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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:

Appleseed Capital is the impact investing arm of Pekin Singer Strauss Asset Management. The views and opinions expressed in this material are those of the authors. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. These opinions are current as of the date of this letter but are subject to change. There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice nor be considered a recommendation to buy, sell or hold any particular security. This is not an offer to buy or sell, nor a solicitation of an offer to buy or sell an interest in any fund, security, or other financial instrument. Any investment in the strategy is speculative and involves a high degree of risk. Investors could lose their entire investment. An investor must be able to bear the risks involved and must meet suitability requirements relating to such investment. 

Appleseed Capital is not, and does not purport to be, an advisor as to legal, taxation, accounting, financial or regulatory matters in any jurisdiction. The recipient should independently evaluate and judge the matters referred to in this Presentation in consultation with their own tax, legal and financial advisors.

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