Late 19th century and first half of the 20th century was a time of great economic development but a time of the great economic rollercoaster. See chart 1 below.
In response to the great depression, governments put in place new initiatives to help smooth out the economic cycle with particular emphasis on reducing the pain associated with economic contractions.
This was supported by the work of John Maynard Keynes who advocated for governments to run budget surpluses in good times and deficits in bad times to smooth out the cycle.
Unfortunately, governments universally only kept one side of that bargain, as budget surpluses became exceptionally rare.
And whereas the excesses of debt cycles prior to mid-20th century were cleansed by the contraction that followed, government support during contractions meant that balance sheets were not reset - instead, the debt mostly remained in place, so that the subsequent growth cycle began with higher debt levels than the prior cycle.
Private debt growth came to a head with the global financial crisis (GFC); but rather than a reset of debts, the government absorbed much of the debt that had accumulated.
Private borrowing did not grow much after the GFC, but government debt did.
The Covid pandemic triggered another round of significant government debt growth.
Americans claim to want fiscal restraint but collectively are unwilling to pay the price to bring government debt growth under control ("it's someone else's fault and someone else's problem").
Interest expense likely consumed about 17% of budget revenue for FY24, higher than the amount spent on either defense or Medicare1.
Interest expense growth is coinciding with entitlement programs consuming a larger portion of budget revenue putting more pressure on budget deficits.
At some undetermined point, investors will require higher rates to provide long-term loans to the U.S. government - what appears "manageable" will then quickly evolve into crisis.
Of course crisis is not inevitable but the odds are uncomfortably high. The Federal Reserve could also intervene to prevent a crisis - though that has dramatic implications for inflation.
Perhaps other central banks are anticipating problems…
"To put the US’s overall fiscal health into perspective, imagine a company with stagnant sales growth for the last two years, with net losses of around 10% of those revenues that is relying on new borrowing to stay afloat while already carrying record levels of debt relative to revenues.
Unlike a typical business, the government has unlimited capacity to expand its monetary base to avoid a technical default. This dynamic likely explains why many foreign central banks have been shifting toward gold over US Treasuries."2
The hedge against the crisis scenario is not found in other currencies. It's found in scarce real assets and hard assets - which is why those assets should be a material portion of every entrepreneur's net worth.
Chart 1:
Citations:
The views expressed represent the opinions of Bluestone Financial Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.www.adviserinfo.sec.gov Past performance is not a guarantee of future results.
Comentarios