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Washington's Game of 'Kick the Can' Could Be Coming to an Abrupt End

America alone (let’s not even consider the EU or Japan) is indebted at 106% of GDP. Washington might not be able to print more money this time around.


This post first appeared on Russia Insider


Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia


Moscow. Slightly overcast, the last day of February and the temperature was holding just above the plus numbers. Passing by the Russian Orthodox church of St. Spyridon I spotted the neighborhood “znakhar”, which in English would be a mélange of seeress + witch + healer.

<figcaption>Financial bubbles loom.</figcaption>
Financial bubbles loom.

I have seen this elderly woman around the neighborhood from time to time and we limit our exchange to polite hellos, as metaphysics is not something I hold in high regard. This time however, she motioned me to come over.

“You are that foreigner, no?”

I nodded smilingly.

“Be ready for very big changes to begin as we approach the middle of this coming March. It is just as well you now live here with us in Russia, you would not want to live elsewhere for a long time to come”.

Curious, I asked what makes her believe that the world outside of Russia will stress out, and why tell me.

Not answering directly, she went on to say, “Better you get rid of your ‘valyuta’ (hard currencies) and turn them into rubles or better, gold St. George’s. Very big changes are now destined to happen and much will turn upside down, so be ready”.

I thanked her for her global commentary and bid her a good day as she shuffled off into the church.

This incident got me thinking, first why she chose today to speak with me and not simply nodded a hello as usual. Secondly, why she chose to deliver her somewhat disturbing opinion to me, “that foreigner”?

Since markets are something I observe and from time to time engage, the first thing that came to mind was market bubbles.

Could this uneducated old lady now be analyzing the economic rhythms of the western world, and making her prognosis to me? Furthermore, what might happen in mid-March that might be so calamitous? Then thinking… I must be nuts to even dwell on her ramblings.

To be sure, we live today at a time when a number of factors that have been unquestioned for decades are under re-evaluation; the dollar, Euro, central banks, Federal Reserve, QE, ZIRP’s, NIRP’s, and historically unprecedented debts.

Unquestionably a dangerous time, and in many ways engendering a Stockholm-like syndrome of denial…. we shall go on as before, in spite of ourselves.

Central bank balance sheets are up globally from $6 trillion in 2007 to $21 trillion today and are growing as we read this at a rate of $200 billion every month. For example, the ECB is buying corporate bonds, which in itself should make anyone shudder as today 30% of investment-grade debt in Europe is trading with a negative yield. The BOJ now owns 50% of all Japanese government bonds. It has been calculated that about 25% of global sovereign debt now trades with a negative yield.

The perception for decades was that bonds were the sacrosanct vehicle for “risk free” rate of returns. This has changed, and it is key. If such risk free rate of return has devolved to 0% over the past 96 months, then everything is at risk of collapse should a bond bubble burst.

What the Old Russian lady may have “seen” in her predictive vision is that on March 15, 2017 the United States faces its debt ceiling deadline. That is the day the debt ceiling holiday the previous US Administration cobbled together just before October 2015 election expires.

According to the law, the debt ceiling will freeze in at $20 trillion. The Treasury may have roughly $200 billion in cash on hand at that time while spending remains today at a rate of $75 billion a month.

It seems that by June 2017 the Americans will be out of cash. This will come clear to the markets on or just after March 15 when speculation will add fuel to the volatility which this massive debt-ceiling crisis will usher in.

Some may say, “so what”? We will just print more dollars (QE) and kick the can further down the road.

Not so simple anymore, we have used up a lot of mojo — and credibility.

America alone (let’s not even consider the EU or Japan) is indebted at 106% of GDP. The new administration also wants to institute a number of programs such as increased defense spending, broad tax cuts for corporations and individuals, more money for border security enforcement, more for veterans and a long overdue trillion-dollar infrastructure program.

All this may indeed cause several bubbles to burst, even all at once. Therefore, we wait until mid-March and see whether the wrinkled Russian seeress was on the ball, and listen to what President Trump tells Congress on this last day of February.

Meanwhile, I just may go out and see where I can find a few of those 10 gram gold St. George coins to hoard away just in case the “znakhar” knows more than the markets.


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