How To Invest In An Era Of $100 Trillion Financial Obligations
August 6, 2018
The four most expensive words in the English language are ‘this time it’s different.’-Sir John Templeton, Investor
It’s different this time, and it’s also not different this time.
It’s different this time because the credit-driven U.S. economy is burdened with a monumental level of financial obligations relative to GDP. According to the Bank of International Settlements (BIS), outstanding loans and debts that burden U.S. corporations, households, and government entities have reached $48.3 trillion or 250% of U.S. GDP. Including off-balance sheet items, the effective level of debt outstanding is almost $100 trillion or more than 500% of GDP. It’s different this time because the U.S. economy has never in its history piled on so many financial obligations.
With that said, it’s also not at all different this time, because this is not the first time that a society’s financial obligations have grown to unsustainable levels. This story has been repeated often through history, and it usually ends poorly. The downside risk today for investors is captured in Charles Bullock’s account of Dionysus of Syracuse, from more than 2000 years ago.
Having borrowed money from citizens of Syracuse and being pressed for repayment, he [Dionysus] ordered all the coin in the city to be brought to him, under penalty of death. After taking up the collection, he re-stamped the coins, giving to each drachma the value of two drachmae, so that he was enabled to pay back both the original loan and the money he had ordered brought to the mint.
Displaying a level of creativity that could compete with today’s central bankers, Dionysus defaulted on his debts by debasing the currency, to the detriment of Syracusans who held their savings in drachmae. When a debt obligation becomes too big to repay, it is no longer a problem for the debtor; it becomes a problem for the creditor. The warning caveat emptor, which translates to “buyer beware,” remains timeless because “this time” is hardly ever different.
$100 Trillion of Financial Obligations
Let’s review the U.S. economy’s financial obligations one-by-one to better understand what makes up the $100 trillion of financial obligations of U.S. consumers, households, and government entities:
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