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Destabilizing Debt Ensures the Financial Crisis Has Just Begun

Stock-Markets / Financial Crisis 2023 Apr 18, 2023 - 09:43 PM GMT

By: Michael_Pento


The debt-disabled U.S. economy cannot withstand the surge in borrowing costs, and the reduction in
money supply growth necessary to combat the record-high inflation suffered over the past few years.
Our beloved U.S. Treasury Secretary Janet Yellen said she believes the American economy remains
strong and its banking system is resilient. That is, if you close your mind and overlook the recent
bankruptcy of three financial institutions. Keep in mind this is the same person who assured us that we
would never see another financial crisis in our lifetime. So, it is self-serving for her to deflect attention
away from the economic meltdown that is on the horizon.

Yellen said at her recent press conference ahead of the spring IMF/World Bank meeting that “I’ve not
really seen evidence at this stage suggesting a contraction in credit, although that is a possibility,” She
doesn't see a contraction in credit?! The net percentage of banks that were already tightening credit
standards prior to this latest banking crisis had surged to the recession level of 44.8 during Q1 of this
year. That number surely has increased post the bank runs of the past few weeks.

She also said the “U.S. economy is obviously performing exceptionally well. I believe our banking system
remains strong and resilient; it has solid capital and liquidity. So, I’m not anticipating a downturn in the
economy, although of course that remains a risk." This proves she is more a feckless politician and
hopeless carnival barker for the economy than a good steward of our nation's public debt.
Perhaps she'd be better off explaining why the Federal budget deficit has hit $1.1 trillion in just the first
six months of fiscal 2023. Therefore, she should be spending her time making speeches that try to
restrain the intractable and profligate spending in D.C. rather than making inane statements about the

The truth is that the level and pace of debt accumulation just cannot withstand the most hawkish
monetary policy in U.S. history. Here are the numbers that illustrate why the economy is about to
collapse under the weight of all this debt and its surging service costs. In the three years leading up to
the Global Financial Crisis, from the start of 2005 thru the end of 2007, total debt in the U.S. (including
public and private debt) jumped by 27%. Total debt increased by $7.3T, rising from $26.2T to $33.5T.
And, total Non-financial debt as a percent of GDP reached 227%. During that tightening cycle, the total
amount of rate hikes was 425bps, starting in April 2004 and ending in June 2006.

Compared to the situation today; during the years 2020-2022, Total U.S. debt jumped by 26%; or by
$14.4T, while nominal debt soared from $54.5T to $ 68.9 T. And Total Non-financial debt as a percent of
GDP is now at a greater 263%.

During the prelude to this latest banking crisis and to the precipice of the economic cliff, the Fed raised
rates by 500bps in the time span of little over one year, from virtually 0% to 5%. And, at the same time,
is reducing the base money supply by selling off its balance sheet. Hence, the Fed has raised rates at a
quicker pace and to a greater degree than leading up to the GFC. And this hawkish policy is taking place
in the context of an economy that is more overleveraged than ever before.

In the end, the Fed had no choice but to aggressively raise rates because of its ridiculous and
irresponsibly delayed response to fighting the inflation it so eagerly sought to create in the first place.
This record increase and level of debt was issued in conjunction with an unprecedented $5 trillion
increase in money printing in the two years following the Pandemic. It engendered a triumvirate of
record-breaking asset bubbles: Bonds yielded nothing, home price to income rations shattered the old
record set during the Housing Bubble in 2005, and the market cap of equities skyrocketed to reach a
historic 200% of GDP.

Therefore, the Fed must bring down; bond, equity, and real estate prices to win the inflation battle.
However, since these asset bubbles need a massive flow of new borrowing and money printing to keep
them from bursting, a soft landing is not possible. Instead, a crash landing is the most probable

Do not expect our Treasury Secretary to give you the truth as to the current state of markets and the
economy. The sad reality is that these boom/bust macroeconomic cycles will be growing more intense
and happening more frequently over time due to the government’s abrogation of free markets. This is a
new paradigm that requires us to invest accordingly.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”


Michael Pento

Pento Portfolio Strategies

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved

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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