Updated: Dec 10, 2020
If you have not already figured it out, witnessed it for yourself, read about it, or otherwise experienced it firsthand, the developed world is swimming in debt in a proverbial sea of sharks without a life raft anywhere to be found.
Canada just added $381.6 billion more debt this year alone, more than 7 times what was anticipated. Yes, we are suffering through Covid. The whole world is. But it does not excuse us from having to keep an eye on the debt meter as it runs higher out of control as though we fell asleep on a drive from JFK to Brooklyn and awoke with a $16,000 cab tab.
If we have learned nothing about ourselves since 2008, we should at a bare minimum, know this: There are only two viable options or outcomes to the surreptitious policies of our lovely central bankers and governments of the developed world.
One option is a global economic melancholy, which kind of feels like exactly where we find ourselves at the moment, despite some of the best stock prices and the gang bang we have had with Bitcoin, while the other remains very high inflation.
It has been my contention, for some time I might add, that the policymakers have preselected door number two, and that over the following years we will experience the anguish of severe inflation. Let’s be prepared.
The basic premise for this argument is a simple one. The US government, “arguably” still the largest economy in the world, is staring at total obligations of US$181 trillion in funded and unfunded liabilities with a debt-to-GDP ratio which is off the charts, at last check over 106%, up 1 full percentage point since 2018 alone.
The American public is also swimming in debt: total US debt as of December 4th, 2020 is now approximately $81 Trillion. That is a staggering increase of approximately 47% since 2010 alone. By comparison, total debt (the combination of government, business, mortgage, and consumer debt) was a mere $13.5 trillion 30 years ago.
Under this scenario, it is arguable that the US will try to reduce this debt through the usage of a sustained increase in the money supply, more commonly referred to as “monetary inflation”. If you have any reservations whatsoever, take a look at the chart below, which captures the incredible expansion in the US monetary base, and pay attention to how the base has expanded since 2008. This speaks volumes as what the “FED Heads” are thinking.
As you can see, over the past 10 years, the monetary base in the US has expanded from approximately US $848 billion, in January of 2008, to a bewildering US $4.9 trillion! And, believe it or not (By the way I am certain this sideshow will be posted in a Ripley’s museum at some point in the future), until now, this surge in the monetary base has not produced a highly visible inflationary impact…yet, that is.
It is also noteworthy that the US is not alone in pursuing inflationary policies. All over the world developed nations such as Canada and many others, are printing money and debasing their currencies. In this era of globalization, no country wants a stout currency and as a result, many of these very countries are betrothed in competitive currency devaluations as we speak. This massive money and debt creation will cause an inflationary explosion over the coming years at some point.
Those who believe, fallaciously, that deflation is more likely should consider the chart below, which highlights the mind-boggling expansion in the balance sheets of various central banks.
As you can see in the image above, several nations are participating in this economic calamity of sorts by printing copious amounts of money; many of which have been in the same race since 2008.
Despite this clarity, many prominent commentators remain steadfast on calling for deflation and even-keel sailing. "After all," they argue, "how can inflation be a problem when bond yields are so low?". Well, these deflationists seem to be missing the point because the US Treasury market is no longer entirely free and hasn’t been, along with many other markets like silver and gold, since 2008 and perhaps much before that.
The Federal Reserve’s intervention, in the form of good ole’ dirty and excessive money printing, is largely accountable for keeping bond yields artificially low while at the same time leaving the impression that the stock market and many other markets are witnessing “substantiated” rebounds.
However, over the past several years the US Federal Reserve itself has purchased most of the net new issuance of Treasuries, and now in 2020 the need to spend yet again is not due to a resurgence of organic growth, but a response mechanism to the Covid situation they and many other countries find themselves in. This is, outside of social net support, a desperate act which the central banks in the US, and here in Canada, use to keep interest rates low. However, it is buying these Treasuries by creating currency (paper money) out of thin air. This is inflationary (either now or long term) and those that do not accept this premise are, with all due respect, daft.
If my assessment is correct then somewhere soon the Federal Reserve will lose its battle and T-bond yields will soar once again. As more and more bond investors wake up to this impending inflationary hazard, they will start demanding a higher rate of return on their money. When that happens the dyke will burst, Covid will be a thing of the past, and the Federal Reserve will become superfluous. In a sense perhaps giving way to a new idea, a new concept (I will not use the term “reset”).
Inflation would certainly make US and CDN debt more manageable but it would also water down the purchasing power of both currencies even more so than is happening already. Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves have continued to diversify away from the US dollar and into assets such as gold and silver; it should come as no surprise that the largest holder of US debt is also now arguably about to become the largest holder of physical gold in history. All of this is pointless, of course, if you still believe that Fort Knox holds the gold they claim to have been keeping for decades; nudge, nudge, wink, wink.
In the past when chapters of inflationary stories have been written the ending has always been the same; a spiraling out of control for a time and a momentous growth in the value of hard assets. This trend is expected to continue. Furthermore, on a comparative basis, we expect precious metals and commodities to outperform all other asset classes for a significant period.
Make no mistake that this is an awakening of sorts into a new cycle of problems and long term uncertainty. Gold and silver are not your only answer but there is no longer an excuse not to have them as part of a well-diversified portfolio. They are tradeable, easily stored, incredibly liquid, and convertible to all major currencies. They can be put into your registered accounts such as 401Ks and RRSP/TFSA and they have a pretty darn amazing track record since my 1st days of being in this market back in 2004 (Gold averaging 10% while Silver averaging 11-12% both per year).
Isn’t now the time to do something different?
Yours to the penny,
Darren V. Long
Delta Harbour Assets