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…Savers and investors alike need to begin to prepare their
portfolios for interest rate rises against a backdrop of crisis-triggering debt levels and unproductive economies.
The original article is presented here by munKNEE.com in an edited ([ ]) and revised (…) format to provide a fast & easy read.
Economies are junkies addicted to credit
Unsurprisingly, credit levels are equal to the increase in private debt every year. Credit is when people spend money that isn’t their own but instead borrow from banks. The bigger private debt levels are compared to a country’s GDP, the more the economy is dependent on credit.
Economic growth becomes addicted to credit. Therefore, the bigger the accumulated debt is when compared to GDP, the more likely it is an economic crisis will happen when credit levels are reduced.
An increase in interest rates means a decrease in credit levels. Especially in countries such as the US and UK where there has been no increase in real wage rates and there is a generation unprepared for an increase in the price of debt...
Currently, debt-to-GDP ratios in the UK and U.S. are not quite at pre-crisis or Great Depression levels but they are fast approaching and they are at those levels globally. This combined with rising levels of interest rates makes for a tricky future and one that places savers and investors capital at risk.
According to the Bank of England guest blogger Paul Schmelzing, as reported by Bloomberg, the 700-year average real rate (the benchmark interest rates minus inflation) over the last 700 years (see chart below) has been 4.78% and the average for the last two hundred years is 2.6%. Unsurprisingly he notes “the current environment remains severely depressed”.
… this worrying? Because the bounce back is not only inevitable, but will also be painful and sharp:
Most reversals to “real rate stagnation” periods have been rapid, non-linear, and took place on average after 26 years. Within 24-months after hitting their troughs in the rate depression cycle, rates gained on average 315 basis points, with two reversals showing real rate appreciations of more than 600 basis points within 2 years.
How will we know if such a correction is headed our way? Aside from the fact that central banks are beginning to increase rates of their own volition there are other macro indicators, many of which resonate with the current environment.
Most of the eight previous cyclical “real rate depressions” were eventually disrupted by geopolitical events or catastrophes, with several – such as the Black Death, the Thirty Years War, or World War Two – combining both demographic, and geopolitical inflections. The infamous “Panic of 1873” heralded the advent of two decades of low productivity growth, deflationary price dynamics, and a rise in global populism and protectionism. Sound familiar?
$217 trillion global debt bubble set to pop
Currently the total global debt bubble is over $217 trillion, with little sign of it slowing. We have built a so-called economic recovery on debt. Spending has been encouraged on a pile of low interest rates and easy-to-reach cheap lines of credit. It has not been encouraged with the thought that one day interest rates will have to climb.
A sudden uptick in interest rates could not come at a more precarious time for global finances. It is not just personal debt levels that are of concern, especially when the Bank of International Settlements is aware of $13 trillion of ‘missing debt’.
In September this year the BIS said it was hard to assess the risk this “missing” debt poses, but its main worry was a repeat of events in the financial crisis: a liquidity crunch like the one that seized FX swap and forwards markets.
It is safe to say that a decade on from the global financial crisis we now have the makings of a new one.
Global debt woes are building up to a tidal wave
…With or without moderate interest rate increases, debt on a global level is becoming more expensive as markets price in further rate hikes. Add to this the global imbalances we see across the globe it is becoming increasingly questionable how so many countries will manage to service these debts.
Clouded judgement of central bankers
…What’s worrying to investors is that central bankers seem to feel interest rate rises are almost to be done at whim. In truth, they are unlikely to have much more time before they are forced to hike rates and then it will be far more dramatic than a gesture of 0.25%. This is worrying because the economy is unlikely to be strong enough to handle such a change. In turn this will impact economies, financial markets and assets – especially risk assets.
Many economists argue that it is only growth that can pull us out of this situation but we now live in a world where we only know how to create growth from debt. We do not know how to grow a healthy economy without the dripping syringe of the current debt based banking and monetary system. This is the case both in people’s homes and in the highest government offices. It is an epidemic of global proportions.
Investors need to protect themselves from the addictive nature of these behaviours. We all know what happens to those who are unable to cut themselves off. They find excuses and then they come knocking for help.
Move to safe haven higher ground from coming debt tidal wave
You must ensure your finances are protected. and you are not forced to “help” the reckless bankers and their dangerous monetary system…The global debt bubble is prompting the wealthiest to diversify into gold…
The next financial crisis may well be preceded by something we did not experience ten years ago but is now a very real scenario – bail-ins. As banks struggle to retrieve payments from those unable to service debts they will begin to falter. Governments will need to step-in. ‘Luckily’ for them they had the foresight to agree that bail-ins could happen.
The possibility of bail-ins place your investments and especially your deposits at arguably greater risk than before the first financial crisis. With this in mind,
- prepare your portfolio against counterparty risk,
- unforeseen consequences of interest rate climbs
- and the collapse of the global debt bubble.
Avoid ETF and digital gold and dependence on single counter parties and have outright legal ownership of segregated, allocated gold bullion coins and bars.
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