The Economy. Strong or House of Cards? You decide.
It was Sunday, September 14, 2008 10 years ago ...
My friend Jeff called me and told me to turn on the television—where I saw dozens of people on the streets of Manhattan filing out of a skyscraper carrying boxes full of their office junk. They were all employees of Lehman Brothers, one of the largest investment banks in the world.
Sept 14, 2008. A financial analyst carries a box out of the US investment bank Lehman Brothers offices
Lehman was hours away from filing bankruptcy in what would go down as THE biggest bankruptcy in US history.
The next day the US stock market tanked. And for most of the next several weeks, all global financial markets were a roller coaster of surreal panic and chaos.
I don’t know if you can remember the general mood back then. I can. It was fear. People were terrified of what was happening in the economy. The real estate market had dried up. The stock market had crashed. Some of the most hallowed financial institutions in the world went bust in the blink of an eye. It’s now officially been a decade since the collapse.
And the typical sentiment among economists, politicians, and central bankers is that the economy has come roaring back.
There’s certainly a lot of evidence to support this assertion—
Several financial markets around the world have hit all-time highs. Stocks. Real estate. Bonds. They’re all generally selling for record high prices.
Earlier this week the US Census Bureau announced that median household income in the Land of the Free had increased by 1.8% between 2016 and 2017. (That’s hardly a life-changing pay raise for workers… but it’s better than nothing.)
Governments around the world, from the US to Western Europe, are seeing strong tax revenue. And the global economy is certainly growing.
In the US, for example, GDP has increased from $14.8 trillion just prior to Lehman’s collapse ten years ago, to $20.4 trillion today, an increase of 38%.
These are all good signs. And if that’s all you look at, it certainly seems like everything’s all good.
But remember that great F. Scott Fitzgerald quote: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.”
So let’s look at the other side of things.
Sure, financial markets have increased. Wages have (barely) increased. Economic output has increased. But what’s really increased? DEBT.
Look at the US Market as a classic example: US GDP is up 38% over the past decade. Great. But over the same period, the US national debt has increased 122%! In other words, in the last ten years, the US national debt increased by more than $3 for every $1 increase in GDP. It’s brilliant! And it’s not just Uncle Sam. Overall government debt across the world has TRIPLED since Lehman’s collapse to $63 trillion…
… and that doesn’t count their unfunded liabilities (like pension obligations, or the $40+ trillion that the US government owes its taxpayers for future Social Security benefits).
Individuals are also loaded up with debt. Student debt. Consumer debt. Auto debt. They’re all at record levels. So is corporate debt.
And a lot of that new debt, by the way, is total garbage. As we’ve discussed before, there are insolvent, money-losing companies that have NO hope of paying back their debts that are able to borrow money at super-low interest rates. Plus there’s nearly $10 trillion of debt issued by insolvent governments at NEGATIVE rates. It’s absurd.
So what else has increased a LOT in the past 10 years?
Money. Literally, the amount of money in the financial system is near an all-time high. Following Lehman’s collapse, the Federal Reserve and other central banks around the world created trillions of dollars out of thin air. And in the process they slashed interest rates to historically low levels. US interest rates were basically at zero for nearly a decade. In Europe and Japan, rates even turned NEGATIVE.
This is the really interesting part… because… these are precisely the factors that heavily contributed to the Lehman collapse:
In 2000 there was a big recession. The stock market plunged and unemployment jumped. Then 9/11 happened, and the economy sank even more. So central banks started printing tons of money and slashing interest rates in the early 2000s.
And as a result, housing prices went through the roof. Stock markets soared. Money was cheap and plentiful… so EVERYONE started borrowing.
A mountain of debt soon followed. Mortgage debt. Corporate debt. Credit card debt. They even created new types of debt which quickly became some of the most popular investments among financial institutions (like Lehman Brothers). And a lot of this debt was total garbage. Worthless. Warren Buffet referred to these financial products (debts repackaged as financial Weapons of Mass Destruction.) People with no hope of paying their loans were able to borrow money for nothing.
There’s a famous story of a homeless guy named Johnny Moon who was able to borrow hundreds of thousands of dollars back in the early 2000s to ‘invest in real estate’. It was totally ridiculous. Yet almost everyone was convinced that the economy was strong and the boom would last. It didn’t. And ten years ago the collapse took all the ‘experts’ by surprise.
Now, a decade later, the experts once again agree that it’s all rainbows and buttercups.
They believe they fixed a problem caused by too much bad debt by facilitating record levels of even worse debt. They believe they fixed a problem caused by too much money in the system by injecting trillions of dollars of new money into the system.
They believe they fixed a problem caused by artificially low interest rates by slashing interest rates to the lowest levels we’ve ever seen in all of human history. They also seem to believe that this time will somehow be different.
Frankly it seems a bit… oh, what’s the word… INSANE… to try the same thing over and over and expect different results.