There is a lot of talk around rising debt – particularly around enormous sovereign debt, including that of the United States – which rocked the financial markets temporarily.
With the debt-ceiling issue pushed out to December, the market appears to gain some stability.
HOWEVER, raising debt ceiling does not address the fundamental issue and represents continuation of the consistent pattern that we have seen from the government – which is
“THERE IS SO MUCH DEBT AND OUR SOLUTION IS TO DEALING WITH HITTING DEBT CEILING IS TO RAISE THE CEILING RATHER THAN PAYING THE DEBT DOWN”
To be fair, the government can’t afford to pay down debt because of the economy – covid19 risk remains real and last thing government want is to pull down spending and be blamed for pushing the economic recovery off the course – therefore, we all resort to issuing more debt and this leads to today’s topic – GLOBAL DEBT TRAP.
Debt trap is not new, but recent interview of Professor Nouriel Roubini of New York University, also known as Dr. Doom due to his bearish view on the market, was particularly interesting because he was NOT talking about market correction, but sounded rather bullish on the financial markets.
His view was as follows – and this was music to my ears because it is so similar to my view.
- THERE IS SO MUCH DEBT AROUND THE WORLD – DEVELOPED NATIONS DEBT ARE NOW AT ~400% OF GDP.
- GLOBAL ECONOMY IS NOW ESSENTIALLY SUSTAINED THROUGH DEBT (GOVERNMENT NEEDS TO SPEND MORE MONEY)
- FINANCIAL MARKETS HAVE ALSO BECOME DEPENDENT ON LOW INTEREST RATES AS ALL ASSET PRICES ARE INFLATED DUE TO SUSTAINED LONG-TERM LOW INTEREST RATE
To pay down debt, the governments will not be able to raise more taxes (highly risky and more importantly unpopular), but will essentially monetize the debt – diluting the value of currency.
WHAT DO YOU NEED TO MONETIZE DEBT? INFLATION – WHICH IS ONLY ACHIEVED THROUGH LOW INTEREST RATES.
MONETIZATION OF DEBT is on-going, but I think we are still in the early innings of monetizing of debt.
If the debt is getting monetized by diluting the value of currency, the asset price inflation is likely to continue because each dollar or euro becomes worth less (not worthless) than it was before and you need more of each currency to represent the value of the assets.
This is why I remain fully invested with leverage – I want my debt to be monetized as well.
I actually also believe that US government can’t afford to have rising rates so far as it is probably the largest beneficiary of low interest rates – I discussed this in more detail in below- please take a read.
Hedge fund manager John Paulson expressed similar view in his interview with David Rubenstein.
I think it is becoming increasingly risker to not invest than ever before – I may not be the best player in investing, but to me, it is better to play the game and move with the group than to not play the game and be left behind and be penalized by the silent tax – the inflation.
It is a shame that I realized this too late – I should have been actively investing with leverage a long time ago.
what are your thoughts on sustained inflation?
