“ Global Bank Issues Dire Warning ”
Ty J. Young Editorial
Global banks are worried. One such global bank is Great Britain’s Royal Bank of Scotland (RBS), and they have issued a dire warning through their monthly client advisory that said “sell everything except high quality bonds” and this would be a “cataclysmic” year for markets. We have never seen such extreme language and inflammatory words from a bank used in printed advisory notes to clients.
Many of their fears are based on a double dose of bad news for markets – debt and retiring workers. The bank found these two factors in particular most troubling – global debt is growing and the working population needed to pay for it is not.
I. Global debt is killing economies and stock markets.
- Total global debt up 25% since 2009.
- Global debt at $250 trillion and counting. The U.S. makes up $60 trillion of the global debt and it keeps increasing. That is almost 25% of the global total.
- Global debt has increased by $57 trillion since 2009. The increase in debt has occurred mostly in mature Western markets such as the U.S., Japan, Europe, as well as China. This is a rapid jump in total debt issued, and an unsustainable pace.
- Debt is now 286% of global GDP! Global debt is now 2.5 times global GDP (Gross Domestic Product), and there are not enough producers to pay it back.
- Payments on debt are killing economies and markets. Growth is stagnated because so much income is used to service debt payments. This is unsustainable. Stock markets do not perform as well as they could with private money being used to pay down debt.
II. Aging populations are retiring and not paying into the system
- Baby Boomers retire: As more retire, fewer are working. Less and less of the population is available to service the debt that government budgets are struggling to contain.
- Other groups are feeding at the trough: Western governments, including the U.S., are paying more for social welfare as it becomes easier to get, and more illegal immigrants gain access to the system. Americans have historically benefitted from immigration to help with population growth, but immigration that is illegal, not assimilated, and of low skill is not the way to grow the tax base.
- As populations age and workers retire, the tax base shrinks: With more of the population retired, it takes even more workers to pay into the tax base. That is the vicious cycle – there are less workers and therefore less economic growth to fund budgets, which in turn satisfies higher payments on debt loads. Debt increases as tax receipts also decline.
Growing debt and slowing demographics … you cannot pay your way without a workforce large enough to contribute. This is a global problem for Western countries. A debt bubble could cause a far greater crisis than the Financial Crisis of 2008. Markets are already struggling under the weight of consumers who have little left in their budgets for expanding their portfolios. Government budgets are strained under the weight of always-increasing debt service payments.
Bottom Line – Western countries, including the United States, have too much debt and too little natural-born population growth. The combination of those factors means little, if any, economic growth for the foreseeable future. Without growth, profits shrink. When profits shrink, stock markets follow. Your portfolio can and will be affected by an expanding debt market and a shrinking pool of workers. Will it be cataclysmic? To borrow the phrase from the RBS … seek shelter from these risks. Contact us to find out how. 877-912-1919.