[__Joker]

Econmics noob here.

Leaving aside the Ad Hominem that Spitznagel is hedge fund manager who might benefit from the said event.

I can only gather two main points in the argument.

1. Level of debt is at unprecedented levels ( private, public, global)

2. Kind of follows from 1, Government(FED) has very high annual debt servicing.

How we go from 1&2 to popping the credit bubble ?

[janejeon]

Right, I'm wondering that as well, because one could argue that 1 & 2 is a necessary condition but not an automatic trigger. Something needs to actually cause the crash, and it's not always obvious that just because there is a bubble, there will be a trigger, hence the saying: "Markets can stay irrational longer than you can stay solvent."

[nprateem]

It's not that 1 causes 2. It's people loading up on cheap debt, and only being able to service it at cheap levels. Interest rates rise, then suddenly people start selling investments and holding back on discretionary spending to pay their (now higher) mortgage costs etc.

So far people are eating into savings or getting pay rises, but as businesses are in the same boat they can't keep paying staff more and raising prices forever.

So at some point the wheels fall off as people and companies need to repay their once cheap debts, or else are just left with very little disposable income/capital with which to operate, reducing spending. This causes a recession.

The government being in the same boat reduces the money available for government spending too.

[bradleyjg]

The real issue is the potential for positive feedback cycles.

E.g.

The government spends more money on the latest bipartisan bread and circuses bill, treasury rates increase as buyers demand more to hold ever increasing amounts of debt, private interest rates follow treasury rates up,

some private borrowers are unable to service their debts at the higher rates and declare bankruptcy, private sector interest rates increase as perceived default risk goes up

some private borrowers are unable to service their debts at the higher rates and declare bankruptcy, private sector interest rates increase as perceived default risk goes up

Etc.

The last time this looked like it was going to happen the Fed stepped in and bought “fallen angel” private sector bonds. This was an extraordinary intervention. They’ll probably try again next time it starts to happen.

But they may just be building up a bigger crisis. Since the start of the “extraordinary measures” era in the early oughts they’ve never had to worry about inflation as a countervailing consideration. Now they do.

[datavirtue]

They don't HAVE to worry about it.

[MichaelMoser123]

> How we go from 1&2 to popping the credit bubble ?

People used to think, that a dramatic crash could only occur on condition of an extraordinary event. Think of country X loosing a major war + inability to pay the accrued bills.

Well, then came the subprime mortgage crisis, so now we know that we really don't know. Mr. Spitznagel is either a crackpot (most likely scenario) or he is in the know.

[datavirtue]

Facts are facts though, corporations frenzy on cheap loans...and they did/are. Stock buyback trends in aggregate make me nervous. Perhaps we should only allow fixed or capped interest rates but that would limit borrowing to fiat sources and probably exacerbate the issue.