(Kitco News) – The global financial system is close to coming off the rails as debt continues to surge higher while central banks scramble to lower interest rates and prop up stock markets. According to one analyst, the current conditions are setting the stage for “an unprecedented monetary destruction.”
“Global money supply has soared by $20.6 trillion since 2019,” wrote Daniel Lacalle, an economist at The Mises Institue. “Additionally, global debt surged by over $15 trillion in 2023, reaching a new record high of $313 trillion. Around 55% of this rise came from developed economies, mainly the U.S., France, and Germany.”
Digging into the finer details, Lacalle noted that “Unfunded liabilities in the United States amount to $72 trillion, almost 300% of GDP. This may seem high until you look at Spain with 500% of GDP, France with close to 400%, or Germany with close to 350% of GDP.”
“There is no escape from debt,” he said. “Paying for the government’s fictitious promises in paper money will result in a constantly depreciating currency, thereby impoverishing those who earn a wage or have savings. Inflation is the hidden tax, and it is very convenient for governments because they always blame shops or businesses and present themselves as the solution by printing even more currency.”
While politicians pay lip service to bringing down inflation in order to help calm the masses, in the background, Lacalle said that governments actually “want more inflation to reduce the impact of the enormous debt and unfunded liabilities in real terms.”
“They know they can’t tax you more, so they will tax you indirectly by destroying the purchasing power of the currency they issue,” he said. “High taxes are not a tool to reduce high debt, but rather to perpetuate the expropriation of national wealth. Countries with high taxes and big governments also have enormous public debt levels.”
For those who think that the monetary destruction witnessed in recent years was excessive, Lacalle warned, “just wait for the suffering we will endure in the future.”
“In 2024, the world has seen more than seventy elections where none of the parties with access to power even bothered to present a realistic plan to cut debt,” he highlighted. “Governments and politicians understand that they can make any promises using someone else’s money, and many voters will readily accept the fallacy of taxing the wealthy. Naturally, currency debasement leads to widespread impoverishment.”
This observation was perfectly exemplified during the recent debate between Presidential candidates Donald Trump and Kamala Harris, where the word “debt” was not mentioned at all. In reality, neither Trump nor Harris has paid much attention to this ticking time bomb, much less put forward serious proposals to defuse it.
“Kamala Harris promises tax deductions for start-ups and first-time homebuyers, as well as families with children,” Lacalle noted. “It is hilarious. Inflation, a hidden tax, consumes their earnings and savings, while high direct and indirect taxes absorb the remaining funds. Despite this, she promises a tax deduction that most small businesses will never take advantage of, as they will shut down before generating any profit.”
The numbers being put out by the government present the rosiest of outlooks, ignoring the possibility of a recession, and still show a dramatic rise in debt over the next decade.
“The Treasury expects a $16 trillion increase in public debt between 2024 and 2034, without taking into account any recession risk,” Lacalle highlighted. “The enormous government debt of $35 trillion, along with its subsequent additions, has the potential to destroy the currency.”
“Citizens will face higher debt, reduced access to goods and services, and the ultimate dissolution of the middle class in the absence of a pro-growth plan and serious support for the currency’s purchasing power,” he warned, noting that governments have a tendency to be both Jekyll and Hyde for the middle class.
“Governments and politicians need the votes of the middle class to reach power, and they also need to erode the savings and wages of that same middle class to reduce the weight of public debt in real terms,” he explained. “When the government says they can print and issue more debt, you pay for it.”
Lacalle suggested that the trillions of dollars accumulated in debt will lead to an unprecedented wave of central bank easing, which will continue to include negative real rates and even direct debt monetization.”
“However, they need an excuse to present themselves as the solution to the problem they created,” he said. “A recession or a significant slowdown will be the trigger to implement the plan to destroy the purchasing power of currencies. However, this time inflation is already evident and persistent.”
He noted that governments are more than happy to destroy the purchasing power of the currency they issue as it serves as “a form of nationalization of the country’s wealth.”
To achieve their goal, Lacalle said governments need to “eliminate your options to run away from the currency.” This helps to explain the heavy-handed approach to regulating the crypto industry in recent years, while the impressive rally in gold has largely been ignored by mainstream pundits.
“Fiat money is just a promise, and the issuer knows they cannot pay it in today’s value,” Lacalle concluded. “Making you dependent and rendering the currency worthless is the best way to control you. Protect yourself investing.”
At the same time, as global debt is increasing at an alarming rate, asset prices are at risk as the available liquidity in the global financial system declines.
“How much liquidity has been withdrawn from the global financial system?” asked The Kobeissi Letter. “In 2022, the major central banks’ balance sheets hit a record of ~$25 trillion, or ~25% of global GDP, in response to the pandemic. Since then, the aggregate central bank balance sheet has shrunk to ~$20 trillion, the lowest since 2020.”
“In other words, global financial liquidity has been falling at the largest scale on record,” they said. “Meanwhile, it is estimated that global central banks will reduce their asset holdings by an additional $1 trillion over the next year. Global liquidity is rapidly falling.”
Generally speaking, as liquidity dries up, traditional financial markets are expected to face challenges. Central banks are expected to cut another $1 trillion from their holdings in the next year, reducing liquidity even further.
With stocks trading near record highs after being in up-only mode since 2020, The Kobeissi Letter warned that traders could be in for a rude awakening if central banks ratchet up quantitative tightening (QT).
“The US stock market is MASSIVE,” they wrote. “The US stock to developed market equities ratio hit a new record of ~3.0x. The ratio HAS DOUBLED over the last decade as the US stock market has massively outperformed global stocks.”
“Since 2014, the S&P 500 has risen by 186% which is 6.4 TIMES more than the MSCI World ex-USA Index's 29% gain,” they added. “To put this into perspective, during the 2000 Dot-Com Bubble, this ratio reached *just* ~1.4x. Meanwhile, the long-term average over the last 75 years has been ~1.1x. Is the US market overvalued?”
As a sign that governments may be losing control of their ability to direct markets, despite the tightening, asset prices have continued to rise, which led Anthony Pompliano to ask the question, “What happens when loose monetary policy returns and global liquidity begins growing aggressively again?”
“The simple answer is that asset prices will take off, just as we saw in 2020 and 2021,” he wrote. “The investors who were able to hold on to their investments over the last 2-3 years during this tighter period will be rewarded. But it would be hard to argue that central banks around the world are excited about pivoting back to loose policies given where the stock market, Bitcoin, and gold currently are.”
“Asset prices at all-time highs during tight conditions spell disaster for preventing euphoria and speculation when the macro environment improves,” he warned.
And with the Fed announcing a 50 bps interest rate cut last week and signaling additional rate cuts in 2024 at the same time as China announced a massive stimulus package, asset prices are expected to see a continued surge higher until an inevitable ‘Minsky moment’ as investors scramble to protect their purchasing power before the global fiat house of cards finally comes crashing down.
“The Fed rate-cut cycle will likely continue,” wrote Lacalle. “However, this will also continue to erode confidence in the currency and international demand for government bonds, perpetuating the U.S. dollar’s loss of purchasing power.”
