Seeking Shelter in the Growing Global Debt Crisis
Just how did the world get into the mess of having too much debt?
This is a pertinent question that is worth asking, given that we’re seeing several events around the world that could push the market over the edge.
The US Congress has decided to pass a stopgap measure to raise the ‘debt ceiling’ of the US government. In other words, the government just voted to increase their own credit card limit so the US taxpayers can foot the bill. It has grown from US$20 trillion in 2017 to over US$28 trillion to date, based on official government statistics.
The Chinese property market is threatening to teeter over after the partial default of Evergrande and a couple of smaller property developers. Recall that Evergrande itself has over US$300 billion of debt and could not pay some of the interest due to their creditors two weeks ago.
Our own treasurer is now requesting that the Australian Prudential Regulation Authority step in to control the burgeoning home loans market as more households are saddled by higher debt-to-income ratios. Trading Economics reports that the Australian mortgage debt now exceeds $2 trillion, or over 120% of the country’s gross domestic product (GDP).
The world is struggling under the weight of debt. Currently, global debt is estimated at almost US$300 trillion. Last year, the global debt level was US$277 billion, according to Visual Capitalist.
It permeates across governments, businesses, and households.
Many people want to know when this debt bubble will blow up and bring our financial system into a messy collapse.
Some are afraid of it as they’re caught amidst this bubble. A few actually look forward to the opportunities that it can offer as every crisis offers an opportunity.
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Getting to the bottom of the global debt problem
To understand how to identify the opportunity, it’s a good idea to know how we got into this mess in the first place. This way, you can position yourself as a winner rather than a victim.
Short answer — banks, their fiat currency system, and the boom-bust cycle.
How does it work?
The chicanery of fiat currency and fractional reserve lending
To understand how this works, you need to understand how fiat currency and a fractional reserve lending system works to perpetuate the debt bubble.
Our crooked financial system is run on fiat currency. The bank notes, coins, and digital numbers on our screen are the means of exchange for goods and services. On its own, these would have literally little or no value. However, the government makes them valuable simply by decree, hence the term fiat.
Now, the fiat currency system thrives on something called the velocity of money. This comes from how often the currency ‘turns over’ in the economy. To increase this turnover, the banking sector that runs this system uses the fractional reserve lending system.
Firstly, banks accept deposits from the general public and pay them interest as an incentive to save.
Banks can pool a lot of funds from depositors using this system. Some depositors will keep their funds in the bank to take advantage of compound interest. This allows the banks to invest these funds to earn a return. They use these deposits to lend to the public at a higher rate of interest and earn profits from the difference.
The fractional lending system allows banks to therefore lend and invest at many times the amount that they hold as deposits. In some cases, a bank can lend as much as $100 for every $1 they hold. They leverage their capital and can earn tremendous returns.
Our financial system feeds on earning interest on the global population borrowing from them.
They have the capital to go big on this enterprise.
So big that it’s global.
A global lending enterprise
Over time, banks amassed a fortune on their lending practices. This allowed them to lobby governments to make it a regulated enterprise. They set up their frontman — the central banks — in virtually every nation on Earth. This they achieved by having governments pass laws to make a central bank a fixture in a country’s financial system. They claim that central banks are the backstop of the economy.
This literally completes their almost perfect process of generating infinite profits.
Central banks lend to the government and charge interest on these loans. Taxpayers are on the tab to repay these loans with interest.
This is a rather ingenious plan. Lend to the people and then make them pay double through interest and taxes.
Furthermore, remember the infamous saying of Mayer Amschel Rothschild:
‘Give me control of a nation’s money and I care not who makes the laws.’
That’s why in the last subprime crisis, most governments around the world bailed out the largest banks in their country and shafted the people who suffered double — the crash and then paying higher taxes after the crash.
Safeguard your assets against the storm
The game seems very much loaded against you. The banking system controls the governments, the markets, and even the information flow via their corporate media machine. They want the boom-bust cycle to enrich themselves and strip you of your remaining wealth.
Do not lose heart. There are places to find refuge. You merely have to know how to read into what they say.
Recall my article in mid-July about how the banks actually welcome a market crash and fear a hyperinflationary market, contrary to what they keep saying.
Look for what the governments, banking regulators, and media pundits hate. They disparage gold as a ‘pet rock’ and ‘barbarous relic’ and cryptocurrencies as what criminals and traffickers use (ironic when the biggest criminal enterprise is the banking sector and their government subsidiaries). They certainly don’t want you doing your own research to manage your own finances.
You have what it takes to set up a robust portfolio to defend against what is to come. Each week comes and goes by with news headlines alternating between saying there is a market crash coming and that it is under control.
But look at what the big investors are doing these days…many are cashing up and selling out of their equities position.
Words are cheap. Action speaks louder.
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.