Wolf Richter: The Economy Is Cracking Under Too Much Debt

Wolf Richter joins the podcast this week to discuss the deterioration of the global macro situation, and how he is seeing growing signs of recession breaking out across the economy:

I think that was one of the biggest mistakes the central banks made during the financial crisis: They stopped the debt from blowing up. So we never had a cleansing.

In a recession, normally companies de-leverage. They go through bankruptcy, they shed their debts, and you have this big wave of debt restructuring. This is painful for bondholders and banks, but it clears out the crap that is clogging up the pipeline. And so these companies reemerge or get bought out and the debt just disappears. The same with consumers: they unload their debts through various methods, and so when the recovery starts, you are not suffocating under this huge load of debt.

That has not happened in the United States, particularly, but in other countries, too. That debt never got fully blown out. And then the recovery started with 0% interest rates and monetary stimulus, which only encouraged companies and individuals and governments to take on even more debt. So now we're burdened with such an enormous amount of debt that I think it is very hard to even breathe for the economy. A lot of people out there are worried about this, which is why you hear now voices saying we need a serious reflation. They need to come up with a lot of inflation to wipe out that debt. And of course, that will be a fiasco for our economy because if you have any uptick inflation without an equivalent uptick in wages -- which we have not been getting -- then you will destroy the consumer. And so this is not a great solution either.

But we are still solving the too-much-debt-problem with too much debt. I mean, the Fed is still saying We will make money for free and you just need to borrow more money, and that's its solution to having too much debt. It's insane when you look at it. 

Restaurants, a classic leading indicator of economic spending, are having one of their worst periods since the 2008 crisis:

Restaurants are a key indicator in an economy for discretionary spending. You do not have to go to a restaurant, you want to go. So we keep our eyes on restaurants for that reason, plus it's a big part of the economy -- it is about 4% of GDP, about 10% of the jobs.

Now we have indications that the industry is running into hard times. We have restaurant bankruptcies this year of chain restaurants. They are just piling up and of course these are all the older chains that have taken on lots of debt with encouragement of the central bank and now the leases are going up and expenses are going up and sales are going down, and the only way out is for them to declare bankruptcy. There are, I think, 14 chains that have declared bankruptcy in the last 10 months. That's a lot. That's as bad or worse than during the financial crisis.

We have the restaurant index that has dipped into the negative now. We have the restaurant owners and operators getting bearish on the overall economy. They are usually a pretty optimistic lot and so now, in the next six months, they are seeing that it is going to get worse rather than better. So, the restaurant business is getting hit. The casual dining, fast dining sectors -- these are the ones that are particularly under the gun right now. If you're running a restaurant like a TGI Fridays or Black Eyed Peas or one of those you're losing your customers. People do not have enough money and they are cutting back on restaurant spending.

And housing in previously "bulletproof" bubble markets like San Francisco are finally straining under the weight of their unaffordability:

So the numbers, they seem really crazy to people to the people who live in other parts of the country.

Here in the Bay Area, San Francisco isn't even the most expensive place. Palo Alto and Silicon Valley are a lot more expensive. But San Francisco is big so we see the numbers. I think the median teacher makes around $65,000 a year here. I mean, forget about buying a house. There are not that many houses in San Francisco; they are very expensive, like a $1.3 million median price, somewhere out in the Avenues, far away from everything. So let's talk about apartments, let's talk about condos. For renting an apartment, if you have a salary of $65,000 a year and you are looking at a one bedroom apartment, nothing fancy, just a median one-bedroom apartment that rents for $3,400 a month, a little over $40,000 in rent a year. So you pay taxes on your $65,000 in salary and social security and so-forth, and then you have practically nothing left to be on rent. So forget buying groceries, forget buying clothes, this is it. So you have to pack a two-teacher couple into a median one-bedroom apartment and that will barely work financially. And raising a family in a one bedroom -- and one-bedrooms in San Francisco are small, I mean these are tiny places -- people do that, it's not uncommon. This is what we call a housing crisis: when the median income cannot afford a median home anymore. You need to be quite wealthy to afford a median home.

Now if stocks double or triple in price, it doesn't really have an impact on the real economy. People do not have to live in these stocks. They do not have to buy them. They do not have to eat them, but when you start talking about housing doubling, the cost of housing doubling in a span of a few years, now you are talking about real life getting so expensive that it is no longer affordable for the lower 80% or so. And I hate to say lower 80%, but that is really what it is, so this is where a housing bubble is very destructive in the real economy. When you walk around San Francisco, you see a lot of little shops and restaurants that are closing. There's not a lot of retail given the income levels in San Francisco because we do not have much money left after rent. So this housing crisis is starting to eat up a bigger and bigger part of the economy. Housing bubbles are treacherous, and when they blow up, which they always do, they become even more treacherous. They impact the financial system in fundamental ways and they wreak a lot of havoc. So creating a housing bubble, or as the Fed calls it:  "healing the housing market", is both terrible on the way up, and terrible on the way down.

Click the play button below to listen to Chris' interview with Wolf Richter (47m:27s).


This is a companion discussion topic for the original entry at https://peakprosperity.com/wolf-richter-the-economy-is-cracking-under-too-much-debt/

Great website with interesting threads…Lots of data and good analysis.

Theres no need to search for esoteric explanations.
Its very simple. The FED is printing money and giving it to themselves

A quick refresher.


The entire Germany economy dose have enough money to bail in Deutsche Bank, IMF bail out coming?   

(Found on LinkedIn - Can be found in many places - Unknown original source)


PS: Same insane logic everywhere. Change country name, change numbers, that's it! The foot is heavy on the throttle pedal…




Yep! that’s an oldie but a goodie.
It’s a few years old so we’d need to change the $14,271,000,000,000 to 19,755,564,017,152.
But other wise spot on.

Great podcast, but as always there is so much to talk about in so little time. 
Seems to me student debt has a lot to do with the floundering economy. My sister-in-law is a productive professional who earns a respectable salary that probably puts her in the top 10% of incomes. Trouble is, she is $200K in student debt mainly from her 3 year professional degree program. She is trying to pay off this debt ASAP but seems to me to be spinning her wheels due to some of her loans being >6.8% interest. She spends 10K+/year just on interest to start nibbling at her principal. She's single, lives in an apartment, and is frugal, but she isn't able to save much after her retirement savings because she spends it all on paying student loans. To me it all feels like a siphoning operation. Siphon the interest off the productive professionals but this takes money away from the real economy. Just another way debt is crushing the real economy by making people debt slaves, and I'm sure my sister-in-law isn't the only one who is screwed like this. 

P.S. All this is not to imply this isn't her fault for taking out the loans in the first place, just pointing out the effects that student debt has on the real lives of people whether the FED wants to recognize that or not.  

If I were in her shoes (and I have been), I’d be put all my efforts into getting that debt off my back. Nobody can.expect 6-8% return on retirement savings. Once the debt’s gone then keep on by paying herself for the future. Thanks for hearing an old timer’s rant.

Who is on the other side of the ledger? 
If you have no answer, then you can enjoy Herr Ludwig von B.


Last night Hillary seemed to indicate deficits are under control!   And Chris Wallace quoted the {Debt - Internal IOU's} number that MSM always repeats with no thinking.

Good, very clear.  Money is used as an exchange mechanism for goods and services (energy and resources).  Debt is a mechanism to bring future consumption (energy and resources in the ground) into the present.  In our fiat system, money is created as debt, so there is always enough money in the system to pay off the debt.  As we enter our energy descent, we will also see money supply and debt decrease. We are not quite there yet but we are very close…The easiest way to do this, when it starts, is by creating non-fiat currency (debt free money) to debase the currency like the Romans did when their Roman empire experienced a their energy descent.


Can one write in a website as a candidate? I may just write-in Elizabeth Warren. She combines some of Trump's no nonsense talk about the Fed, the 1%, etc, but without all the baggage of misogyny, bigotry, and narcissism. I don't like that she supported Hillary, but I understand her desire to maintain party unity. She also doesn't seem like the type of politician to just assume the "Russia is a bogeyman" paradigm is true without digging deeper, though I could be wrong.

Scooby and Shaggy perhaps? At least then we'd all get snacks.

So you're saying - and many others are saying - we need MORE budget cuts… so who…or what agency are you going to cut?
In advance, my point is that you can only please some of the people some of the time. I suppose you already knew that, but if you tell the American people up front that you'll balance the budget by cutting XYand Z, you're either not going to get elected or else not going to get your legislation passed by Congress.

and let me finish my thought:

Those who don't realize that the USA is already in collapse mode aren't going to be ready to accept that everybody getting federal gov't funds needs to tighten their belts.

We can feel good that we know what is good for everybody, but we cannot make it happen, can we?

This picture has the quality of making these huge numbers accessible to everyone. Agreed, this is approximation, but grasp is the key in this context.I know the last sentence won’t happen a soon. or if it happen, it will be to replace old monkeys by new monkeys.
When a household is drowning in debt, it has no choice but to cut spending and start paying its debt, or go bankrupt with all the inconvenient that comes with.
Here is Quebec, the government is cutting everywhere it can (education, health, infrastructure, etc…) and at the same time the debt is still growing (at a lower rate). People, especially poorer ones, are suffering.
Example, there is a drug rehab center near our home that got a cut of 200,000$ and had to close. Tens of people thrown in the streets to dive again in what they want to get out from.
And the cancer of corruption is still widespread. One of my wife’s colleague witnessed something. The management forced her to sign a document and shut closed her mouth or else… you see the picture. Public funds managed by small mafia.

Yes we are in bad shape now with no easy answers.
To me the USA could help itself a lot by cutting the military (we have many large bases throughout the world)…but even that would be very unpopular and it might make the dollar weaker - one reason why it won't happen soon.

So debt will keep rising as long as it can.

Military power and ego, sometimes, are just one thing.On top of that, unfortunately, the globalization, as we built it, is not the right boat…
Everything is interlinked, so whatever the thread we pull, we just get a bunch of inextricable knots…

on debts will take money out of circulation. Governments with printing presses can’t go into this mode without commiting to a USSR type shutdown. None of our present political ‘leaders’ has the experience or courage to pilot their countries into a controlled descent. Convincing citizens and corporations dependent on the public purse to live on a lot less looks like a fool’s errand. Any volunteers will be looking at short lived careers…(and maybe lives)…but they would be visionary leaders.
Our present crop of pilots seem determined to fly this jumbo jet of an economy until it runs out of fuel or gets completely overloaded with debt. Either way, at some point we stall and go into a nose dive.

 What are the names of the 14 chains that have declared bankruptcy in the last ten months?