The Debt Bubble Continues to Grow: How Long Until It Bursts?
If there is one defining economic characteristic of the modern age, it is the explosive growth of debt levels. Whether personal, corporate, or government debt, debt levels are growing at an exponential rate. Debt is no longer seen as a necessary evil, a means to an end, or a way to finance a handful of big ticket items like houses. Nowadays it’s seen as something so common that it’s treated as a normal financial product, just another good or service offered by financial firms. And that has grave implications for the health of the US economy.
Government Debt Paves the Way
As with many aspects of our society today, government behavior has a tremendous influence. And the US federal government is the greatest debtor of them all.
The US national debt currently stands at $26.5 trillion, having started the year at just over $23 trillion. That’s nearly $3.5 trillion in debt incurred in only eight months, and that could grow even larger over the rest of the year.
While the fiscal year ends at the end of September, there’s a high likelihood that Congress could pass another stimulus spending bill before the November election. Democratic legislative proposals could cost close to $3.5 trillion, all of which would have to be funded with new debt issuance. That could push the national debt to $30 trillion by the end of the calendar year.
This is an unprecedented amount of debt-financed spending, with the national debt potentially rising 30% in a single year. It seems quaint to look back at the mid-1990s and read about how government officials worried that there would be budget surpluses in the future, when in fact government spending has accelerated ever faster.
It seems as though the national debt doubles every eight years, with each successive President presiding over massive increases. President Trump isn’t any different, even if he does criticize Democrats for their overly ambitious spending goals.
The US government has had the benefit of providing the world’s reserve currency for decades, and has taken advantage of that to issue trillions of dollars of debt to flood the world with dollar-denominated assets. But with more money creation and a dollar that is worth less every year, eventually other countries will tire of the dollar’s devaluation, find an alternative, and ditch the greenback. When that happens, dollar-denominated assets will lose much of their value, and investors holding dollar-denominated stocks and bonds might find themselves in a pretty pickle.
With other currencies around the world devaluing too, the alternative that will replace the dollar will likely be gold, or some sort of gold-backed currency. The odds of gold reestablishing itself as a monetary metal grow every day. But while the dollar’s disappearance may not be ideal for mainstream investors, for those who invest in gold it could be a dream come true.
Corporate Debt Continues to Grow
The corporate debt bubble has been a ticking time bomb for years, and its danger continues to grow. Total corporate debt in the US passed $10 trillion early in the year, bringing total corporate debt levels to more than 50% above their 2007 levels. And corporate debt issuance has absolutely exploded in 2020.
Total corporate debt issuance through the end of July was over $1.5 trillion, exceeding the $1.4 trillion issued in 2019 and well on track to pass the record $1.69 trillion issued in 2017. It’s amazing that companies continue to issue so much debt with the economy so weak, but perhaps that’s the only way they can come up with money.
Unfortunately, piling debt on top of debt is no way to operate a company. Once that starts happening, you’re probably in the middle of a debt death spiral out of which you won’t be able to return. But that seems to be the way that the US economy is heading.
The share of zombie companies, those whose revenues are insufficient to service their debt, thus requiring them to issue more debt, is expected to climb to nearly 20%. And with the Federal Reserve continuing to keep interest rates low, don’t expect corporate debt issuance to lessen anytime soon.
All of this debt issuance is bad news for the economy and for investors, as companies that find themselves in such a financial position are at higher risk of bankruptcy. Whether you’re left holding those companies’ bonds or stocks when bankruptcy is declared doesn’t matter – in either case, you’re wiped out.
That’s one reason gold is beginning to look far more attractive to many investors, as it presents no default risk. When you own an ounce of gold, you own an ounce of gold. It doesn’t matter how gold mining companies are doing, how Wall Street financial firms are doing, or any of that. That ounce of gold will maintain its purchasing power over the long term.
Households Growing More Indebted
US households are in sorry shape too, with the economic lockdowns in response to coronavirus helping to diminish the financial well-being of millions of Americans. Americans were already burdened with high rents, expensive mortgages, and growing amounts of credit card debt, auto loans, and student loans. And they continue to take on even more debt.
One-quarter of parents today have gone into debt to pay for their children’s educational expenses, with many families citing the cost of breakfast and lunch as one reason to take on more debt. Ordinarily you might wonder how merely providing your children with two of their three meals could lead to more debt, until you remember how many Americans rely on subsidized meals provided through the school system, and how many Americans lost their jobs during the lockdowns.
No matter where you look, things are looking bleak for US households. The country is drowning in debt, and when the debt bubbles finally burst, with businesses going bankrupt, homeowners losing their houses, and perhaps even the government defaulting on its debt, the economic landscape is going to be completely upended.
How to Protect Yourself
In an era of growing debt, where the prices of all assets are skewed higher due to the ease of obtaining financing, one of the best ways to protect yourself is by holding assets whose value isn’t dependent on easy money and that will actually gain in value once the debt bubbles burst. And one of the best assets to play that role is gold.
Gold has been trusted by investors for centuries to protect their assets against economic turmoil and financial crisis. It maintains its value over the long term, outperforming stock markets since the closing of the gold window in 1971 and better than doubling the growth of stock markets in the 21st century. If you’re worried about the pending collapse of the various debt bubbles that have swallowed the US economy, start looking to protect your assets with gold today.