Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Debt Time Bomb

Economics / Global Debt Crisis Dec 18, 2009 - 02:46 AM GMT

By: Puru_Saxena

Economics

Best Financial Markets Analysis ArticleBIG PICTURE- “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation? It would ameliorate the debt bomb and help us work through the deleveraging process” – Kenneth Rogoff, Professor of Economics at Harvard, Former Chief Economist at the International Monetary Fund


Make no mistake; the developed world is drowning in debt and as outlined above, there are only two viable options – a global economic depression or very high inflation.  It is our contention that the policymakers have chosen the latter option and over the following years, we will experience the trauma of severe inflation. 

Look.  The American government is staring at total obligations of US$115 trillion, America’s debt to GDP ratio is off the charts and the American public is also up to its eyeballs in debt.  Under this scenario, you can bet your bottom dollar that the American establishment will try to reduce this debt overhang through a process known as monetary inflation.  If you have any doubt whatsoever, take a look at Figure 1 which captures the incredible expansion in America’s monetary base.  As you can see, over the past two years, the monetary base in America has expanded from US$827 billion to an astonishing US$1.93 trillion!  Up until now, this surge in the monetary base has not permeated through the broad economy but once the money velocity picks up, the money supply will zoom and the end result will be surging price inflation.          

Figure 1: Explosion in America’s monetary base
   

Source: Federal Reserve

It is notable that America is not alone in pursuing inflationary policies; most nations all over the world are printing money and debasing their currencies.  In this era of globalisation, no country wants a strong currency and everyone is engaged in competitive currency devaluations.  Given this reality, we firmly believe that this money and debt creation will cause an inflationary holocaust over the coming years.

In fact, those who erroneously believe that deflation is unavoidable should review Figure 2 which highlights the mind-boggling expansion in the balance sheets of various central banks.  As you can see, America alone is not the only nation guilty of printing money; the Europeans have also jumped on this train to Inflationville. 

Figure 2: Central bank balance sheet expansion (15 Sept 2008 – 1 July 2009)

Source: Various central banks

Now, we are aware that many prominent commentators are still calling for deflation and their argument is based on the strength in American Treasuries.  “After all, how can inflation be a problem when bond yields are so low?” seems to be their reasoning.  Well, these deflationists seem to be missing the point because the American Treasury market is no longer a free market and we would argue that the Federal Reserve’s intervention is largely responsible for keeping bond yields artificially low.  It is noteworthy that over the past several months, the Federal Reserve has purchased most of the newly issued American Treasuries.  It goes without saying that the American central bank is engaged in this desperate act in order to keep interest-rates low.  However, it is buying these Treasuries by creating money out of thin air.  This is inflationary.  

If our assessment is correct, somewhere down the road, the Federal Reserve will lose its battle and long-dated American Treasuries will plummet in value. As more and more bond investors wake up to the looming inflationary menace, they will start demanding a higher rate of return on their capital.  When that happens, the dyke will break and the Federal Reserve will become irrelevant.  

We have no doubt in our minds that over the next decade, various central banks will intensify their money-printing efforts and Mr. Bernanke will lead by example.  After all, America has run out of choices and if the Federal Reserve does not inflate away this mountain of debt, the biggest sovereign default in history is guaranteed.  Now, given the ability of the Federal Reserve to create confetti money, we are convinced that it will opt for the inflation tonic.  Remember, inflation dilutes the purchasing power of each unit of money and it will make America’s debt more manageable.  Of course, this inflationary agenda is not a secret and this is why many creditor nations with huge reserves are beginning to diversify out of the American currency.

It is our observation that throughout history, monetary inflation has caused asset prices to rise and this time should be no different.  In the past, when inflationary expectations spiralled out of control, hard assets were the prime beneficiaries and this trend is likely to remain intact in this inflationary episode.  If our assessment is correct, over the coming years, stocks, precious metals, commodities and real-estate will appreciate in value versus paper currencies.  Furthermore, on a relative basis, we expect precious metals and commodities to outperform all other asset-classes.  Conversely, we anticipate that cash and fixed income instruments will probably turn out to be the worst assets to own over the next decade. 

Bearing in mind the looming inflationary nightmare, we urge you to protect your purchasing power by allocating capital to precious metals and commodities related businesses.  Finally, we suggest that you consider allocating a portion of your capital to the fast growing economies in Asia (China, India and Vietnam). 

For our part, we have invested our clients’ capital in world-class businesses in our preferred themes and we expect our holdings to benefit during this low-growth, high-inflation environment. 

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2009 Puru Saxena Limited.  All rights reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in