Pro Perspectives 4/21/20

April 21, 2020

Let’s talk about debt.

Congress approved another $500 billion in aid/relief/stimulus today. 

That adds to the initial $2.2 trillion that’s just now working its way into the economy. And then we have the Fed, which has already expanded it’s balance sheet by $2.2 trillion to keep credit markets functioning/ as the lender of last resort.  Here’s what that looks like on a chart …

So, the Fed’s balance sheet is now about 27% of the size of the economy. That’s a record.  And that number go higher (probably much higher). 

In addition to all of the above, let’s add another $2 trillion that seems certain to come, which will represent another 1930’s-like “New Deal” — a massive government spending program, to rebuild America (likely focused on infrastructure, healthcare and manufacturing).

This all balloons debt levels, which were already running at record highs.  At the end of 2019, our government debt was already 107% of GDP.  

Does this mean people around the world will dump our bonds (our debt) and flee from the dollar?  In a normal world, in an average country, probably.  But we happen to have the world’s reserve currency.  And the ballooning of debt levels isn’t just a U.S. centric problem, it’s global. 

Global debt-to-GDP was at record highs already (thanks to the aftermath of the global financial crisis), and is accelerating rapidly in this global health crisis.  Why?  Global central banks and governments are all printing money, financing government debt, and spending to keep economies alive — to bridge the way back to a normal operating economy again.  It’s the only option. 

This is debt monetization in the name of salvaging economies.  And by design, with the printing of paper currencies, that debt will be paid back with easier to come by and less valuable money. 

So you don’t want to be a creditor in this environment. Debt is being devalued. 

And currencies are being devalued. But not against each other — paper currencies are being devalued against asset prices (like stocks, commodities, real estate). 

Now, clearly, for the moment, this all looks like deflation.  Stocks and commodities prices have crashed.  And economic data is crashing.  But don’t be fooled.  This is a global gameplan to reflate economies and inflate away debt. It’s coming.