The world is drowning in debt, and nobody knows what will happen next. This is terrible news for fiat currencies, and excellent news for gold and Bitcoin.
At a certain point, debt tends to beget more debt in a downward spiral with no way out. This generally happens for two reasons:
- First, because the debt load gets so heavy, relative to income, that the borrower is forced to borrow more just to stay afloat, which only makes the debt load worse.
- And second, because the cost of servicing the debt — the funds applied to interest rate payments, and payments on top of payments — compounds as the debt load grows.
The ultimate result of the spiral is either technical bankruptcy — an official default as recognized by the courts — or de facto inflationary bankruptcy, in which the debt is inflated by printing currency (as the currency rapidly becomes worthless).
For countries, a simple measure of health is the debt-to-GDP ratio. This ratio looks at how much government debt a country holds relative to its productive output each year.
According to the Institute of International Finance (IIF) in Washington, D.C., the global debt-to-GDP ratio hit an all-time high in the third quarter of 2019. Total debt levels rose almost $10 trillion from a year prior, to a global tally of $252.6 trillion.
The U.S. debt-to-GDP ratio rose to 105% last year — the highest level since the 1940s and the aftermath of World War II. But it isn’t just the United States. Government debt-to-GDP also hit multi-decade highs in Australia. Canada, meanwhile, has record levels of corporate debt, as do China and France.
And emerging-market debt burdens make the U.S. numbers look tame: According to Kaushik Basu, former chief economist for the World Bank, emerging economies have a record-level debt-to-GDP ratio of 170%.
Everywhere you look, debt levels are exploding.
It’s happening in the private sector, too: “Corporate America is awash in junk debt,” CNBC reports, “and the situation could deteriorate substantially in the next five years as a record amount of issuance comes due.”
Meanwhile, U.S. consumers are feeling confident — but their borrowing habits look shaky. Auto loan balances topped $1.2 trillion at the start of 2020, with defaults at a record high. U.S. student loan debt is $1.6 trillion, with nearly half of all borrowers struggling to make payments.
Then, too, most of these numbers are expected to get worse. The IIF sees the global debt burden rising, not falling, in the coming years. According to the Congressional Budget Office (CBO), the U.S. deficit will top $1 trillion in 2020 for the first time in eight years — and keep on growing from there.
But the really scary thing isn’t the size of the debt burden; it’s the timing.
The global financial crisis was 12 years ago, in 2008. The global economy has been recovering for more than a decade, ever since markets bottomed out in the first half of 2009. In 2019, meanwhile, equity markets boomed and U.S. unemployment was at its lowest in decades.
This leads to a series of unsettling questions:
- If debt levels are still in the stratosphere after 10 years of recovery, what happens after the next financial crisis? (Because there is always another financial crisis; it’s just a matter of when.)
- If governments, companies, and consumers are borrowing this much in boom times, when surplus savings are supposed to be paying down debt, what happens in a recession?
- If central banks have already leveraged their balance sheets into the trillions, what will they do in the next emergency? Leverage them into the tens of trillions?
This is why nobody knows what will happen next.
There is no precedent for the record levels of debt we are seeing now. The only comparisons in history were the result of two world wars.
One likelihood that seems reasonable to count on, when all of this shakes out, is some form of mass-coordinated “de facto” default — meaning the efforts of central banks on multiple governments to inflate away debt burdens with new fiat currency injections. And that likelihood, in turn, makes gold and Bitcoin — the two stateless currencies, one old and one new — a compelling investment proposition for the 2020s.
TradeSmith Research Team
