This past weekend Ray Dalio, founder of Bridgewater Associates the $160 billion investment firm, addressed a packed room of central bankers at the 40th Annual Banking Seminar of the Federal Reserve Bank of New York. The message he brought was sobering.
“Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States. This is a global problem,” he told the silent stunned audience. “The biggest issue is that there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”
Dalio was referring ominously to the decades-long debt super cycle which has been underway and is rapidly coming to a close. He warned about a near-future big squeeze. The world’s biggest economies, including Japan, The United States, Europe, and China have run up unprecedented levels of debt and are getting dangerously close to their limits.
Dalio is not alone in sounding the alarm. The International Monetary Fund also chimed in last week with their announcement that the total worldwide debt has reached a historical high mark of $152 trillion. This eye watering number represents about two times the amount of the entire global economy.
The trend is worsening too. Over $5 trillion in brand new debt has been wracked up in the first three quarters of 2016. The year is on course to defeat the prior 2006 all time high. Countries from Japan to South Korea to Italy have broken their records for levels of public debt.
These international debt levels do not even take into account other underfunded future obligations for pension and healthcare programs. Dalio said it best when he reminded the crowd of an embarrassing truth they already know. “There are too many promises that can’t be kept, not only in the form of debt, but also in the form of healthcare and pension costs.”
You may shrug this off as a foreign issue. While this is a global problem, it is also dangerously an American one. The 2016 fiscal year for the U.S. government represented the third biggest growth in the federal debt in all of American history. The only two times that beat it were the years of the financial crisis and Great Recession.
The problem is that 2016 was not a year of financial crisis. It represented a year of growth in the world economy, the U.S., and the developed world. Despite this, corporate debt for the year also has broken its old record, as have credit card and student debt in the U.S. As Dalio has warned, debt is now in a major bubble itself.
When you see this bubble pop and/or interest rates rise (one will likely cause the other), the U.S. and other heavily indebted nations will no longer be able to service the interest on their debts, let alone hope to repay them.
On top of this, the major economies’ central banks have printed enormous quantities of money by expanding their balance sheets to all time highs (including the Federal Reserve, the European Central Bank, the People’s Bank of China, the Bank of Japan, the Swiss National Bank, and the Bank of England). As they are all in over their heads, this could cause major global inflation at the same time.
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