It won’t be the coming financial crisis that kills the world economy. It will be the response to the crisis by the nitwits in the White House that will plunge the globe into deflationary collapse. Donald Trump, Larry Kudlow and Peter Navarro are about as prepared as Moe, Larry and Curly to deal with a financial crisis at this level. Trump has been like a wrecking ball in a global economy already teetering on the precipice of recession.
Since Trump took office he has done everything possible to make things worse and amplify the damage when the inevitable happens and the already very long in the tooth expansion ends. He has encouraged corporations and financial firms to increase leverage and engage in riskier behavior.
U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the Dot-com bubble and U.S. housing and credit bubble
But the most important part of the story is that U.S. corporations are cannibalizing themselves and using debt to cook the corpus. For years, corporations have been the largest buyers of U.S. equities through M&A (including leveraged buyouts which I have long considered a long-term economic disaster for America – more on this below) and stock buybacks. They effectively conducted a massive leveraged buyout of Corporate America and left the private sector’s balance sheet far more leveraged than a decade ago.
Remember synthetic CDOs, the villain of the 2008 crisis?
It was the proliferation of sub-prime mortgage CDOs that transmitted and amplified losses in the US housing market throughout the financial system. Well they are back but with twist:
Rather than referencing mortgages as many deals did in the run up to the crisis, the new generation of synthetic CDOs now see investors taking a leveraged bet on whether corporate defaults will rise, using tranched portfolios of credit default swaps.
So the geniuses that brought you 2008 have decided that stuffing synthetic CDOs with toxic corporate debt instead of toxic mortgages will make it all totally fine. Just as they transmitted and amplified losses in the US housing market throughout the financial system. They are now doing the same with toxic corporate debt.
There are alarm bells ringing throughout the financial system. An inverted yield curve, declining copper and FedEx stock prices, are all early warning signs of recession. The UK and German economy have already contracted and a no deal Brexit has not yet hit the European/UK economy. The financial data from China is awful and China has its own gargantuan toxic debt problem. There is now a long list of events across the globe that could trigger the next 2008.
Now imagine Trump and his band of nitwits having to deal with that scale of crisis.
There was a scene in the movie To Big to Fail where a Chinese official confided to Treasury Secretary Henry Paulson that the Russians had approached them and wanted to work with the Chinese to collapse the U.S. financial system. They proposed dumping massive amounts of Fannie and Freddie bonds during the financial crisis.
The Chinese declined to conspire with the Russians to tank the US economy at a point when it was vulnerable. They opted for cooperation and stability instead. What do you suppose they would tell the Russians today? How many friends does Trump have that he can work within an International crisis?
Let a pea-brained grifter and his band of corrupt morons run the worlds largest economy. What could go wrong? We are about to find out.