Herbert Stein, a prominent economist and adviser to presidents Richard Nixon and Gerald Ford, once remarked, “If something cannot go on forever, it will stop.” The fact that his remark is obvious makes it no less profound.
Simple denial or wishful thinking tends to dominate economic debate. Stein’s remark is like a bucket of ice water in the face of those denying the reality of nonsustainability.
Stein was testifying about international trade deficits when he made his statement, but it applies broadly.
This article looks at the nonsustainability of global debt levels. Debt actually is sustainable if the debt is used for projects with positive returns and if the economy supporting the debt is growing faster than the debt itself. But neither of those conditions applies today.
Debt is being incurred “just to pay the bills” in the form of benefits, interest and discretionary spending. It’s not being used for projects with long-term positive returns such as interstate highways, bridges and tunnels; 5G telecommunications; and improved educational outcomes (meaning pedagogical improvements, not teacher pensions). And developed economies are piling on debt faster than they are growing, so debt-to-GDP ratios are moving to levels where more debt stunts growth rather than help.
It’s a catastrophic global debt crisis (worse than 2008) waiting to happen. What will trigger the crisis? In a word — rates.
Low interest rates facilitate unsustainable debt levels, at least in the short run. But with so much debt on the books, even modest rate increases will cause debt levels and deficits to explode as new borrowing is sought just to cover interest payments.
Real rates can skyrocket even as nominal rates fall if deflation takes hold. (A nominal rate of 1% with 2% deflation equals a real rate of 3%.) The world is on the knife edge of a debt crisis not seen since the 1930s. It won’t take much to trigger the crisis. Simple solutions for investors include cash, gold and Treasuries. Be prepared.
Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.