The Makings of A Global Debt Crisis Are in Place
The comments below are an edited and abridged synopsis of an article by Jim Rickards
In 2017, the financial world talked of synchronized sustainable growth in major economies for the first time since the 2008 global financial crisis. But global growth has turned into a global slowdown. Growth has turned negative in two of the world’s largest economies, Japan and Germany, and is slowing rapidly in the world’s biggest economies, China and the US.
But while global growth may be slowing down, debt creation is not.
Total debt held by economies both mature and emerging rose to a record $247 trillion in the first quarter of 2018. That’s up 11% over the same period in 2017.
It requires a record $8 trillion of new debt to create just $1.3 trillion of global GDP. The massive debts intended to achieve growth are piling on everyday. Meanwhile, many of the debts taken on since 2009 are still on the books.
One massive event could mean an immediate halt to governance. The turmoil would be a horrendous blow to the full faith and credit of the US government and cause blowback creating prolonged government shutdowns throughout the year.
The Fed is drawing down its balance sheet with quantitative tightening (QT) by ceasing to roll over maturing positions in US Treasuries. Its tightening has created the need for other central banks to tighten, or pause their easing inorder to match it.
The Fed is already in the negative. The Bank of England is
If another crisis happens, the Fed will cut rates to zero. But it won’t be enough. They’ll have to abandon QT and go back to QE4. Other central banks will follow the Fed’s lead.
The market sees this coming, but the Fed does not. As usual, the Fed will be the last to know. Investors should prepare now for the inevitable crack-up.
Having cash and gold are two places to start.