The Alfred Hitchcock Theory of Debt

The Hobbesian Dilemma: Part 2

In an earlier article, I noted that there’s an unmistakable tension in society that people feel in their bones. A quick, informal poll of those around you would likely back up that assertion. Real polls do, too: The majority of people polled in 33 countries believed that a World War was on the way. That’s far from evidence it will, but it is, however, evidence that people know something is very wrong. You can call it instincts or spider sense or many other things, but we all know the feeling when something important or bad is going to happen. 

Alfred Hitchcock called it suspense, and he was a master of it. There’s certainly an ominous sense of suspense looming over civilization, but defining just what it is can be tricky. 

That’s because the problems facing us are complex, multifaceted, and interconnected. Some potential scenarios, like a global conflict, are thankfully not guaranteed. However, another scenario — one far more broad in its impact — is guaranteed. It’s just a question of when it happens rather than if.

Above all else — beyond foreign or domestic policy, internal disputes, bad hair days, and even the looming threat of war — the worldwide debt pile-up is problemo numero uno for us. By “us” I mean “most of the human species.” We’ve passed the point of no return in both private and public debt. Centralized power and finance have failed us. 

There are two framing mechanisms I like to use when describing this point of no return. The first is the event horizon of a black hole. Once you get past that edge, there’s no getting out of the gravity well no matter what you do. It doesn’t matter who the captain of the spaceship is anymore — the inevitable is, well, inevitable. 

The second is a ticking time bomb. Inflation is raging in every developed economy, and central banks are raising interest rates to combat it — but this time is not like the last period of inflation in the 1970’s and 80’s. This time, there’s vastly more debt, both national and private, in the global financial system. The choice is to either raise rates and make debt burdens unbearable or allow runaway inflation. Neither option ends well. This is a predicament rather than a problem — the proverbial rock and a hard place.

So, ticking time bomb? Event horizon? Am I mixing metaphors? Yes, and who cares? They both accurately describe the situation. 

We’re faced with what I call the Alfred Hitchcock Theory of Debt. Simply put, it’s this: The debt bomb will explode. Most people are unaware of it, but for those paying attention the suspense is intense. All other concerns discussed while the debt time bomb is underneath — or while flying into the black hole, if you prefer — are simply noise distracting from the real problem. The unsustainable levels of debt in nearly every corner of the world can no longer be reasonably handled and will lead to dire consequences. We don’t know exactly how or when the debt bomb will go off. But we do know that it will and why. Many people will be surprised, while others see what’s coming.

There’s a million charts and graphs to demonstrate that point, but I don’t want to over-chartify this post. We will get to a few key ones later. For now, consider a worldwide, unmanageable debt situation a backdrop to everything happening in both national and international politics. 

Alfred Hitchcock on Suspense

Hitchcock’s mastery of suspense can go a long way in explaining the current pervasive anxiety. In fact, I’ll let Hitchcock speak for himself and make the metaphor for me:

“There is a distinct difference between ‘suspense’ and ‘surprise,’ and yet many pictures continually confuse the two. I'll explain what I mean.

We are now having a very innocent little chat. Let's suppose that there is a bomb underneath this table between us. Nothing happens, and then all of a sudden, ‘Boom!’ There is an explosion. The public is surprised, but prior to this surprise, it has seen an absolutely ordinary scene, of no special consequence. Now, let us take a suspense situation. The bomb is underneath the table and the public knows it, probably because they have seen the anarchist place it there. The public is aware the bomb is going to explode at one o'clock and there is a clock in the decor. The public can see that it is a quarter to one. In these conditions, the same innocuous conversation becomes fascinating because the public is participating in the scene. The audience is longing to warn the characters on the screen: ‘You shouldn't be talking about such trivial matters. There is a bomb beneath you and it is about to explode!’

In the first case we have given the public fifteen seconds of surprise at the moment of the explosion. In the second we have provided them with fifteen minutes of suspense. The conclusion is that whenever possible the public must be informed. Except when the surprise is a twist, that is, when the unexpected ending is, in itself, the highlight of the story.”

My hunch is that, if you’re reading this, you’re firmly in the “suspense” camp. If not, please let me know in the comments below since I love to know more about my readers. 

The Debt Bubble: Bizarre Behavior Explained

The suspense in the face of the looming debt crisis explains a lot of seemingly bizarre behavior, especially from governments and other powerful groups. How on Earth can the US Congress pass a $1.7 trillion funding bill without reading it, much of which must be financed with debt? For that matter, how has government spending gone up every year without any attempt to address mounting debt? How have central banks printed even more debt-based money for governments to spend recklessly, especially since 2020?

If you bear in mind that this debt problem is insurmountable and will never be paid back, it all makes more sense. If a person knows they’re going to be bankrupt and has no way out, they may as well buy a bunch of nice steakhouse dinners on a credit card. 

It’s not like national debt levels are a secret, anyway. When you combine sovereign debt (i.e. a country’s debt) with corporate and private debt, you get a level that’s just hilarious. Clownish, really. Check out the following chart from SeekingAlpha — from 2017. The predictions even before the Covid crisis and its economic fallout showed there was no way for global GDP to catch up with global debt. Governments knew it, investors knew it, and central banks certainly knew it. 

Source: SeekingAlpha

In 2017, money was still extraordinarily cheap by traditional standards, so borrowing seemed like the way to go. Debt levels for both corporations and governments could grow without much of a concern because borrowing at 1-2% interest or less means you can generate a substantial return with almost no risk. If I could borrow a billion dollars at 1% interest or less, I’m pretty sure I could find a way to get rich, too. In fact, that in itself is getting rich, which is one reason the last several years have seen the rich get richer in extraordinary fashion. 

This isn’t something new, however — it’s just accelerated recently. Let’s look at the US, specifically. The trend of consistently lowering interest rates has been going on for 40 years — until 2022, when inflation came back in an ugly way. If you’ve been to the grocery store recently, you don’t need me to explain the effects of inflation to you. 

Really, there has been a steady downwards trend in the cost of borrowing since 1985. Every single interest rate hike has led to a recession, forcing the Federal Reserve to lower interest rates to ensure the economy doesn’t take a nosedive. 

The logical endgame was interest rates to 0%, which was the case for several years. That encourages borrowing, which leads to huge amounts of debt, which is where we are now. And the trend continued — until it couldn’t anymore, because of inflation. 

That little breakout at the end — where the interest rate finally jumps above 0% — looks small in historical terms. But when you look at it on a shorter timescale, it’s way more significant. The US data is just an example here — the same thing is happening around the world. This is a breaking of a very long pattern. 

Bubble, meet needle. Suddenly, servicing that debt borrowed at near-0% rates is far more expensive and untenable. Countries are quickly finding that out. Ask Sri Lanka or Ghana what it feels like when you can’t service your debt anymore. Individuals know the feeling all too well, too. Homebuyers in the US, for example, are finding out just how much more expensive a few percentage points of debt can make monthly payments. And plenty of people learned the hard way in 2008 just how much a variable interest rate can screw up financial plans. 

So, major debt holders — like countries — find themselves responsible for enormous amounts of debt borrowed at historically low interest rates…but now those interest rates are rising fast. Servicing that debt will become ever more painful to the point where it’s impossible. 

If you know you won’t ever be able to pay off your debt — screw it, why not just have a big ol’ blowout and spend all your money before you lose control of it? If you know there’s a time bomb under your restaurant table — and you’re chained to the table — shouldn’t you order champagne and cake and lobster all at the same time?

And so they did. 2020 saw governments around the world borrow some $19.5 trillion in one year. That was before interest rates rose. The Bloomberg article linked in this paragraph is from 2021, and the situation has changed radically as interest rates rise. The bill is coming due. The suspense is on. 

Beyond the Event Horizon

Before we get into potential outcomes here, let’s take a moment to laugh at Modern Monetary Theory. It suggests that government debt in its own fiat currency never needs to be paid off as it can be rolled over in perpetuity with central banks no matter how big it is. It’s like having a credit card with no maximum limit even if you’re broke. How very kind of central banks to arrange such a system! Consequently, governments should not be afraid of rising debt according to the theory.

It’s just like a person saying “I’m immortal until proven otherwise.” We all know how that really ends.

Back in the real world, however, that’s not how things work. There are three ways out of enormous sovereign debt problems:

1. Grow your tax revenue enough to pay off the debt and/or decreasing spending, e.g. by growing the economy and reducing government services

2. Monetize the debt, i.e. devalue the currency to make the debt worth less in real terms

3. Default on the debt and face sky-high future borrowing costs and penalties as well as the social unrest that goes with them

Since option 1 is clearly not happening — with governments on a spending spree — we’re left with options 2 and 3. And because option 3 is politically painful and not something any elected official will want to have their name associated with, we’re almost certainly left with option 2. 

Let’s continue with the US for an example. The last major round of inflation was in the 1970’s into the early 80’s — when the country’s debt to GDP level was around 40%. When Paul Volcker raised rates to near 20% to finally beat inflation, that 40% level was manageable — but still painful. 

Now that the US debt to GDP ratio is around 120%, raising interest rates further to tame inflation would mean making the Federal government insolvent. Even at current interest rates, the Fed is nowhere close to defeating inflation. So, they can choose between allowing inflation to continue or screwing their friends in DC. Again, we’re left with option 2. 

As I mentioned in the first Hobbesian Dilemma article, the tipping point in an empire’s power comes when it starts to inflate away its debt. It’s a prelude to bankruptcy and eventual collapse. It can be an agonizingly painful and slow process as happened with the Roman Empire. We don’t have a model of how this’ll work with the current global system so interconnected — nothing like this has ever happened before. 

End of the Road

So, where are we headed? Some indications from recent geopolitical events are a strong indicator that our current, dollar-led and debt-based system of global finance is on its last legs. I’d argue that it’s been on life support since 2008 at least, and I’ve been surprised by how long governments and central banks have been able to kick the can. But eventually, there’s no more road to kick the can on, and the jig is up. There’s yet another metaphor for you.

When asked how he went broke, a character in Ernest Hemingway’s The Sun Also Rises explained succinctly: “Two ways,” he said. “Gradually, and then suddenly.”

We’re in the “suddenly” part now. Years of unrestrained and irresponsible spending are now catching up with governments everywhere. And seismic shifts are happening as a response. 

Saudi Arabia is set to sell oil to China in Yuan. This is as seismic a shift as it gets, since Saudi Arabia has been underwriting the oil-for-dollars scheme that’s made the US Dollar the world’s reserve currency. That has now been undone. Saudi Arabia also appears to be pivoting away from the US as an ally. 

Russia is aiming to create a new currency with the BRICS (Brazil, Russia, India, China, and South Africa) economic forum. It’s also mulling backing its currency with gold — something the global financial system abandoned in full in 1971. 

Japan has finally capitulated and raised the rates on its government bonds. Japan has been the largest foreign holder of US debt, meaning it’s helping prop up US government spending. That may soon unravel. 

The debt time bomb finally going off would change…well, everything. Whether it’s via hyperinflation or a series of national defaults, the economy as we know it would fundamentally change. Prices and valuations everywhere would be thrown into chaos. It’s hard to say just how fast this could happen, but previous periods of hyperinflation show that it can happen very, very quickly once it begins. 

Central banks are already preparing for a potential new system. This could be the surprise ending Hitchcock was describing. The Federal Reserve Bank of New York is conducting an experiment with blockchain-based central bank digital currencies (CBDCs). The FedNow instant payment system is set to be ready for May-July of 2023. That’s very soon, if you didn’t notice. 

They know about the time bomb. They know we’ve passed the event horizon. Call them what you will, but they’re not stupid. And it looks like they’re getting ready for some fireworks to go off. This could get ugly. Prepare yourself accordingly. 

Furthermore, I believe the Ghislaine Maxwell client list must be released.