- Worldwide debt rises to record high of 225 per cent of GDP
- Interest rates rise too fast and too much, threatens a collapse of the system
- Small steps of interest in worldwide coordinated actions of by central banks could work
- To write off debt, would lead to massive loss of confidence in the currency
- Investors remains only the investment in tangible assets, including shares
Interest rates in the United States continue to rise. Who lends money to the State for three months, will get a yield of 1.89 percent currently. Doesn’t sound much, but is the highest value for nearly ten years. There’s even again interest rates of more than two percent for six-month bonds. And that the 10-year government bonds would again regain the three percent mark, was only a matter of time. And it is back again on the stock markets, the fear of interest rates rose further and faster. But can continue to rise the interest at this rate?
No, because the world is sitting in a debt trap. Despite a global, almost synchronous, economic recovery, the global debt according to the International Monetary Fund has grown to a high of 164 trillion or 225 percent of economic output. And that’s only half the truth. Extrapolating to that of businesses and households, the debt is now at more than $230 billion. Sustained low interest rate policy of the central banks may have boosted while economic activity. But, the hope that the resulting from this monetary policy financial repression with low or even negative real interest rates lead to declining debt, has not been fulfilled.
Now you may say “we had ever”: the debt relative to the GDP in the United States was at the end of the second world war 100 percent and the United Kingdom even 250 percent. Here, however, the position was totally different. At that time large parts of Europe and Japan had to be rebuilt which led to high economic growth and in combination with negative real interest rates enabled debt reduction.
The situation today is different. Interest rates rise too fast and too much, threatening to collapse the system. And the critical threshold for this interest rate level decreases with increasing debt further. States as well as companies and private households would be affected. On the State level politicians have pushed to the buck the central banks, can be politically hard to implement structural reforms to reduce of the national debt, at least in democratic structures.
Central banks could only do so if they would perform regular small interest rate increases in internationally coordinated actions over a period of time. Only in this way would avoid a too rapid and strong rise in interest rates and at the same time be increased the pressure on indebted States and companies to implement efficient structures. Currently, this is counterbalanced however by persistent expansionary monetary policy of the European Central Bank and the Bank of Japan.
Another way to reduce of the debt is in the monetisation of government debt. So, central banks could convert debt on their balance sheets in eternally ongoing zero-bonds. Or they write off the debt on their balance sheets as the Bank of Japan, which holds more than 50 per cent of Japanese government debt, begin already does. In greater style result would however a massive loss of confidence in the respective national currency, so such a scenario only in several leading central banks concerted action would be possible. This seems the suffering but still not big enough to be.
The investor remains ultimately only the investment in tangible assets. In addition to investments in real estate and gold a stake in good company in the form of shares should prove remains the more attractive alternative. As a percent of a company remains one percent, no matter in what currency to calculate this.