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The No 1 Gold Stock for 2019

Marc Faber on QE Money and a People's Bailout

Interest-Rates / Quantitative Easing Aug 05, 2014 - 04:50 PM GMT

By: Keith_Hilden


Diego A. Saucedo Guerra writes: A Main Street Bailout in Washington or Mexico City?

In our latest Squawkonomics interview with Marc Faber, Keith Hilden raised the question of what Faber thought of the idea of a Main Street Bailout, a real People's Bailout that would lower personal debt and increase the rate of domestic investment and business formation- rather than simply only a Wall Street bailout. The legendary investor also ruminates upon the minimum wage and the role of the government in the economy. Check it out below:

After the interview, what particularly interested me was Faber's take on the idea of using QE money to perform a bailout of Main Street:

Regarding the People's Bailout, Faber told us that he’s against money printing because money doesn’t flow evenly to the system, thereby not benefiting everybody to the same extent. He claims this creates very significant divides in wealth and income inequality. But what concerns him the most is debt forgiveness upon people acquiring debt and the Government bailing them out, which creates moral hazard. People go on asking for more and larger loans and become not willing to pay them back, expecting instead the Government to repay their debt.

Faber's main concern was moral hazard eating away at efficiencies in a free market economy, and having the money for nothing syndrome infecting all of a country, not just corrupting their financial sector. So then at what extent does moral hazard affects a country and their people, and how much has moral hazard corrupted nations so far? And how much do countries actually need a solution like a People's Bailout?

To answer this question, first we need some perspective on the issue. Let us not forget 2008’s bailout of the U.S. financial system due to the subprime mortgage crisis. Let us ask ourselves- has the U.S. government fixed the system as a whole or have they just only fixed one part of the economy? Are bailouts only a privilege that the financial sector gets to enjoy? Or are there other sectors of the economy that need an injection of capital to boost investment and business formation?

Subprime Mortgages, as American as Apple Pie?

I ask you all to ponder this because recently student loan debt has become the new subprime mortgage, and has become part of the American national agenda. Student debt has crossed the $1.2 trillion marker, becoming the second highest form of consumer debt after housing mortgages, with 2/3rd of students with an average of USD $26,000 debt after graduation.

Until 2008 people were acquiring mortgages that they couldn’t pay, and in 2014 we move to the same beat but to a different drummer.  Nowadays, students are getting loans to pay for college but there’s a degree of uncertainty as to whether they can afford that debt or not and also how much debt can they take on.

So far there are many who graduate staring down a tough job market, with a large debt to service. As such, policies to fix this issues has been taken into debate, and many ideas have surfaced due to this. Ideas run the gamut, from slashing students' interest rates by half, fixing the interest rate at a 10% cap of a student's income for the next 20 years in the U.S., to forgiveness/bankruptcy innovations and even house arrest in Mexico. Progress as it may appear, the problem yet remains without a feasible solution- students can’t find decent paying, full time jobs, and interest rates are increasing, and the economy remains on a downturn.

The Rise of the Student Ninja

Warping back to the hindsight of the last financial crisis, we see banks were willing to give loans to ninjas (people with no income, no job and assets). Nowadays, many students are acquiring loans to pay for university, a new car; using credit cards to pay products, services and getting personal credit, and drowning in debt while purchasing all the things that they can’t afford, and revolving credit cards and pay off other credit cards. From a national level, the habits of the youth in Mexico, the U.S., and other countries are troubling to say the least.

Looking at the present environment we can ask us this question:  Are banks’ lending money to new and younger student ninjas? Seems like they’re doing so- students have no assets, they have no income and there’s uncertainty of when are they going to find a job, yet they've got credit cards in their pockets. The problem remains without solution and semester by semester students are enrolling and graduating, exacerbating the problem.

Did people in 2008 not know that they were in danger of not being able to pay their loans? Of course they knew it, but banks were willing to give more credit and people were taking advantage of it. We know the end of the story. The government bailout created a moral hazard psyche upon both people and banks, believing that Papa Government will save their senseless behavior. So are students following the same example?

From what we see, they are, but whether the U.S. Government will bailout students and other interest groups in the U.S. this time is something that we need to take a trip south of the border to find clues of where all this is heading.

Crossing borders engenders insight. So, let us take a trip to my country, and go south of the border to Mexico, where incredibly punitive interest rates, seizure of property and even house arrest are fair play practices in Mexico's desperado credit industry sector.

In Mexico, the Sound of Credit as a Shackling of Chains

The newspaper “el sol de Mexico” (the sun of Mexico)  tells an all-too-common tale of the plight of Mexican borrowers held at financial gunpoint to draconian credit practices. Leticia Gonzalez, thought it impossible to be able to afford to throw a party for her son that would cost about $200 dollars. When she was leaving, a retail store, a salesperson offered her a credit card with a limit of about 1200 U.S. Dollars. Seeing a way to afford the party for her son, she signed up for the credit card on the spot, and the party went on as planned. Afterwards, she worked out the $200 repayment as roughly 5 months of a 40 USD plus interest, thinking this was a prudent and timely way to pay off the balance of the credit card.

After one year she was absolutely shocked when the credit card company informed her that her total bill mushroomed to 1200 USD, because she was paying the interest, value added tax and value added tax over the interest. How is a 6-fold borderline criminal increase on a credit card bill due to interest, commission, and fees even legal in this day and age?

Many consumer outlets like Walmart, Domino's pizza, Mc Donalds, several car dealers, department stores and thousands of banks and non-banking institutions surround Mexico, and consumers are taking on ever more copious amounts of credit at a rapid pace to live the American Dream from Monterrey to Mexico City.

Millions of people like Leticia find themselves today with an endless array of choices of products and services to procure, as the Mexican consumer continues to expand in scope and buying power fueled by a binge in credit. Financial institutions have a real business in Mexico and consumers are taking all the credit they can get for sure.

In Mexico it is commonplace to have more than three credit cards, and more than five, issued from an array of retail,department stores, and banks. The financial institutions found a gold mine in Mexico from both punitive interest and people's lack of financial education, and people like Ms. Gonzalez are their hostages.

We are talking about a new credit-fueled Mexico, where people are whipping out Visa cards and buying HDTV's and Apple products for their homes, and driving cars based on credit, one has to wonder, just how different are Mexicans and Americans these days?

Mexico’s nonperforming loans are bubbling from a low level, but 2014 showed delinquencies rising at an alarming 63.2% rate, year over year.  With delinquencies exploding at such a rapid rate, how do credit institutions manage?

Caja de Credito for Criminals?

Unlike their American counterparts, Mexican financial institutions generally slice a whopping 35-55% cut for personal loans, and non-banking financial services can surpass an astounding 150% interest rate. There are even cases where debtors pay more than 300% of the original loan, that means a high number of people getting into trouble to pay their debts while the debt ratio goes sky high at the drop of a hat. With a lending situation in Mexico that would register at criminal lending levels in America, Mexicans increasingly find themselves unable to pay this debt, while debt owners take the matter into their own hands, with debt collection agencies waking up debtors at 3am demanding payment or threatening jail. You see, Mexico has debtors' prison, so simply walking out of the financial arrangement is not an option here. I ask you: Who is the real criminal here? The borrower or the financial institution that granted the credit at these rates?

Looking at this figures it seems like Mexico needs to worry. But the Mexican government and the economists said that Mexico’s finance is on the right track. Are they?

I will say that the Government needs to worry about its economic path derailing. Since 2012 when the old guard thrust themselves back into power, President Pena Nieto instructed the Congress to make the structural reforms that were supposed to boost the economy, but for 2014 expectations of growth were ratcheted down from 3.9% to 3.0% in May to merely 2.7% in July. As consumers continue to take on crushing credit debts as the consumer carnival continues in Mexico City, we see Mexico echoes the U.S. more and more in its debt-fueled growth path. Is a People's Bailout looming ahead for Nieto's Mexico? And if the U.S. students continue taking credit on like drunken cowboys, is President Obama willing to forgive them or is he going to leave the kids alone in the cold? Looks like we have an interesting panorama for the following months in both Mexico City and Washington, stay tuned, until next time dear investors, this is Diego A. Saucedo Guerra from Squawkonomics, bidding you adios and safe travels.

Diego A. Saucedo Guerra

Diego A. Saucedo Guerra is a Frontier Market Analyst for Squawkonomics. Diego recently finished his Global MBA from National Taiwan University. He previously worked in the Mexican Federal Tax Department as a Tax Lawyer.

Keith Hilden is the founder of Squawkonomics. He holds a degree in Economic Crime Investigation and has CFE training, and is fluent in Mandarin. He also researches Asia Pacific markets and Cyber Security for geopolitical consultancy Wikistrat.

By Keith Hilden

Keith Hilden holds a degree in Economic Crime Investigation and has CFE training. He is an Asia Pacific markets and Cyber Security Researcher for geopolitical consultancy Wikistrat, and researches frontier markets in developing countries and digital currencies on Squawkonomics.

Squawkonomics is focused on delivering multi-dimensional media and business intelligence products on emerging and frontier markets, to assist companies with their market entry strategy and market research needs. Employing a team of capable analysts, Squawkonomics provides first-hand business insights from the best sources and synthesizes them into perspectives that understand markets like never before. Currently based out of Taipei, Taiwan, and with operations in Thailand, China and Canada, Squawkonomics offers an unparalleled glimpse into a whole new economy. Contact us on Twitter, Facebook, or

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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