FRA is joined by Alasdair Macleod and Uli Kortsch in discussing global levels of government debt and the challenges in servicing that debt, providing economic growth, and its effect on central bank policy.

Alasdair Macleod writes for Goldmoney. He has been a celebrated stockbroker and Member of the London Stock Exchange for over four decades. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy.

Uli Kortsch is the Founder of both the Monetary Trust Initiative (MTI) and Global Partners Investments (GPI).  Currently most of his time is spent on MTI whose mission is to bring transparency and authentic principles to our monetary system. As President of Global Partners Investments and other ventures Mr. Kortsch has worked in over 50 countries, written a bill for Congress, and conferred with approximately 15 national presidents, ministers of finance, and ministers of commerce.  He has served on numerous corporate boards with both for-profit and not-for-profit organizations.

PRIVATE AND PUBLIC DEBT CRISIS

There’s a slow back and forth between private and government debt. When there’s a deleveraging in the private sector there’s a massive pickup on the governmental side, and vice versa. Global debt today is at about 110% of global GDP. The level of outstanding debt at the end of 2015 is about $200T. This doesn’t take into account the shadow banking system, which can’t really be quantified.

The whole system is in a debt crisis. If the Fed Funds Rate rises to 2.5%, that will trigger a complete collapse in the economy. It is virtually impossible for the Fed to have any control over outcomes if the only room they have is to raise interest rates by no more than 2.5%. If we have inflation picking up next year, we are likely to have a situation where we have no economic growth and inflation at the price level beginning to pick up, the Fed is faced with a dilemma. They can’t raise interest rates to the level where it will stop price inflation.

The next recession isn’t going to be a normal recession at all. If we end up with a situation where we have official stagflation, we will move into a hyper-inflationary situation if the general public begin to understand that the paper money only has as much value as they give them, and then the whole thing enters a very dangerous slope.

Even economic collapse has always resulted in wealth destruction, which occurs due to the collapse of the purchasing power of the currency. By the end of the firs World War, the only way Germany could function was to print money. And that culminated in 1923 with the collapse of the currency. Nowadays we have a different set of circumstances, but the burden is at least as painful as reparations. An inflation rate of 4% for 10 years will reduce the debt by half. That has been the preference of governments and central banks over the years.

US DOLLAR PURCHASING POWER

The banks have been drawing down on their reserves over the last couple of years. If you look at LIBOR rates and compare that with what they get for leaving it in reserve at the Fed, there is a huge incentive to gradually move some of this money out. The Fiat Money Quantity (FMQ) includes money that is reserves held by the Fed and the Austrian True Money supply. That has been increasing at an accelerating rate. If you look at M2-M1, then you see a recent acceleration above trend. That suggests there is a demand for money somewhere outside the Fed and US banking system. International debt is tending toward contraction, which is likely creating a demand for dollars. The debt is still the dominant factor.

Recently Brazil targeted a specific rate of inflation, which ultimately led to a much higher rate of inflation. It’s very difficult to keep the inflation target at a certain level once it gets going. The value put on the dollar in terms of purchasing power is up to the people, not the Fed. This is the point the monetary planners miss: they can never control the purchasing power of the currency.

EFFECT ON US ELECTION – FISCAL PLANS?

Debt has not been on the discussion at all. The candidates say things to get votes, but what’s interesting is how the press has been on Hilary’s side to become president. Trump has achieved astonishing results. Hilary’s campaign has literally become a “woman’s lib”. The motivation for the FBI, when it comes to reopening Hilary’s case, can only happen if there has been a decision taken by the security services as to who they actually want to support.

The good news is that Donald Trump will be on side with the establishment. It is actually the establishment that is switching side. Whoever becomes to the next president will likely be a one term president. There are no answers in our current economic system to deal with the accumulation of debt.

Recently Trump has been going after the Fed, and there certainly is the possibility that the next president will put in several of the new governors. The next president will definitely be able to stack the deck in the Fed’s favor.

FORWARD GUIDANCE AND FINAL THOUGHTS

Forward guidance has a place if you actually understand economics and what is happening to money. Then you can use forward guidance to tell the banking systems look, we’re moving back to freer markets and this is the schedule, so banks can prepare for it and the transition becomes possible. To use forward guidance to pursue current policies is a horrendous mistake.

In 2017, the story is going to be stagflation. Escaping from that isn’t going to be as easy as it was in the 1970s; it’s going to morph into something far worse on the inflationary front.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.