Will Out-of-Control Debt Annihilate the Global Economy?

Most of us realize a lot of debt is a bad thing. But unless we find out the hard way, through personal experience, it remains an abstraction. Until it’s too late debt always seems like OPM – other people’s money.

Many homeowners found out the ugly truth about excessive debt when their mortgages slipped underwater during the Great Recession and they either found themselves and their families out on the street, or they ended up pitching their hard-earned money down a hole that never seems to fill.  Twenty-somethings are also making the shocking discovery once they graduate college and enter the workforce, only to discover as soon as the first payment of their student loan comes due they’re buried in debt even before they have a career.

If we seriously consider the implications of a February 3 New York Times article, we stand to be dogged by a “multitrillion-dollar problem that could sap the strength of large economies for years to come.” The country with the biggest problem is China, with debt that could soon exceed five trillion dollars – half its current annual economic output.

Economists consider a nation’s debt low when it logs in at twenty percent of Gross Domestic Product (GDP), and very troublesome at one hundred percent of GDP. By that reckoning the Chinese, and many of the rest of us, are well on the way to dire financial straits. Recently, China’s banks have eased up on lending, which could injure the economies of many countries that do business with them. When turmoil hits that part of the world it takes only seconds to feel the impact on Wall St. and in each of our portfolios.

Furthermore, as the Times notes, it’s not just the Chinese wrestling with excessive debt.  Analysts claim Europe is also struggling with bad loans in excess of one trillion dollars. Italy has already forged a plan to clean up its own bad-loan problem.  Of course, one strategy a country can always resort to is trying to inflate its way out of debt.  Whether that works for China, the world’s second-largest economy, through its continued devaluation of the yuan, remains to be seen.

By contrast, it now appears unlikely the U.S., still the largest world economy, will attempt such a strategy to tame our own enormous debt. The Fed seems to have taken a hard look at downward slide of the world economy—and blinked.

The world’s worst inflation nightmare is currently Venezuela, a country long expected to default on its eleven-billion-dollar debt.  But what that nation is now doing to keep from sinking is a move so drastic it’s (hopefully) unthinkable to us here in the United States.  Venezuela is swapping its gold reserves for cash from foreign banks.

Can you picture the United States handing over our Fort Knox gold reserves to another country? We’d cut Social Security payments and put government workers on a three-day week before we’d even dream of letting go of our gold.

Ironically, Venezuela has maintained the largest oil reserves in the world, which used to be its safety net. With oil’s drastic fall, largely due to Saudi manipulation, gold is now the tangible asset that has the best chance of keeping Venezuela afloat.

It’s another stark example of why physical gold equals protection. It’s survived every fiat currency since nations have been issuing fiat currency.  In fact, when the financial news is bad, gold rallies—just as it’s doing now.  No matter what the Saudis, the Chinese, the Russians or even the Fed does to cause world havoc, the physical gold we hold remains a powerful asset and protection against national and personal disaster.