The Snare of Debt


The Snare of Debt

Debt is the Achilles heel in today’s high-flying American economy. Vast wealth is being accumulated on a crumbling foundation of massive debt. What will happen when the economy slows down? How will that debt be repaid?
From the March-April 2000 Trumpet Print Edition

Mankind has just completed what can be justifiably called the “American century.” No other nation has impacted the world and history more by its military, economic, diplomatic and cultural power since the ancient days of Rome.

A January 14 article on the Internet’s CNNfn, “Party on Wall Street,” stated, “U.S. stocks rallied for the second straight session Friday, pushing the Dow Jones industrial average to a record high [11,716 points] after government data and words from the nation’s most powerful banker [Alan Greenspan] convinced investors that only a modest interest rate hike lies ahead.”

On that day when the Dow jumped to that record, Intel’s stock went up $12 per share, which increased Intel’s market value by an astounding $40 billion dollars in one day! Since March of 1991 when the present expansion began, U.S. stocks have risen an amazing $11 trillion in value! People are calling this the “virtuous cycle,” meaning strong growth with low inflation. And they say it will never end, and that we have overcome the problems which have in the past led to stock market crashes.

In the January 3 Wall Street Journal (wsj) a headline read, “Economists Are Euphoric About the Prospect for 2000.” The article stated (emphasis mine here and throughout), “Nearly all of the economists in the Wall Street Journal’s semiannual economic-forecasting survey believe that strong consumer spending, rising business productivity and tame inflation will keep the U.S. economy humming through the year 2000—shattering records for the longest economic expansion in U.S. history [nine years as of last February]…. ‘There is no end in sight to the expansion,’ said [Allen] Sinai [economist at Primark Corp.], who contends the U.S. economy is operating in a ‘new era’ in which a number of structural changes have made it possible for the economy to grow nonstop without triggering inflation—the culprit that has often led to economic downturns in the past.”

Mr. Sinai is saying we are experiencing a new economic era based on some structural changes which make this economy better. But we must ask, is this truly sustainable?

One of the greatest economists to ever live, John Kenneth Galbraith, wrote a book in 1954 titled The Great Crash 1929. On pages 194-195 he wrote that “the chances for a recurrence of a speculative orgy are rather good. No one can doubt that the American people remain susceptible to the speculative mood…. A rising market can still bring the reality of riches. This, in turn, can draw more and more people to participate. The government preventatives and controls are ready. In the hands of a determined government their [effectiveness] cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them. In our democracy, an election is in the offing even on the day after an election. The avoidance of depression and the prevention of unemployment have become, for the politician, the most critical of all questions of public policy. Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment. Booms, it must be noted, are not stopped until after they have started. And after they have started, the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929, like a decision in favor of immediate as [opposed to] ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate, but of identifying the executioner.”

Mr. Galbraith is saying that if the Fed’s high interest rates kill the boom, then all fingers point at them (and the politicians in office). He continues, “The market will not go on a speculative rampage without some rationalization. But during the next boom, some newly rediscovered virtuosity of the free enterprise system will be cited [a “new era” due to “structural changes”]. It will be pointed out that people are justified in paying the present [high] prices—indeed, almost any price—to have an equity [or ownership] position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith.”

Prophets of Doom

On page 73, Mr. Galbraith uses the term “prophets of doom” as society’s label for people who don’t jump on the bandwagon of euphoria during boom times. He says in the concluding paragraph of his book, “…inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.” Mr. Galbraith’s last words in his book are a warning to not be deceived by lying men.

Jeremiah 17:5 says, “Cursed be the man that trusteth in man.” And four verses later, it tells us why: “The heart [meaning the mind of man] is deceitful above all things, and desperately wicked [meaning incurably sick]…” (v. 9). We cannot trust men who say things are good when they are not!

An article in the Orlando Sentinel of September 29, 1998, gave a series of statements being made in 1929 about the promising year of 1930, despite the stock market crash in October 1929. “I believe that 1930 will be one of the most soundly prosperous years in American history,” said E.A. St. John, president of the National Surety Company. “There can be little that may indicate a serious or continued depression,” said the president of Metropolitan Life Insurance Company. “A consensus showed that the new year [1930] will be more prosperous than for some time, with every indication of an excellent 12 months from a business and financial standpoint,” stated the sixth Federal Reserve District. And the New York Times reported, “Bankers say…that the full year [1930] will prove sound. Authorities in all branches of business and industry agree that already indications of improvement are seen.”

The article then stated, “As Harry Truman was fond of observing, the only surprises are the history you don’t know. So people who don’t know history don’t know…that all this talk of a ‘new era’ is actually more than 60 years old. It was all said on the eve of the Great Depression.”

The Great Crash 1929 says on page 77, “In March of 1929, [Paul M. Warburg of the International Acceptance Bank] called for a stronger Federal Reserve policy [meaning higher interest rates to slow the stock market] and argued that if the present orgy of ‘unrestrained speculation’ were not brought promptly to a halt there would ultimately be a disastrous collapse. This, he suggested, would be unfortunate not alone for the speculators. It would ‘bring about a general depression involving the entire country.’… As the market went up and up, his warnings were recalled only with contempt.”

The Trumpet knows this is not a popular message with most people, but there are other very cautious predictions being made based upon a clear-headed view of some very unsettling facts about America’s economy.

Just the Facts…

For one thing, the Federal Reserve Bank has been very slow about raising interest rates, just as Mr. Galbraith said they would be for very political reasons. By not raising interest rates, there is now a very great risk that today’s rising corporate and consumer debt levels may turn into tomorrow’s crash.

The January 3 wsj quoted earlier went on to say, “‘These are the best of economic times by any measure. The economy is growing rapidly, inflation is nonexistent, unemployment is the lowest it ever has been, and real median household income—probably the best measure of our standard of living—[has] never been higher,’ says Mark Zandi, chief economist at…an economic-consulting firm…. ‘When euphoria is running very high is when we should be most concerned.’

“Mr. Zandi worries that Americans are taking on too much risk on the mistaken assumption that the economy can expand forever. Investors are borrowing to buy stocks in hopes that the market will never decline.” That was one of the great mistakes before the 1929 crash, when only 1.5 million Americans, 1.2 percent of the population, were in the stock market. Today, 63 million Americans—24 percent—directly own stocks, much of it on borrowed money. In fact, margin debt (credit extended to buy stocks) jumped 46 percent in 1999 to a record high.

The wsj article continued, quoting Mr. Zandi: “Hubris is running pretty high. That’s when mistakes happen.” Hubris means “wanton insolence or arrogance resulting from excessive pride.” He is saying when you have that kind of arrogance and excessive pride, “mistakes happen.” Your Bible says the same thing in Proverbs 16:18: “Pride goeth before destruction, and an haughty spirit before a fall.” Hosea 5:5-6 says that pride is going to bring Israel down, because God has withdrawn His blessings due to Israel’s sins.

A Mountain of Debt

The nations of Israel (primarily the U.S. and former British Commonwealth nations) are all going to fall and fail together, and when that occurs, the huge amount of debt we have accumulated will roll over us like a mammoth steamroller.

U.S. corporations and individuals are on a borrowing binge of historic proportions, which is making them more vulnerable than at any time in history to a slowdown in the economy.

Because of relatively low interest rates, corporations are borrowing money and selling bonds like never before. Remember that bonds are simply loans to a corporation or government—selling bonds is just another form of borrowing money, because it must be paid back.

U.S. non-financial corporations had accumulated a record $4.2 trillion in outstanding debt by September of 1999. That is up 12 percent from the same time period in 1998 and is an increase of a staggering 60 percent in the last five years alone.

Corporations are not alone in this mountain of debt, because individuals are hugely in debt also. American consumer borrowing has risen almost 50 percent in the past five years, amounting to a record $6.3 trillion over that period—including $1.4 trillion of credit in 1999.

Debt is growing at a substantially faster rate than either individual income or corporate after-tax profits. But the level of debt is not as important as the ability of corporations and individuals to pay it back.

As long as the economy remains strong, debt payments are manageable for most. But what happens if there is an end to this booming economy?

That question is clearly answered by British economist Peter Warburton in his 1999 book Debt and Delusion, which says, “The kernel of the argument is that the [simultaneous] accumulation of debt and financial assets in a low inflation environment cannot continue indefinitely. There are many indications…that this departure from economic reality is destined to reach its [end] in the relatively near future. Whether it is emu [European Monetary Union] that pulls the trigger, or U.S. bonds, or the Japanese credit system…is impossible to know in advance; but when it happens, we will all know. How much time do the institutions, companies and citizens of prestigious Western nations have to change course? Until the end of 1999? Probably. Until the end of 2001? Possibly. Until the end of 2003? That would take a miracle” (pp. 244-245).

We at the Trumpet are not setting dates, but as this renowned economist indicates, it is very likely that we do not have very much time before a disastrous collapse of the American economy. The best thing we could recommend is that you get out of debt, such as credit card and other short-term debt, and get into a good cash position so that you can weather some of the early storms on the horizon.

A lot of people are going to be wiped out financially. When that occurred in 1929, many people jumped out of office building windows so that their families could at least start over with the life insurance money. And America is setting itself up for a repeat of this horrible history!

Foreign Capital Flight

This present economy is two to three times more debt-dependent than in the 1950s. A great deal of that debt is owed to foreign investors, and that is the real danger.

When investors take their money out of a country, it is called capital flight. Foreign capital flight is probably the greatest financial danger facing America today.

Deuteronomy 28:43-44 and 52 show that foreigners who own America’s assets and are financing its national debt and fueling its stock markets are going to buy our bonds to make astronomical loans to us—and then they will “besiege” and destroy us financially because of that debt condition!

It doesn’t matter that our money says “In God we trust.” It is the “almighty dollar” Americans truly trust, as Proverbs 18:11 and Ecclesiastes 7:12 clearly show. Americans put their trust in their money and wealth, and that is why America will be “besieged” financially!

If you paid any attention at all to the Asian financial meltdown of 1998 as it spread around the globe, one of the most striking facts was how quickly investors panicked and pulled their money out of Thailand, Indonesia, Russia, Brazil, Venezuela and so on.

A headline in the December 1, 1999, wsj trumpeted, “Dollar’s Fall Against Yen Raises Fears Investor Faith in U.S. [Dollar] May Waver.” The article said, “The dollar is down 17 percent from its 12-month high against the yen, a slide apparently precipitated by stirrings of recovery in the Japanese economy. But the dollar’s decline against the yen is now fueling worries that if it continues, it could turn investors’ focus to the huge U.S. trade deficit and shake their confidence in the dollar against other currencies.”

In 1997, America’s trade deficit was $104 billion, meaning Americans bought $104 billion more of imported foreign products than we exported, or sold to foreign countries. In 1998, that swelled to a deficit of $164 billion. And in 1999, it had ballooned to a staggering $271 billion!

Not only does a record-high trade deficit mean more debt on the backs of Americans because it has to be financed, a high trade deficit also masks inflation because foreign competition prevents U.S. manufacturers from raising prices until inflation explodes on the scene. So no matter what politicians say, the U.S. trade deficit is a major problem.

The wsj article continues, “…if the [dollar’s] slide against the yen turns into a general weakening of the dollar, that could put a damper on the…nine-year-long U.S. expansion, as international investors look elsewhere for places to park their money, and domestic interest rates are forced upward.”

Please don’t miss the significance of that statement! Foreign investment is what is keeping America alive right now.

On a national average, Americans are not saving anything—they are spending more than they make and borrowing the difference, and they have been doing that for seven years. That means the only significant place the federal government and U.S. corporations can get loans is from foreigners.

There are trillions of dollars which will need to be repaid if for any reason foreigners decide to sell their U.S. holdings. All it will take is a panic among investors.

A Future Crash

On page 174 of The Great Crash 1929 it says, “The collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before [meaning, they knew a collapse would occur eventually]. The only question concerning that speculation was how long it would last. Sometime, sooner or later, confidence in the short-run reality of increasing common stock values [rising prices] would weaken. When this happened, some people would sell, and this would destroy the reality of increasing values. Holding for an increase would now become meaningless; the new reality would be falling prices. There would be a rush, pell-mell, to unload. This was the way past speculative orgies had ended. It was the way the end came in 1929. It is the way speculation will end in the future.” That is quite a prediction!

It is foolish to think America will be different from every other civilization in history. That is nothing but pride and vanity. And remember the warning that “Hubris [arrogance resulting from excessive pride] is running pretty high. That’s when mistakes happen.”

America is making a terrible mistake which will result in the greatest fall in all of mankind’s history! As soon as America is no longer a safe place for foreign money, that money will be gone. And once the foreign money is gone, it will leave us with a mountain of debt that we cannot repay.

Americans seem to be forgetting lessons we should have learned in Economics 101. What happens when we cannot pay our house payments or car payments? At a house-loan-closing meeting, a lender made it very simple. He said that all the loan paperwork which had just been signed simply meant, “If you pay, you stay; if you don’t, you won’t.”

Quite simply, what happens when we cannot pay is that the lenders repossess the cars and houses. That is exactly what will happen to this country! You can read about the repossession of Israel in Deuteronomy 28:43-52. They’re going to take all of this glory and power and wealth and comfort away from us!

Financial Rejection

So the question arises: Where will the foreign money go just before America’s collapse?

A Financial Times of London article on December 16, 1999, said, “In spite of its lackluster performance on the foreign exchange markets, the euro has proved the most popular currency in the international bond markets since its launch in January [1999]…. ‘The U.S. dollar has punched well above its weight in the financial markets over the last 30 years because it had no competitor,’ said David Knott, head of fixed-income research at Deutsche Bank, ‘but now borrowers can choose between two markets.”

Another Financial Times article quoted the head of Hong Kong’s monetary authority as saying, “I’m afraid more and more people are focusing on the vulnerability of the U.S. market and will start moving out” (Dec. 7, 1999).

Times are changing, and it is only a matter of time until America is toppled from its seat of power and replaced on the world scene—just as Britain was toppled and every other superpower nation which has dominated the world. That is the main lesson America is forgetting: America is no different than any other nation which has risen to power and then fallen from power.

Debt will play a major role in the unwinding of American power, and a rising Europe is just waiting for the opportunity to assume world dominance. America’s extremely vulnerable economic position has caused investor confidence to be squarely aimed at a German-led Europe—the new darling of the monetary world.

Haggai 1:5-6 describes America perfectly, because Americans have not saved anything! It’s like their money ran out of a hole in their moneybag. And soon, hyperinflation will cause the spending power of the dollar to vanish. Americans are spending themselves out of existence!

The U.S. dollar is going to fall from dominance, and people will only be able to buy or sell with the mark of the beast (Rev. 13:16-17). The beast power of Europe will totally control world economies and will look like a perfect place for investor money; therefore, trillions and trillions of dollars of investor money will flow out of America and into Europe!

An economist was quoted by the Associated Press recently as saying, “A day of reckoning doesn’t come until there is something to do with the money that is better than investing in the United States.” He is right, and it is just a matter of time.

Foreign capital flight is on the horizon for America, yet Americans, in all their haughtiness, refuse to see it coming. America will be blindsided and totally shocked when it is rejected by the investors of this world! In fact, foreign capital flight is probably the primary mechanism whereby America will be abandoned by its former financial “lovers” in fulfillment of God’s prophecies.

Jeremiah 4:30 says that no matter what Israel does, her lovers will despise her! America and the other nations of Israel will be hated by all nations. A time is coming soon when Israel will try to make itself appear financially attractive to investors of other nations, but all in vain.

Something soon will very likely cause what is known as a “bond shock,” which will cause a rapid rise in bond yields resulting in a dramatic increase in the costs of financing debt. A sudden jump in oil prices or commodities can cause a bond shock. The trigger could be an earthquake or volcanic eruption, or a major crop failure, war or political instability—any number of things. In such an event, the cost of financing debt becomes intolerably high and unsustainable.

Countries with low national savings rates and high foreign ownership of domestic public debt are the most vulnerable to a bond shock. That perfectly describes America. Foreign bond holders will immediately take their money back to their own countries when the bond markets become unstable. In such a scenario, there is no money to borrow, because the “locals” don’t have any savings and the foreign money has gone.

Prepare Yourself!

The concluding paragraphs of the book Debt and Delusion are quite eye-opening: “The story of the Western financial system since the early 1970s is one of debt addiction. In the Anglo-Saxon countries [Israel], access to affordable forms of borrowing has risen exponentially…. In other developed countries, conservative attitudes to personal borrowing have been negated by [spendthrift and wasteful] attitudes to public debt. Even as the agonies of Japan’s debt-induced calamity are being re-expressed in East Asia, Western governments insist that all is well. However, the absence of serious inflationary problems during the 1990s does not prove that the debt addiction has been broken. Rather, there is persuasive evidence that the problem has migrated elsewhere. Over-emphasis, to the point of obsession, on the inflation objective has blinded governments and their central banks to the risk of widespread debt default by borrowers. The unpreparedness of the Western world can be understood only in terms of ignorance. Most of those under 50 years of age hold only a small proportion of their assets in the form of cash and deposits. They do not appreciate how fragile the financial system has become, nor how easily the investment gains of many years could be forfeited. One day the mist will clear and the collective delusion of effortless wealth creation will be shattered. Until that day, we are living on borrowed time…. Prepare for an explosion that will rock the Western financial system to its foundations.”

That is why it is so important to get out of debt. God’s people need to get their short-term debt down and get into a good cash position so they can weather the waves of financial shocks that will be coming in the near future. Have a minimum of debt and the maximum cash possible—six-months’ income in savings, if possible, because there is nothing like cash to help you weather a crisis. We should all do this in order to protect our families and be able to continue financially supporting this work of the living God all the way to its conclusion.

We are told in I Timothy 6:6-10 that wrong financial dealings are a snare waiting to snap shut on the unwise, and that it will produce great sorrow. Right now, this wonderful nation of America is in a great deal of danger because of the snare of debt.

But in spite of the tremendous trouble and turmoil immediately ahead, you can be protected if you will keep God’s laws and His ways and help us finish this work of warning a dying world.

“But take heed to yourselves, lest your hearts be weighed down with carousing, drunkenness, and cares of this life, and that Day come on you unexpectedly. For it will come as a snare on all those who dwell on the face of the whole Earth. Watch therefore, and pray always that you may be counted worthy to escape all these things that will come to pass, and to stand before the Son of Man” (Luke 21:34-36, nkjv).

We urge you to study your Bible and prove if we’re telling the truth. May God give you ears to hear and eyes to see.

Sidebar: Deeper Than Ever in Debt

You need to understand the extremely vulnerable position this nation is in today. Here’s a look at the nation’s debt by the numbers:

• $5.69 trillion The federal government’s debt as of February 7.

• $130 billion The increase in debt for 1999.

• $37 billion The increase in debt so far in fiscal year 2000 (since September 30, 1999). If America’s budget was actually balanced as they say, then the federal government’s debt would not be rising! The present U.S. administration’s “pie in the sky” budget projections for the next decade are just not going to happen!

• $41 million Amount the U.S. government pays per hour in interest on the debt—24 hours per day, 7 days a week.

• $3.3 trillion Amount of interest on its debt the U.S. government has paid in the last 11 years.

• $25 trillion The total national debt, not including what the government owes to the Social Security trust fund, government pensions and Medicare. This covers all U.S. debt: the sum of all recognized debt of federal, state, local governments; international debt; private household debt; business and domestic financial sectors’ debt.

• $100,000 The average share of the total national debt owed by every American man, woman and child.

Sidebar: The Perils of Minimum Payments

• If you charged $1000 on a credit card with an interest rate of 18 percent, the minimum payment would only be about $20 per month.

• If you only paid the minimum payment and did not charge anything else to the card, it would take eight years and four months to pay off the balance.

• If you added $50 to the minimum payment every month, however, the card would be paid off in one year and five months.