First Shadow Banks, Now Shadow Debt?

One of the problems facing markets today is that many market actors believe that federal policymakers and regulators have the ability to fix the economy. They have placed their trust in the Federal Reserve, in particular, to manage a soft landing and avoid recession.

But federal policymakers are not omnipotent, and more importantly, they are not omniscient. While they claim that their policy decisions are driven by data, those decisions can only be as good as the data they’re receiving.

When policymakers don’t look at the entire range of data available to them, whether by conscious exclusion or by accidental oversight, it can significantly alter the decisions they make. And it looks more and more like policymakers aren’t aware of some very important pieces of data.

The Rise of Shadow Banking

The 2008 financial crisis became so severe in large part because of problems in the so-called shadow banking sector. Shadow banking is a term used to describe financial institutions that perform some functions similar to traditional banking, but without the oversight and regulation that banks face.

The 2008 crisis faced difficulty because of the major role played by mortgage-backed securities. Many of the mortgages backing these securities were originated by non-bank lenders, and were then bundled up and securitized.

These mortgage-backed securities (MBS) were then used as collateral for borrowing in overnight repo markets, where they quickly became incredibly popular. But when trust in the safety and security of those securities started to break down, the financial system quickly found itself in peril.

Policymakers were largely caught flat-footed by how vital MBS had become to the functioning of funding markets, and had to scramble to adjust to the reality on the ground. One reason for that was that they hadn’t focused on the growth of shadow banking, to their detriment.

A Growing Mountain of Debt

We live in a world of seemingly ever increasing debt. From a national debt that has grown to nearly $35 trillion, to corporate debt that is double what it was during the financial crisis, to household debt that continues to climb, this country is awash in debt.

Yet despite this growing pile of debt, policymakers in Washington are still working under the assumption that the economy is going strong. We hear all the time how US consumers are continuing to drive the economy and spend money.

How are they able to do this?

Well, we know that Americans are increasingly funding their spending with credit card debt, which is at over $1 trillion today. Meanwhile, credit card delinquencies are rising precipitously.

But Americans are also engaging in a murkier sort of borrowing, that of “buy now, pay later” plans. And this “shadow debt” isn’t being reported in any official statistics.

If you’ve bought anything online in the past couple of years, you’ve probably seen merchants offering payment plans through firms like Credova, Synchrony, Affirm, or Zip. Sometimes you’ll even see discounts offered if you pay with one of these payment plans.

While these buy now, pay later plans could be useful if you’re having momentary cash flow issues and just want to space out your payments, many Americans are racking up huge amounts of debt through these payment plans.

Rather than paying off their purchases during the interest-free grace period, they’re piling up debt just like they are with their credit cards. By some estimates Americans have built up over $700 billion in debt through these payment plans, and it has gone largely unnoticed.

This debt isn’t reported to credit card bureaus, it isn’t gathered and reported by federal agencies, and it likely isn’t taken into account when policymakers make monetary policy. It’s a huge mountain of unseen debt that is weighing heavily on American households and that could harm them significantly during the next recession.

But because this debt isn’t reported, everyone in Washington thinks everything is going just fine. They see what they see and don’t know what they can’t see, so they can’t understand and appreciate the actual financial situation of US consumers, which is getting worse and worse every day.

Far from the soft landing that the mainstream media still thinks the Fed can pull off, we’re more likely to have a very hard landing, and this shadow debt could play a major role in just how hard that landing ends up being.

Protect Yourself Against the Debt Bubble

So how can you protect yourself against this mountain of shadow debt? Well, one of the best ways is to minimize the amount of debt that you carry.

Hopefully you pay off your credit cards every month, avoid installment plans for small purchases, and don’t waste money on frivolous things. Establishing good financial habits now and sticking to them can help you when times get tough.

But when recession comes, everyone is going to be affected. Even if you are a disciplined saver, the financial losses that impact markets may very well affect you too.

Remember what happened in 2008, when stock markets lost over 50% of their value from October 2007 to March 2009? Those losses wiped out trillions of dollars of wealth from Americans’ financial accounts, money that had been saved for years or decades.

But while markets suffered those massive losses, not everything was performing as poorly. Gold, for example, gained 25% during that same period, then went on to continue growing in value until it hit all-time highs in 2011.

Many Americans who lost big back then undoubtedly looked at gold and wondered why they hadn’t bought gold sooner. And many of those people are making sure they aren’t making the same mistakes again this time around, as they’re buying gold to help safeguard their savings.

Safe haven demand for gold has been strong for the past couple of years, and demand for gold has increased this year, driving up the gold price to new all-time highs. With strong support for the gold price and the possibility for even higher demand once recession hits, the next couple of years could be very good ones for gold.

With a gold IRA, you can protect your tax-advantaged savings with physical gold coins or bars. Gold IRAs can be funded with a tax-free rollover from existing 401(k), 403(b), TSP, IRA, or similar retirement accounts.

Gold IRAs enjoy all the same tax advantages as any other IRA account, but own physical gold rather than conventional financial assets. And when you decide to take a distribution from your gold IRA, you can take that distribution either in cash or in gold.

If you have assets outside tax-advantaged accounts that you want to protect, there is always the option of direct cash purchases of gold. You can choose to store that gold at a depository, in a safe deposit box, or even at home if you prefer.

No matter how you choose to buy gold, Goldco has options available to you. With over $2.5 billion in precious metals placements and thousands of satisfied customers, we work hard to ensure that as many Americans as possible can benefit from owning precious metals like gold.

If you’re worried about the trajectory of the US economy and are looking to safeguard your financial future with gold, call Goldco today to learn more about the many benefits of owning gold.