Debt grip holds world economy

May 3, 2018

Pat Heller

On April 18, the International Monetary Fund (IMF) issued its latest annual Global Financial Stability Report. The title of this year’s report is “A Bumpy Road Ahead.” You can read the summary of it online at http://www.imf.org/en/Publications/GFSR/Issues/2018/04/02/Global-Financial-Stability-Report-April-2018, or click on the link there to view the entire 150-page report. You can also click on the video of the April 18 Washington, D.C., press briefing on the report.

A quick recap of the report is that while there are some positive economic and financial indicators today, there are heightened risks in the short and medium term. As the IMF’s Director for the Monetary and Capital Markets Department, Tobias Adrian, stated in the press briefing, “under a severely adverse scenario, growth could be negative three years from now.”

The report identifies three vulnerabilities to the sustainability of global finances. First, there has been a surge in the issuing of riskier bonds, a pattern often seen in the late stages of a credit boom. Leveraged lending hit a peak in 2017. Should interest rates rise on the basis of higher inflation levels (and the U.S. 10-year Treasury debt interest rate touched its highest levels in almost seven years on April 25), Adrian said, “This could trigger a sudden tightening in financial conditions and a sharp fall in asset prices.”

Second, this financial tightening could also hit much harder in emerging markets and low-income countries, where debt sustainability is already deteriorating.

Third, non-U.S. banks that need U.S. dollars for conducting international transactions rely on short-term wholesale sources for about 70 percent of this funding. In any downturn in financial markets, these banks may have difficulty obtaining sufficient U.S. dollars to facilitate trade.

Early this year, the Institute of International Finance reported that global debt as of the end of the third quarter 2017 totaled a new record high of $233 trillion. This amount had increased by 8 percent in the previous nine months.

This figure is misleading, because it does not include the net present value of unfunded liabilities incurred by governments. For instance, my best estimate of the U.S. government’s net present value of unfunded Social Security and Medicare benefits as of Sept. 30, 2017, is somewhere between $75 trillion and $95 trillion. To that you can add maybe another $10 trillion for American state and local governments’ unfunded employee pensions and retiree health care benefits. Then you can add whatever comparable unfunded liabilities are for all the other governments worldwide.

While trying to avoid sounding all doom and gloom, the IMF report two weeks ago is a definite warning that the values of fiat (paper) currencies face higher risks of declining values in the short and medium term than they have in recent years.

Whether or not such financial crises come to pass, I consider it a prudent step for people to establish and maintain their “wealth insurance” holdings of bullion-priced physical gold and silver in their direct custody or control to cushion any bumps in the road that might come to pass in the short, medium, or long term.