Debtonation 🔥
Inflation is running at the highest levels seen in decades.
Interest rates are also headed to the highest levels in many years.
How worried should we all be about inflation?
Or the impact of higher borrowing costs?
Or economic slowdown?
Or so called ‘stagflation’ (the nightmare scenario of both slower growth and higher inflation)?
Not only have savings have been exhausted but corporate and personal debt are on the rise, in a way that indicates that the US economy is slowing far more than policymakers intended right now, that the quality of borrowing indicates serious underlying economic concerns and that a wave of defaults may be coming unless policymakers change path urgently.
Debtonation?
Replacing government money creation with inadequate private debt expansion is
a danger that could explode the economy
MBMG Investment Advisory Update July 2022
by
Paul Gambles, James Fraser
Myself and the team at MBMG Group take a deep dive into these issues in this video (As Above) Â and discover some very uncomfortable indicators, mainly using research and data provided by the Federal Reserve Bank itself (FRED).
What does that mean?
Within such complex aggregated data, there are many factors at work and many possible interpretations but to us, it seems fairly clear, that economic activity encountered an exogenous shock (the lockdown) that
de-railed it and that the emergency borrowing facilities put in place by policymakers through the banking system injected sufficient cash to enable businesses and people to survive an otherwise existential threat and to be able to quickly resume activity and for companies to relatively normalise their operating and borrowing patterns.
What happened with personal debt?
At the same time that corporate debt ballooned, private borrowing fell sharply – again this makes sense, people were less likely to borrow during lockdown and also they received government stimulus payments to help replace lost income. However, the fall in consumer lending was more than offset by the surge in business borrowing, so in aggregate loan amounts increased.
And of course, in addition to this, the government injected funds into the economy.
So policymakers did good?
No.
They were doing well.
But they got carried away and overshot.
When fiscal year 2022 began (1st October 2021), it looked as though a mythical soft-landing (rarer than unicorn 💩 in the real world) was about to happen.
Government spending was falling sharply and GDP seemed to have stabilised, with the increase in borrowing widely posited as being able to take up the slack.
Disclaimer:Â The above information has not been independently verified. This investment brief is given for information only and does not represent an investment proposal, recommendation or advice to invest in the shares or business of the subject company. Additional information shall be made available to interested parties subject to the execution of the requisite confidentiality undertakings. The financial information, actual and/or forecast, provide herein is based on management representation.
