It’s a fairly simple rule of thumb — if we borrow more money than we can pay back, we’re overleveraged.
Consumers become overleveraged when they have more bills and expenses than income to pay them with. Businesses become overleveraged when they have a high ratio of debt to capital. Countries become overleveraged when their liabilities exceed their overall economic output.
These are not unfamiliar scenarios. Cheap credit, excessive borrowing, and vast gaps between income and debt were among the root causes of the Great Recession. And when the financial crisis hit back in 2007-2008, central banks from Western and Eastern Europe, Asia, Scandinavia, the Middle East, and North America stepped in to save their economies from collapse by lowering borrowing costs, underwriting bank debt, guaranteeing deposits, and bailing out lenders. So, in order to restore confidence, stimulate growth, and ignite a recovery — they dramatically stretched their balance sheets.
As we approach 2020, household debt has reached unprecedented levels, corporations are carrying unwieldy liabilities, and governments worldwide are swimming in a deeper and murkier sea of red than at any other time in history. According to a November report by the International Institute of Finance (IIF), world debt is on track to exceed $250 trillion this year, three times global economic output. This comes on the heels of another reckless era of cheap money, easy credit, and rampant borrowing. It is the highest cumulative debt load the world has ever known, and it shows no signs of abating.
This has brought us to a breaking point. The world’s reserve banks have managed to deliver the economy from crisis-to-recovery for hundreds of years, but now find themselves overloaded and under stress. Faced with balance sheets that are too high and interest rates that are too low, they are short on stimulus and shy on firepower.
So, as we sit atop this towering mountain of debt and default and once again look to monetary authorities to save the global economy — we realize that they may not even be able to save themselves. Fiscal cycle after fiscal cycle, deficits have increased and budgets have exploded to unsustainable levels. And, for the first time ever we’re forced to contemplate the desperate notion of what comes next —The Implausible? The Unworkable? The Impossible?
With a $23 trillion liability, the threat of de-dollarization, and the prospect of massive new spending initiatives like ‘Medicare for All’ and the Green New Deal — the Fed, in particular, has little room to increase spending or encourage borrowing. And if Powell and company lose control of the economy, America could be headed for a crisis far worse than 2008 with no foreseeable escape.
So, where does a cash-strapped, belly-up world turn? To one place and one place only. In 2019 central bank, net gold purchases will shatter 50-year highs. This is no coincidence. In a world that has seen empires rise and fall, civilizations come and go, watersheds, turning points, depressions, recessions, defining moments and monumental indebtedness — there has never been anything as safe, steadfast and as enduring as solid gold.