Video Transcript 3
Yesterday, I talked about the looming Aussie recession, and how we got to this point. Today, I’m going to show you specifically what you should be worried about.
One thing people do need to be worried about is the interconnectivity of global markets. If one market falls, then it’s going to take the rest of them with it. We’re all very synced up these days. You know, this is just one of a handful of the risks facing Australians today. For example, we have rising Australian household debt. We are the second most indebted nation in the entire world and that is terrifying. We’ve got the trade war escalation between China and the US. Now, this is by no means finished. That’s going to take another couple of years to play out. And Australia is piggy in the middle in this one. There’s no happy ending for us here. Already, China’s retaliating, so to speak, by turning away Australian coal. And that will progress.
But another thing, too — and this touches on the interconnectivity of global markets that I mentioned before — is an emerging markets debt crisis. But not just emerging markets debt, so to speak, but emerging markets US dollar-denominated debt. Now, what that means is that private corporations in emerging markets have generally taken out US dollar-denominated loans. But the problem with that is that money needs to be paid back in US dollars. Now, as the US dollar gets stronger, like we have seen through interest rate hikes from the Federal Reserve Bank, that weakens the value of other currencies around the world. And in turn, that reduces their ability to pay back their US dollar-denominated loans. So, if one company defaults on this US dollar-denominated debt, we actually don’t know what sort of problems it would trigger.
Just to put that into context, the financial subprime crisis started in March 2007 when a subsidiary of IAG defaulted on their credit swaps. Now, that company was turning over less than $100 million a year and that brought down nearly a $30 trillion financial system. So, just because I’m talking about emerging markets US dollar-denominated loans, sure, it might only be for $10 million or $20 million, or even a billion dollars, but we don’t know the impact; we don’t know what one small default could trigger. We don’t know what the trigger could be throughout the financial system.
There’s a few things here. The accidental white knight that’s coming to save the Australian economy — they’re just not there this time. We’re looking at rampant global debt — something like a quadrillion dollars in derivative debt in the world. Now, that’s unrepayable. It comes to the point where you just can’t produce more debt to save the economy and bail it out. As I said earlier, monetary policy in Australia is starting to show its limits. Sure, the Reserve Bank’s got a current interest rate of 1.5%, and there’s probably going to be a couple of rate cuts this year. But those rate cuts are going to stop being effective at some point. And of course, too, with every rate cut comes further problems. So a rate cut isn’t going to solve this.
The other thing, too, that we really need to consider is the limitations of the Australian government. Generally, governments like to come in and start propping up an economy with infrastructure programs. Well, we don’t really need that much more built. We’ve already got $80 billion worth of federal projects underway. We don’t need white elephant projects for the government to save the Aussie economy. Furthermore, while it would save a portion of the economy, other people would still be affected by that. And more to the point, if they do go in and start creating these giant infrastructure programs, there’s only one way to do that, and that’s with debt. And increasing that debt means we pass that debt burden on to our kids once more. It generally leads to much higher taxes in the future, and also, too, again, it reduces the value of our currency. If our debt levels increase too much, the Australian dollar will weaken, and, again, that could reduce money flowing into the Aussie economy. So we don’t really have a tool bag to save us from a crisis this time. Everything that we’ve used in the past couple of decades, you know, we’ve used up. The batteries are dead.
And Chinese money, well, they hate us and they’re broke, essentially. They’ve run their credit machines. I know that’s a simplified way of saying it, but they’ve pumped as much money as they can into their economy. They’re facing the same sort of problems we are, too. If they keep throwing money into their system, it creates all sorts of problems on their balance sheets at their end. And again, as I said before, our government’s actively damaging our relationship with the Chinese government. China’s not going to be in any sort of hurry to come in and prop up the Aussie economy once more. The miracle could be ending. I don’t think people fully get the impact the contagion will have.
Many years ago, when I was discussing the impacts of contagion and financial markets, I had somebody make an offhand comment about the fact that Australia survived the 1997 Asian currency crisis, and if we survived that, even though they’re our neighbour, we’ll probably survive any further crisis that comes our way. Well, that was true then, yes. And it wasn’t because they’re our neighbour and we survived. It was because our markets weren’t interconnected back then. We were still very much separated from the rest of the world, from a financial markets point of view. Our fragility was demonstrated during the 2007 and 2008 market crashes. That was when Australia got a glimpse of just how connected our markets finally were. And it’s even worse this time. There’s something like $700 million that Australian banks owe to international corporations around the world. So, everything is interlinked in a way that it was never linked before.
One of the things I haven’t mentioned yet but is really important — and it goes back to that emerging markets US dollar-denominated debt — is that some of those people with those US dollar-denominated debts, they’re our biggest trading partners. We’re talking India, China, Brazil, Malaysia, Singapore. These are countries that have actually taken out US dollar-denominated debt, and they do business with us. So we are just as exposed to these loans going bad. And this comes back to that interconnectivity point that I’ve been talking about. Our markets are very, very linked now. So contagion is something that could have a drastic impact on not only our financial markets, but obviously each of us individually.
Don’t be complacent. That’s the most important thing I want people to take away from this video — to not underestimate the risks and the impact this could have on you.
I’ve prepared a strategy to help you navigate the trouble that’s ahead. And it’s something that nobody else is talking about.
I’m going to send you an email tomorrow with a link to the report. Inside, it has information on how I can help you get through what I believe is a crisis coming, and help protect your wealth. But also, too, it might even actually help you grow your wealth in a very tumultuous time. Make sure you don’t miss it.