In “The Subprime U.S. Economy,” S. R. Srocco gives examples of asset bubbles just waiting to burst:
Real Estate. One might think that, after the bursting of a gigantic housing bubble in 2007, government and corporations might hesitate to create another bubble. One would be mistaken. US housing prices are increasing at twice the rate of inflation. New homeowners need only make a 3% down payment. Credit scores are being manipulated to allow more dubiously qualified people to purchase a house. The same bad practices that led to the devastating burst of the housing market in 2007 are being repeated.
Energy. In 2006, the seven largest shale oil companies in the US (Continental Resources, Concho Resources, EOG Resources, Noble Energy, Occidental Petroleum, Hess Oil, and Chevron) were $17.2 billion in debt. By the end of 2015, their combined debt had grown to $72.1 billion.
Their debt began its exponential increase in 2011. At that time, the price of US oil (West Texas Crude) was $100/barrel. It continued to average above $90 a barrel between January 2011 and June 2014 (NASDAQ [broken link]). In other words, US shale oil companies were experiencing exponentially increasing debt during a period of time when the price for a barrel of oil was relatively high. This means that shale oil production has never been profitable and, with the price of oil averaging $50/barrel for the last 18 months, won’t be.
To make matters worse, production at the top four US shale oil fields (Bakken, Eagle Ford, Niobrara, and Permian) has fallen from an average of 5,067,000 barrels/day (between November 2014 and November 2015) by 677,000 barrels/day to an average of 4,390,000 barrels/day. That’s a 13% drop in production in less than one year. That’s also a drop of 247 million barrels per year in production if that reduced rate of production continues until November 2016.
Significant decreases in the price of oil and its production mean that the debt owed by US shale oil companies is skyrocketing.
To make matters worse, the “US Energy Sector” as a whole owes $370 billion. In 2015, 48% of their profit went to paying the interest on that debt. If the price of oil remains below $50/barrel, that percentage might rise as high as 70%.
Other industrial commodities. After 2008, Chinese governmental elites expanded the supply of money by over $20 trillion to finance the construction of new factories as well as homes. This artificial building boom had destructive consequences. One, it led to asset bubbles in energy, commodities, and the sovereign debt bonds of emerging nations. Two, too many factories in China will lead to too few factories being needed in emerging economies (Andy Xei).
Sovereign debt bonds. When a sovereign government sells bonds, it is borrowing money from the individuals and organizations buying them. Government bonds mature after a varying number of years; for example, 10, 20, or 30 years. If a person or organization purchases a 30-year government bond, then traditionally that government promises to repay that purchaser the amount of money they spent on the bond plus interest. The longer the period of time involved, the greater the interest payment the government promises to pay on the bond.
By February 2015, purchasers had actually bought $3.6 trillion worth of bonds at negative rates of interest. That means the governments selling the bonds promised to repay those purchasers the price of the bonds minus interest. Purchasers were buying bonds from governments, even though they knew they would lose money, because they believed such bond purchases would protect the value of their money more than other purchases would. That was a measure of the weakness of the GTS by February 2015.
It’s gotten much weaker since. By February 2016, the amount of bonds with negative interest purchased had doubled to $7 trillion. Now, only five months later, purchases of negative-yielding bonds has increased to $13 trillion. Purchasers are betting, in ever-increasing amounts, that a negatively-yielding government bond will maintain its value better than other investments promising large positive interest payments or dividends.
The result, however, is a huge bond bubble because the bonds themselves have only negative value. It’s only the greater perceived risk of other investments that gives this market its inflated value. Srocco has grave misgivings that the bankrupt governments issuing negatively-yielding bonds will be able to repay even the price of the bond minus interest.
Corporate bonds. According to Jeff Cox (“Corporate Bond Defaults Hit Highest Rate Since Financial Crisis” [broken link]), 100 US corporations have gone bankrupt so far in 2016. That’s 50% more than during the same period of time in 2015 and the most since 2009.
Stocks. Current stocks are valued much higher than usual due to $5 trillion magically created by the US Treasury and handed out free by the Federal Reserve since 2008. Companies borrowed this money to buy back their own stocks to raise the dividend per share. In other words, companies didn’t increase dividends by making money. They did it by going into greater debt. The Price/Earnings ratio of a corporation is the relationship between the price of one share of its stock compared to the dividend it pays on each share. The P/E ratio today is much higher than normal and as high as it was in 2007 when the stock market crashed.
All of this is simply to indicate that, contrary to the Grand Narrative brought to us daily by TV and other corporate media, the GTS is in real trouble and getting worse. Automobiles, real estate, oil, other commodities, sovereign debt bonds, corporate bonds, and stocks are all overvalued and their coming devaluation will be painful. As Christians and churches, our worst response would be to ignore, deny, or justify this evil. Instead, Jesus is calling us to acknowledge it and to begin responding creatively to it.
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