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Swamponomics: The $277 Trillion Global Debt Nuclear Bomb


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Swamponomics: The $277 Trillion Global Debt Nuclear Bomb

Turkey is in an unenviable situation right now. The country is going through a second wave of the coronavirus pandemic. At the same time, the government is entrenched in two geopolitical disputes and the Turkish lira has been one of the worst-performing currencies in foreign exchange markets this year. But has the nation turned the sinking ship around after the government and central bank cleaned house?

Talkin’ Turkey

Recently, Finance Minister Berat Albayrak resigned from his position due to health concerns, and central bank Governor Murat Uysul was terminated. President Recep Tayyip Erdogan acted swiftly, appointing former Deputy Prime Minister Lutfi Elvan as the treasury and finance chief, and Naci Agbal as the head of the Central Bank of Turkey. So far, the financial markets have reacted kindly to the decision, giving the lira some new life as investors are placing bets on more orthodox approaches to monetary policy.

Recep Tayyip Erdogan

The central bank held its November policy meeting. It was a notable powwow for two reasons: it was the first meeting in the Agbal era, and policymakers would possibly extend an olive branch to markets.

Officials surprised market observers by raising the benchmark one-week repo rate by 475 basis points to 15%, representing the biggest rate hike in two years. While economists had anticipated tightening, they did not expect this big of a move. In a policy statement, the Committee explained that it would continue to implement monetary tightening to rein in the inflation risks and “restore the disinflation process.”

Monetary policy has been chaotic in 2020. The central bank has reduced its forex reserves to their lowest levels in 15 years to prop up the lira, while President Erdogan had insisted that rate cuts were the best way to go to mitigate rising inflation. Erdogan has been so desperate for gross domestic product (GDP) expansion that he defied basic economic reasoning. It turned out that injecting some sanity back into monetary policy resuscitated foreign investors’ confidence in the lira. But will everyone’s confidence in Agbal maintaining a rational and conventional central bank persist?

A Bleeding Disorder

The world was deeply in debt before the coronavirus public health crisis paralyzed the global economy. But the response to the highly infectious respiratory illness, which has a survival rate of 99.7%, resulted in dramatically increasing debt levels across the globe. So, just how much red ink is the planet bleeding right now?

The Institute of International Finance (IIF) released a new report forecasting that global debt would hit an all-time high of $277 trillion by the end of 2020. Between January and September, international debt – public and private – spiked $15 trillion to $272 trillion, with the government accounting for about half of the boost.

The U.S. is poised to sniff the $80 trillion mark this year, while the eurozone will climb to $53 trillion.

Developed markets also took on more debt than developing economies. According to the IIF, developed nations’ overall debt surged 432% of GDP in the third quarter, up from 380% at the end of 2019. Emerging markets’ debt-to-GDP ratio soared to 250% in the July-September period.

Will the world ever deleverage? Unlikely, which is something even conceded by the report authors.

“There is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity,” the IIF said in its report.

With interest rates at historical lows worldwide, this $277 trillion figure will inevitably increase to $300 trillion next year. The Great Reset acolytes have been advocating greater public spending, especially on progressive goodies, from climate change to free tuition. But what happens to this debt anyway? It does not magically get tossed into a black hole, nor does it get forgiven. A currency crisis is the only way to go.

Don’t Cry for Me Argentina

Since President Alberto Fernández and his partner in crime, Cristina Fernández de Kirchner, rose to power in December 2019, Argentina has been witnessing a barrage of big government policies. From tariffs on exports to high inflation, Argentina has been going through a rough time this year. The pandemic pales in comparison. Thanks, socialism.

 

Alberto Fernández and Cristina Fernández de Kirchner

The latest boondoggle-in-the-making is Argentina’s newest confiscatory wealth tax on millionaires. As part of efforts to raise money for a cash-strapped government, the government voted 133 to 115 to penalize people with more than $2.5 million in net worth, which is estimated to affect 10,000 individuals. These folks will be mandated to pay a 2% flat tax, but the levy would increase as citizens’ equity increases.

“The level of concentration of wealth, in a few hands, is so strong that this contribution falls on less than 0.02 percent of the population,” said government deputy Fernanda Vallejos during a debate in Congress. “About half of what is collected will be contributed by only 252 people, those who are at the top of the pyramid.”

The opposition rejected the initiative, explaining that the South American country already possesses a treasure trove of taxes that has sparked a broader trend of widespread tax evasion. Other groups make the common-sense case that the legislation would lead to less investment, lower productivity, and declining employment levels since it punishes success.

Will this be effective? Hardly. When governments, like Norway and Spain, have instituted progressive net wealth taxes, the revenues raised have accounted for a minuscule percentage of overall government revenues. The only purpose behind it is to identify an enemy, blame another party for an economic downturn, and prove to the public your government is doing something in the best interests of the little people. Of course, this is nothing new as Buenos Aires has repeatedly experienced economic pain over the years, from currency destruction to food shortages to a rising cost of living. It might be time to cry for Argentina.

~

Read more from Andrew Moran.




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