Cost of Living keeps going up and the buying power of currency keeps declining. Some people are already One Bad Month away from being homeless, I can't imagine how things will be in a recession. Financial Austerity- Corporate, Government, and Individual alike- is inevitable, but I think if we embrace it now, we'll have to maintain it for less.

[Thoughtful Monk]

Well, I may have been on to something after all. Wednesday, the markets slide and the news I read said it was because the markets were jittery because the Fed might hike rates after all. I'm still thinking at least two more rate hikes before we see a rate drop.

The other item I haven't factored in is a decline in the Chinese economy. It will spill into the US. I'm not sure how. Also makes for a more unstable world as I fear a China in distress more than a China in good-times.

[seanD]

Why does the Fitch downgrade matter?

When there aren't enough buyers, yields on the bonds have to rise to attract more buyers, which automatically makes the bonds risky because the debtor (the US) has to pay more money to cover the interest. The general principle is that the higher the yield on a bond, the riskier it is. It's not rocket science and most people understand this concept. When you invest in a higher risk asset, generally speaking the higher the yield you're going to get.

Because of a barrage of US treasury bonds spilling onto the market, you obviously need more and more buyers, but you can't force buyers to buy these bonds, even though confidence in US bonds in the past has been taken for granted as the least risky assets to buy. As a result, everyone, including most economists, have developed a remarkable hubris about how safe these assets are. But yields are skyrocketing anyway because the buyers know the debt is now too risky. It has to do with the fact that the buyers know the debt is much greater than there are enough buyers in the market for the debt they're creating.

The fact many people are expecting a recession doesn't help the problem, but this is not an essential part of the problem, so don't be distracted by this.

Coupled with this flood of treasuries because of crazy government spending, you have both foreign elements also dumping bonds onto the market, as well as the Fed (Federal Reserve) itself dumping bonds by offloading its balance sheet...

10-year and 30-year Treasury yields rise to their highest levels since 2007

The jump in rates has rekindled talk about market "bond vigilantes," a term coined by economist Ed Yardeni to describe the impact when fixed income investors leave the market because of worries over U.S. debt.

Persistently high fiscal deficits are one factor in the rising costs of borrowing. Public debt has risen past $32.3 trillion this year. Debt has risen to nearly 120% of total gross domestic product.

"The worry is that the escalating federal budget deficit will create more supply of bonds than demand can meet, requiring higher yields to clear the market; that worry has been the Bond Vigilantes' entrance cue," Yardeni wrote Tuesday morning in a note titled "The Bond Vigilantes Are On The March."

"Now the Wild Bunch seems to have taken full control of the Treasury market; we're watching to see if the high-yield market is next," he added. "We are still counting on moderating inflation to stop the beatings in the bond market."

Why will it get worse? Because we know US government will never EVER stop spending, our biggest creditor will probably not stop dumping their treasury bonds (as the cold war continues), and, unless the Fed ignores fighting inflation and reverses course, the Fed won't stop offloading their own balance sheet.

[seanD]

And the debt market carnage continues...

Treasury yields tick higher after inflation data

And the brilliant economic mind of Janet Yellen tells us we can afford MORE debt and fund multiple wars at once.

The correlation with inflation is simply this: If inflation continues to be stagnant or even keeps rising, the Fed will be less likely to reverse course and initiate QE (print money to buy bonds), which means investors in bonds are without government stability and assurance (insurance). IOW, bond investors know they won't get government welfare in the event the bond market continues to implode because of all the debt.