Are You Prepared for the Global Debt Impact on Your Financial Future?

By November 22, 2017Blog

One day you were dreaming about retiring on a beach. But then the market changed. And the next day you found yourself on a desert. I’ve been there.  When the Great Recession hit in 2008, I was not prepared and my investment and retirement plans took a major hit.

How are your retirement plans going?  Remember, it’s not what you have; it’s what you keep. A secure and properly diversified portfolio could help you hedge against the risks that lie ahead.  One of the biggest risks is the skyrocketing global debt.

 

 

 

 

 

 

 

 

This chart illustrates the disturbing trend of growing global debt.  AEs (Advanced Economies) have had longer to spend and borrow themselves into trouble, but EMEs (Emerging Market Economies) are learning bad habits quickly.  Rising percentages of debt to GDP (Gross Domestic Product) for much of the world have become the norm rather than the exception.

As consumers become more dependent upon debt, not only are their individual and family financial futures at risk, their countries’ GDP and economic growth are as well.  When an economy grows via debt instead of more cash-fueled purchasing, the economy and the country’s GDP become dependent upon the continued use of credit and keeping interest rates low to fuel growth.

 

 

 

 

 

 

 

 

Here is a chart for the 2-year Treasury Note over the past 20 years.  Note that since 2008, the rate has been below 1.0% until this year.  That’s nine years of artificially maintained risk-free borrowing.  Millennials are defined as those between the ages of 18 and 34 in 2015.  Virtually everyone in this group has enjoyed these suppressed borrowing rates and they have no experience with more normal rates that many of us have seen in our investing and savings years.

We need only look to the UK to get a hint at the troublesome effects of coming rate increases already being implemented by the Federal Reserve. In November of 2017, the Bank of England raised the rate of borrowing from 0.25% to 0.50%.  This minor 0.25% increase didn’t roll out to mild interest.

  • The value of the Pound was sent tumbling on the announcement.
  • The FTSE, Financial Times Stock Exchange, came within a point of its previous record high on the prediction that companies would benefit from the falling Pound.

The Bank’s governor, Mark Carney, stated that the increase was in large part necessary to stay in control of inflation.  There are complex interactions in economic models, and one points to the statements by Amit Kara, the head of UK macroeconomic forecasting at the National Institute for Economics & Social Research.  “He said the low pound would continue to encourage a surge in exports and, with it, an increase in high-priced raw materials, forcing the Bank into a more severe clampdown on inflation.”

We see that an increase in the interest rate is spurring a drop in the Pound.  We are told that the lower Pound will encourage a surge in exports and force the bank into a more severe clampdown on inflation…meaning more rate hikes.  Kara also stated that Brexit and other economic forces justify the increase in rates to 2% by 2021.  That’s four times the current rate.  It’s like water circling the drain, speeding up as it gets closer to disappearing down that drain.

All of that should be alarming to Britons. But more importantly, most of the world is in a similar situation to varying degrees.

Business Insider reports that global debt is 325% of GDP and likely over $221 trillion dollars and we are borrowing money faster than we are creating wealth. Many global economies, heavily burdened by debt, are struggling.  Some could easily default on their debt.

Bringing this home, the U.S. isn’t in very good shape either. Back to those artificially low U.S. Treasury rates, we see that they’ve turned upward and that pressure to keep them rising will continue. The Federal Reserve has raised rates twice already this year, with another rate hike assumed before the end of 2017.

 

 

 

USDebtClock.org

That debt snapshot doesn’t do justice to the speed at which the numbers are rising.  The U.S. is not immune to the financially debilitating global events that could significantly impact our investment and retirement accounts.

Then there are the Bail-ins.

No, that’s not a mistake. We’re not talking about a bail-out.  The fallout from the previous “too big to fail” bail-outs will not make it easy to do it again, and the U.S. will be unlikely to afford it anyway.  So, what’s a bail-in?  It’s rescuing a financial institution on the brink of failure by making its creditors and depositors bear some of the burden by having part of the debt they are owed written off or restructured in a way that ultimately reduces your holdings.  That hurts.

In a perfectly legal and expected bail-in, your deposits in these institutions can be taken, and you are given fairly worthless stock shares in exchange.  If you think that the FDIC has your back, that agency only has the funds to cover a tiny 0.25% of the deposits they insure.

Begin to think like the wealthy, and protect your assets from the global debt crisis.  The insurance company Munich Re, as well as Lord Rothschilds Ray Dalio, among many other banks and savvy investors, have been aggressively moving to precious metals to protect their wealth.  Remember, sometimes the worst decision is no decision at all.

Scott Carter

Author Scott Carter

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