Geopolitical & Investment Cycles

The Fed and Even More Debt

by JR Crooks | June 23, 2017

The Fed is entertaining a disaster: Unwinding its $4.5 trillion balance sheet is expected to become part of its normalization efforts.
That’s a bad idea.
Michael Pento explains, “Since Quantitative Easing (QE) began back in November of 2008, the Fed’s balance sheet has grown from $700 billion to $4.5 trillion today. That is an increase of 540 percent [while] U.S. GDP has only managed […] a comparative measly blip in growth of just 29 percent.”
To state the obvious: Buying bonds does not stimulate the real economy. So, then why jack up the balance sheet?
“We hereby take these measures in the name of financial stability.”
That’s become a Fed mandate. Its members fully understand that crippling debt levels will kill the economy if they cannot be serviced with more, cheaper debt.
So, forgive me if I don’t fall out of my chair when I hear that it took $4 of debt to produce every $1 of U.S. GDP in 2016.

At some point, debt impedes growth. And we are well past that point.

One could argue there was a time and place for using debt to grow an economy. But not anymore.
In fact, my colleagues at The Edelson Institute have talked about the looming debt crisis. And the way I see it, it’s far from over.
Consider …
Hoisington Investment Management reports that total domestic nonfinancial debt “surged to a record 254.8% of GDP in 2016, 5.6% greater than in 2009 when Lehman Brothers failed.” And total debt “amounted to 372.5% of GDP in 2016, compared with 251.9% of GDP in 2006.”
What about businesses? The news there is just as bad: “Business debt surged to a record 72.6% of GDP in 2016, for the first time eclipsing the prior peak of 70.2% reached in 2009.”
The fact is the U.S. economy is saturated with debt. And Dallas Federal Reserve Governor Robert S. Kaplan must have had a crisis of conscience earlier this year. After talking optimistically about U.S. growth, he offered up these eye-openers:

At some point, debt impedes growth. And there’s no doubt about it: We’re well past that point.
In fact, a few days ago, we talked about the financial disaster in Illinois. This week, its comptroller warned the governor that the state can no longer function without sacrificing its primary obligations and essential services.
You read that right: “No longer function” — their words, not mine.
All because it owes too much money and it is spending $600 million more than it takes in each month. Ridiculous!
In response, the Republican governor and leadership are willing to raise taxes so they may negotiate a budget with the Democrats. The same game is being played in the U.S. Congress, where Congressional Democrats are maneuvering around Republican tax-cut proposals because the debt ceiling is back in play.
So, what’s the inevitable consequence of government spending shenanigans like these? Even more debt. And don’t put it past government to reach into your pockets to make ends meet. And that means more taxes, more fees, more regulations. Even outright confiscations.
That’s why we are warning investors to steer clear of government debt. And any exposure to this market – if not short or in cash – should be in well-managed companies with little debt and stable business models. And of course, you could also protect some of your capital with gold.
Do right,
JR