Sobering Math

Posted on Posted in Burlington

Sobering Math

The American dollar has proudly existed as the Reserve Currency of the Global Economy for nearly 100 years; there is little debate that America has been truly blessed with it’s geographic cornucopia. This has evidently resulted in the world’s largest economy, the biggest armed forces, as well as English being the major language of commerce.

Nations that have had their currencies designated as a Reserve Currency have, over the centuries, normally demonstrated a fair degree of fiscal fortitude reserve. All of these nations behaved in a forthright manner, wisely shepherding their economies and current accounts, as a means of keeping their currency strong. Think of Great Britain and the pound through the Victorian age, for example, The Spanish ducat of the 15th and 16th century, or the Denarius of the Roman empire. All of these exemplary currencies could be traded and accepted as the premier currency of the known world until almost unpredictably, they were no longer acceptable!

Currently, the US government is running a trillion dollar deficit, during what has been proclaimed as an unprecedented decade of unbridled American economic expansion. Perhaps, it is worth considering for a moment, if all these exhalations are indeed factual.

Presently, the U.S.A national government debt is a staggering $23 trillion. Additionally, and perhaps more importantly, the American government is carrying unfunded liabilities of > $127 trillion. To clarify the meaning of an “unfunded liability,” it is a debt obligation that is deficient of adequate or projected funds to pay that debt. For example, pension plans, government debts, social security, Medicare, etc. This $150 trillion sits beside a domestic consumer debt load of $14 trillion. Plus an escalating corporate debt of $16, trillion, which is representative of 75% of America’s GDP. Essentially, America now owes >$180 trillion plus interest.

Maybe we should start to ask ourselves, who is buying all this debt? Will they continue to buy this debt? China and Japan hold 2.3 trillion, aging Americans and their institutions hold 9 trillion and counting. This mammoth escalation in debt has ironically occurred on the watch of a president that campaigned in 2016 on a platform of eradicating the $19 trillion national debt within 8 years.

Despite the widely accepted concept, “debt does not matter” many ask, what would happen if things reverted back to an older norm?  If things ever reverted to the older more understandable norm it would seem inevitable that interest rates would spiral northwood as demand slackens along the debt ladder. Presently, most Central Banks continue to participate with their quantitative easing policies. So grand changes over the short term are highly unlikely, however things do change and many times much faster than anticipated.

Historically, grossly indebted nations have revealed their inability to protect their currency by retaining sizable tangible reserves. Could the USA be replicating the mistakes of the Hapsburgs & Victorians?  The prosperity of a currency is unlikely once a nation loses the ability to promptly and diligently repay their debt obligations. Mayer Rothschild once inferred that money normally follows the path of least resistance. Could the Euro or the Renminbi become the next reserve currency? Only time will tell!

Attached below is and article written by Rachelle Younglai of the Globe & Mail, which highlights a disturbing but developing trend in the Canadian mortgage housing market. Could this be a monetary harbinger for all concerned?

Additional Links Related to This Topic:

If you have access to the Globe and Mail, check out the article titled Consumer insolvencies on the rise, raising concerns about financial well-being of Canadian households written by Matt Lundy and James Bradshaw. (2020).

As well as Michael Babad’s article, titled RBC fears Toronto’s housing market is headed for another round of froth (2020).

We hope you found this blog both interesting and informative; we are never opposed to sparking valuable discussion.

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