Debt creation behaves like printed money until the time at which the creditor demands to be repaid in full rather than extended through refinancing.  The continuous expansion of debt is therefore no different than continuous money printing up to the point at which the credit markets will no longer tolerate more debt.

The U.S. economic system is riddled with more debt now than in 2008 when a de facto financial collapse the Great Financial Crisis occurred.   Debt behaves like printed money until the time at which the debt has to be repaid.  The Federal Government never repays the debt is issues.  It rolls over maturities while at the same time it issues more debt.  This happens every two weeks.   There’s now $19 trillion in Treasury debt outstanding.  That number was about $10 trillion when Obama took office in 2008.

Perpetual debt refunding and increased issuance is NO DIFFERENT THAN OUTRIGHT MONEY PRINTING.  Until of course, the creditors will no longer tolerate the refinancing of existing debt.  That’s what happened in 2008.  The market forced the issue and the financial system was collapsing until the Treasury facilitated an eventual $4.4 trillion in outright money printing.

The difference between then and now is that the amount of debt issued  is significantly greater today than it was in 2008.  While everyone was watching the Fed’s printing press to monitor the creation of money, no one was keeping track of  the spending “power” being created by the fractional banking system’s credit market funding mechanism.

This illusion of economic “wealth creation” is perhaps best represented by the auto market, in which sales have soared to record levels over the past few years.  The problem is that the amount of auto loans issued to drive this level of sales is, by far, at an all-time high.  At least one-third to half of this debt issued since 2010 can be considered sub-prime, even though the bankers may not have labelled it as such.  While the headlines today might herald “strong” auto sales in February, bear in mind that it is primarily funded by artificially low interest rates and non-income verification 100%+ loan to value debt. Private market credit companies that are now offering “equity” loans to people who own cars with little or no debt.

The level of debt issuance currently in many respects is even more insane than it seemed during the period leading up to the 2008 credit market collapse.  The same is true for mortgage debt.  The Government has begun guaranteeing, via Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA (yes, the U.S. Dept of Agriculture), this issuance of 0-3% down payment mortgages down to scores as low as 500.  Even more absurd, the  .01 – 3% portion of the down payment does not have to be in the form of cash contributed by the buyer.  That “down payment” can take the form of seller concessions or loans to the buyer. Home equity loans are back in full force just as prices in most areas are starting fall rather quickly.  While not quite as crazy as the non-doc 125 LTV option-ARMs underwritten during the big housing bubble, the destructive force that will occur when these mortgages go into default will be even greater than the first time around.

I get irritated by all of the financial analysts out there who point to the rest of the world – especially China – as being the source of global economic weakness.  A global economy sinks or swims together and the U.S. economy is one of the biggest “swing” factors in the global economy.   Make no mistake, the U.S. economy is likely already technically in recession despite small pockets which are still showing some pulse.  Moreover,  United States’ contribution to global economic growth over the past six years has been nothing more than the illusion of economic activity which was fueled by both the outright money printing from the Fed’s printing press and the de facto money printing of the Fed’s electronic credit creation mechanisms.

The time-tested economic law of diminishing returns is starting to engulf the U.S. economic system. The credit markets are starting resist additional credit issuance and the U.S. economy, notwithstanding the phony Government economic reports, is starting to head south quickly – click on image to enlarge:

Formal headline activity continues to run well above economic reality as signaled by a number of business indicators, such as corporate revenues, domestic freight activity and a variety of better-quality economic series, such as industrial production, new orders for durable goods and real retail sales. Even housing starts and construction spending are signaling a fourth-quarter contraction. – John Williams, Shadowstats.com

The stock market is spiking higher on the expectations that western Central Banks will start printing more money again. That may juice the markets for a bit longer than expected but the graphs above show that more printed money will not stimulate real economic activity. The credit markets started to collapse in the fourth quarter, led by defaulting energy debt and lower quality junk bonds. Those were just warning tremors of the massive credit market heart attack coming through the arteries of the U.S. financial system.

I sent out a mid-day notice to the subscribers of my Short Seller’s Journal  mid-day yesterday alerting them to an opportunity to make money today. Despite the 1.8% spike up in the SPX today, the stock I recommended as a “quick hit” short is down over 5% right now.  If it misses its earnings when it reports after the market closes, this stock will drop at least 25% tomorrow.