Weekly Comment - August 05, 2020

Aug 05, 2020 | Nick Foglietta


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With the largest percentage of the world’s economy in history in recession, the inflation fear is muted.

“Debt Will Never Matter Again”

The past couple of weeks, my wife and I have done a bit of camping, golfing and fishing… and personally, I have done a lot of thinking.

Using pure reduction analysis, my goal was to try and see what sits at the very pinnacle of the giant global bubble in asset prices.

My answer: Debt.

More specifically, the belief that debt will never matter in the future and the world can continue to add to its debt pile ad infinitum.

After a huge amount of thought, I believe the many tentacles of the infinite debt narrative powers every aspect of our world today.

Therefore, it leads me to two conclusions:

  1. Asset prices will not meaningfully breakdown until debt finds some outer boundary to constrain its expansion.
  2. Finite assets will become more valuable when measured in fiat currency that pays no interest rate to the lender.

That’s it. That is all I have to say at the end of my reduction analysis of the present world situation.

There are a great number of subsets we could talk about beneath this banner. But at the end of the day, they lead back to being enabled by the narrative of unlimited amounts of debt being possible to create.

So let me lead you in one more thought.

The risk the present narrative of “meaningless debt” is that someday debt has “meaning” again.

Great job Sherlock, thanks for letting us know!

I guess I deserved that, but I’m a slow learner and that means I need to visualize the steps of a reversal to see how it could happen.

Only uncontrolled inflation creates the underlying economic conditions that truly end the global debt bubble and asset price expansion.

I think that is why the kryptonite feared by Modern Monetary Theory (MMT) is inflation. That’s the only thing that brings MMT to its knees.

For now, with the largest percentage of the world’s economy in history in recession, the inflation fear is muted.

But markets are always forward looking and assets like real estate, inflation-helped stocks, and gold or silver are getting bought against the future inflation building in the system.

Just consider how many new Treasury Bills and Government bonds have been issued in the past five months. It is really quite amazing.

The red line on the graph above separates out the US and shows the total dollar amount of Treasury Bills outstanding. Incredible.

This brings me back full circle. As long as “debt doesn’t matter” then the chart above doesn’t matter.

Keeping it simple, we will watch for a place where the narrative might change in the future.

 

 

The problem is that it is nearly impossible to find NON-CORRALATING INVESTMENTS when interest rates are near zero and debt creation is unlimited.

You might ask why that is important. Ah, please click here and I’ll forward you a link to a great analogy of one of the secondary problems that is created by the “debt doesn’t matter” narrative. 

 

Enjoy the summer weather….

Nick