Global Debt up 76% on GFC. What next?

Posted | 22/11/2018 / Views | 4154
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Ray Dalio, head of the world’s largest hedge fund Bridgewater, warned in an interview last week that the US dollar could depreciate as much as 30% as the US’s irresponsible fiscal policy of bigger and bigger deficits (and more and more debt) starts to see foreign buyers of US Treasuries disappear.  That would see yields rise and the dollar tank.  From Bloomberg:

"The role of the U.S. dollar will diminish, and the returns on U.S. dollar-denominated debt will suffer," he said. "Then I think you will see the emergence of other currencies," though he declined to identify which ones, saying it was "too big a topic to get into."

Of course the historic inverse relationship between gold and the USD would see gold rise in such a scenario.

And as to current markets:

"When you're at a zero interest rate in the US, a zero interest rate in Europe and a zero interest rate in Japan, I think we've squeezed out a lot of assets. I think the world by and large is leveraged long. Meaning the buying of debt - corporate debt. One of the biggest sources of returns on assets was the fact that the interest rate was low relative to the return on equity. There were a lot of buybacks and mergers and acquisitions by companies buying companies. Then you had corporate tax cuts...all of those things have pushed asset prices to the level where it's difficult to see if you could squeeze more."

It’s not just the US however.  The whole world has been on a debt binge and indeed the first quarter of this year saw one of the fastest rates ever with $8 trillion added in just one quarter according to the Institute of International Finance (IIF).  For context, the whole year of 2017 saw $22 trillion added.  Interestingly the second quarter saw debt decrease by $1.5 trillion ending at an astronomical $247 trillion of global debt.  

At the onset of the GFC, a debt borne crisis, that global debt figure was around $140 trillion.  So in response to a debt crises we have increased debt by 76% in just 10 years.

To put that $8 trillion of freshly created ‘money’ into context let’s compare it to the world’s original money, gold.

Global Debt up 76% on GFC.  What next?

So in case you missed it…. We created 58 times more fiat money than gold in one quarter.  Keith Weiner calls gold a “non-expiring hedge”.  He sums it up rather neatly below:

“So we end on a conclusion we have reiterated many times. When gold goes to $10,000 it is not gold going up. It is the dollar going down. It is inevitable that the dollar will go down. I just gave a talk at an Austrian economics conference in Madrid “There Is No Extinguisher of Debt” (paper to be published soon). The collapse of the dollar is baked into the mathematics.

People could buy gold today at an 88% discount from that price. But do yourself a favour. Watch any politician on TV. Watch a Republican promise to “grow our way out of the debt”. Or watch a Democrat promise a free university education to everyone. Watch even many libertarians promote Universal Basic Income(!).

If you think they don’t understand, you are right. But the vast majority of voters support these politicians. The voters, too, don’t understand. And the same holds for investors.

Buying gold is a non-expiring hedge. But only people who perceive a need to hedge, will buy the hedge. The rest may think that stocks are a bargain here, being down almost 7% from the high last month. So far in this incredible boom following the crisis, every time people who bought the dip were rewarded.

Are we getting close to the point where it won’t be? If GE is any indication, if GE will have a contagion effect (remember that word?) then the answer is likely yes.”