How To Turn A Corporate Credit Crisis Into A Currency Crisis

How To Turn A Corporate Credit Crisis Into A Currency Crisis

Tyler Durden

Fri, 09/04/2020 – 14:55

Authored by MN Gordon via,

Surely, Thursday’s stock market selloff didn’t catch you by surprise…now did it?  Why would it?  After going nearly straight up for the last five months, it’s only natural for there to be a pullback.

This was particularly true for technology stocks.  They’d reached such dizzying heights it was just a matter of time before the thin air got to them.  And get to them it did.  Some of the mania’s favorites, like Apple, Tesla, and Nvida, fainted in unison…dropping 8 percent, 9 percent, and 9.3 percent, respectively.

A company called PagerDuty garnered the honor of the day’s biggest loser.  The San Francisco based company, which operates in the cloud, made a graceful 25.8 percent swan dive from its heavenly realm.

So, what should you do about it?  Should you buy the dip?

As far as we can tell, there’s currently no fundamental reason to buy stocks.  But like a pair of Yeezy sneakers or avocado toast, if buying expensive stocks makes you happy…go for it.  Just realize, we are in the midst of a reckoning.  A great catastrophe is upon us.  What’s more, stocks should be the least of your concern.

Where to begin?

U.S. gross domestic product (GDP) dropped below $20 trillion during second quarter.  But while the economy has slumped, government debt has spiked.  The U.S. national debt’s now over $26.7 trillion.  Of this, the federal debt held by the pubic amounts to over $20.5 trillion.

This is significant for several reasons.  First, the gap between national debt and GDP is widening.  Second, the federal debt held by the public has eclipsed 100 percent of GDP.  This unsettling factoid was presented in a report released this week by the Congressional Budget Office.

To be fair, the CBO report says federal debt held by the public will hit 98 percent of GDP in 2020.  By our back of the napkin calculations, the 100 percent mark was notched in June.  But that’s beside the point.

For the point is, debt ratios near or above 100 percent of GDP severely encumber economic growth.  And if debt’s hampering economic growth, then how can the economy grow its way out of its massive debt?  Quite frankly, it can’t.