Before the latest rapid rises of Covid cases in November, the global economy was forecast to shrink 4.9% this year. At the same time, companies and governments worldwide have taken on $9.7 Trillion Dollars of new debt.
The Institute of International Finance reported global debt has risen $15 Trillion to $272 Trillion in the first nine months of this year. The IIF figures more broadly report debt and include household debt.
Global debt is set to hit $277 trillion by year’s end which would be a record 365% of world gross domestic product.
The Financial Times headlined the debt problem with these words—
Pandemic Fuels Global “Debt Tsunami”
We should all be concerned that world governments, small businesses and even corporate tech giants have created a debt tsunami. The economy has become totally dependent on the massive growth of borrowed money to create even modest growth— this was before the Covid Crisis.
Too often, in the past, rolling waves of debt ended in global financial meltdowns, including in Latin America in the 1980s, Asia in the mid-1990s and US housing in the 2000s.
Everybody’s Living on Borrowed Money
During the Covid Pandemic lockdowns, the Federal Reserve has provided direct lending to corporations, state and local governments, households, and even ETFs. This borrowing has also been supported by capital injections from the US Treasury.
We repeat the bad news: The global economy is forecast to shrink 4.4% this year. The good news is a 2021 forecast for the economy to expand 5.2% according to the International Monetary Fund. (This appears to be a very overly optimistic outlook as the lockdowns and pandemic drag on.)
Today, waves of pandemic-induced lockdowns crisis-cross the world. Both Covid cases and deaths are rising rapidly worldwide. Travel restrictions and stay-at-home orders continue to wreak destruction on the business outlook here and worldwide. Clearly, the economic damage will continue growing throughout 2021 even as the vaccine is being distributed.
Can Fake Newly Printed Money Fill the Covid Void
The on-going radical experiment of Central Banks creating new money to replace economic activity seems very delusional to us.
Keep in mind, the larger Central Banks purchased 63% of the new government debt. That means the world’s major economies created money out of thin air, loaned it to their governments, and they spent it in an attempt to fill the economic void left by the Covid Pandemic.
We’re Left With Nagging Questions
How long can this influx of new money prop up the Stock Market? How can evaluations of so many Stocks remain this high when we know the economic activity, gross sales, and profits will be down for another two or three quarters?
Can massive monetary inflation and historic levels of borrowing really mitigate the growing risks of failed businesses, personal bankruptcies, and local government’s gone broke?
Can monetary stimulus mitigate the impact of the severe Coronavirus recession we’re in today? Or will today’s debt be a lingering drag on growth for decades— a ball and chain that just won’t go away?
Only time will tell. We are surely living on borrowed money and borrowed time.
Let’s hope and pray that this unique experiment in money creation works out in the long run. Please think this out carefully. If you see the rising risks and potentially falling rewards, you still have time to prepare your portfolio now for the worse possible outcome.
The recent pullback in Gold and Silver prices may provide an excellent entry point for those of you thinking of adding precious metals to your portfolio.