Global Macro Structural Shift By Michael E. Chadwick, CFP® April 2017

The wise man builds his house on a rock and the fool builds his house in the sand. The global monetary system as we know it today is headed towards a major structural shift away from faith in government and towards fiscal sanity without the possibility of manipulation. The current belief in “government can fix all ills” simply by printing money, lowering rates or otherwise providing monetary easing in some form is a complete fallacy. Debt has been spiraling out of control since 1981, but the debt trajectory has really gone vertical since the financial crisis in 08 across the globe. America has seen its national debt almost double from 2008 – 2016. From 1776 – 2007 the national debt went from zero to 11 trillion, then it went from 11 to 20 trillion in 8 years. That’s a very sad state of affairs for our great nation. The impact of this debt is that it ultimately puts an anchor on the productive economy due to the cost of servicing it. We’re trying to spend our way to prosperity but it is both mathematically and economically impossible. We’re spending $4 in new debt for every $1 in GDP growth at current levels. In another time this would have been labeled sheer insanity but today it’s all okay, for the time being. This has happened with rates artificially suppressed at zero or near zero levels and the cost to service the debt has not yet been really felt.

Rates are now on the rise, at least temporarily, and we’re not even close to done reconciling with the debt situation that first caused global tremors in 2008 when the real estate credit market imploded. When this happened governments around the world decided to kick the can down the road and simply print more money to make massive bailouts and give people confidence in the system and lastly “reflate” asset prices. This was the chosen course over being responsible and dealing with the structural issues that caused the problem in the first place, excess debt. Looking back it is crystal clear an entirely different path should have been taken, one where overleveraged institutions were allowed to fail and fiscally sound policies implemented. The problem in the real estate bubble was they were lending money to anyone to buy a home that would supposedly go up in value forever. It clearly didn’t and that bubble ended. Today people can still buy homes with virtually nothing down, but they’ll need a job and good credit to do so. Since they’ve bailed out everything and thrown money at banks, manufacturers and stock markets around the globe. The old adage of when nothing can fail everything has failed has never been more poignant.

All of the money they’re using today for stimulus is borrowed money, printed out of thin air and massively increasing the country’s debt load. Central bankers call this “balance sheet increases” to make it palatable to the public. Think about the fact that they’re attempting to fix a debt problem by creating more debt. The very problems we had in 05-07 have simply been moved from one part of the economy to another, now real estate lending is somewhat sane and controlled although down payments are still far too small. The exact same underwriting problems exist today in three different areas of the economy; student loans, automotive loans, and government borrowing on virtually every level. Governments now spend more than they take in almost every year and continuously add to the annual and total deficits. There isn’t even talk of paying down debts, we just continue spending beyond our means. In fact a few years ago when a politician suggested fiscal discipline and balancing the budget they were labeled a “terrorist!” This is like helping a couple with $40,000 in credit card debt who have maxed out their cards and cannot make the payments any longer and now no longer have access to any credit, offering them a new, $40,000 credit card at a lower interest rate and lower monthly payment.

If one continues to do what they have always done expecting different results, this is the definition of insanity. The fact that governments and central banks can print money, seemingly on an endless basis, will not provide for a positive outcome to the current problem. They’re doing nothing but delaying the inevitable. People have bought into this faith narrative, quite surprisingly, for some time now and the big question is how long will the “full faith and credit” of global governments last? How should one position to protect against the possible outcome of a loss of faith in an era of government financial engineering?

The current debt bubble began in 1981 when credit creation shifted into high gear. The big government experiment of “balance sheet expansion” forms the illusion that the only form of currencies or savings tools is those administered by governments. Governments are currently tasked with the complicated challenge of allowing debtors to service their debt while gross output grows at a rate lower than current debt creation. The other balancing act government must master is to not diminish the purchasing power of the currency via runaway inflation without the perception of ongoing output growth and complete control.

The option many have not considered for some time is an alternative currency and store of value with a finite supply that cannot be manipulated by politicians – gold. The fact that we’ve gone off the gold standard is how governments have been allowed to accumulate such absurd levels of debt without being called out on it. The shift toward a fiscally balanced economy that cannot be manipulated will have clear winners and losers. Winners will be those who hold gold and other such assets and losers will be those who have too much debt. Gold will one time soon anchor central bank base money supply once the current financially engineered model no longer produces positive output growth for major global economies. This isn’t something the government wants so they’ll do anything they can to delay it because when it does finally come it’ll result in a serious power shift and that is what the political class is all about power.