I’m Norwegian (the name says it all!), born into a family where shipping and banking were the mainstay. These are highly cyclical industries – and I’m a great believer in economic cycles. They’ve taught Scandinavians to protect their wealth over decades. And they’ve also taught us that there is always financial opportunity – no matter where you are in the cycle.
But moreover, the Scandinavians have a very particular take on money. In a biblical sense, money is not to be coveted – ostentation is not acceptable. But as a Scandy, I can assure you, money is respected.
And if I could sum up the one, main reason why we, in the West, are now struggling to make our economies work and grow, I’d say it’s all down to lack of respect for money.
We see it everywhere in today’s society. All the way from politicians and their flagrant abuse of expenses, to debt-junkies on credit cards and payday loans, right through to the central banking fraternity and their money-printing voodoo.
Money is not the root of all evil – but to my mind, its misuse most certainly is.
The thing that really concerns me – as I’m sure it does you – is, who will suffer at the hands of today’s monetary irreverence? I put it to you that it’s not going to be the über-rich. They’ll be OK – they always are! And frankly, the way things are set up, the poor don’t have too much to fear either.
What concerns me, are people like you and me. Those with savings. I guess we’re talking about the middle classes here, or…
The squeezed middle-class
Today, the middle and upper classes find themselves as little more than a cash-cow for a bloated state. And in this respect, I fear things can only get worse.
For me this is a story about debt – and how we use it to prop up the wealth of the middle class in Britain for decades now.
I believe that for decades now, the middle-class has been duped into taking on huge debt just to keep the government and finance industry in clover. And I don’t say that lightly – I used to work in the City before I left to set up my import business in 2000. And I’ve seen how we encouraged people into debt to buy things like cars, property and stocks.
We have allowed this to happen because that debt has sustained the value of those assets. But it’s become a dangerous obsession. The chart below shows how much debt the West has taken on over the last couple of decades. And the big story here is the UK. This is a nation that’s simply gone bananas. Total indebtedness has risen from just over twice the size of our economy in the ’90s to over five times the size of our economy today.
Total debt as a % of GDP
(Source: Haver Analytics National Central banks & McKinsey Global Institute)
OK, so we’re not totally alone here. As you can see, Japan is up to its eyeballs in debt too. But if you look at the trajectory of our debt build-up, you’ll probably agree, it’s rather shocking.
According to the Monetary Policy Committee’s Ben Broadbent, the UK private sector is the most indebted in the world. In the world!
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
‘This is basket-case territory’
This build-up of debt really matters. That’s why I’ve talked about it so much in The Right Side. And it’s why I worked with The Fleet Street Letter team to put together a plan for protecting people from the fallout.
Because to encourage debt creation is to encourage an ever-more unstable and inefficient economy. The way the system now works is that we now need to grow our debt, year after year, just to keep the economy from suffering a very nasty bust. But the size of this impending bust is of such a magnitude that the central planners are doing everything within their powers to keep it from playing out. And there’s only one way to do that – and that is increase debt. What we have now is the biggest debt bubble that Britain has ever seen, expanding right at the heart of the British economy.
This problem isn’t going to go away. You’ll have noticed recent government initiatives to do anything they can to coerce the public, business owners, or even students into more debt.
They are desperate for business to borrow, hence the funding for lending scheme; they’re increasingly desperate to encourage new homeowners to take the plunge; or existing homeowners to get in deeper. The last Budget from George Osborne was practically all about reinvigorating the housing and mortgage market. And even students are encouraged to pile on debt in order to keep the system alive.
In the USA, the level of student debt has doubled in just the last six years. It’s just hit $1trn!
But governments are finding it increasingly difficult to encourage the public to take on more debt voluntarily. So, they force it on us all through public sector debt. And it’s growing at an insatiable pace.
Despite so-called ‘austerity’, our government is set to borrow £121bn this year. That’s about 8% of GDP. This is basket-case territory! And it’s set to continue for years to come. Or at least, until the whole thing blows up.
We are caught in a debt cycle
The way I see it, the carnage brought about by the subprime fiasco was just a small part of the bigger debt cycle. We’re still only part of the way through this cycle. There are far more opportunities (and death traps) to come. And it’s not like this cycle isn’t easy to spot.
Take Iceland’s blow-up for instance. Now, I ask you, did Iceland’s bust happen all of a sudden? No, of course not. This was a bust that was many years in the making. I, for one, had cut all my exposure to Iceland well over a year before the banking defaults shocked the financial world.
Shrewd Icelanders had taken care to store wealth and cash abroad too. Iceland’s banking crisis was obvious to anyone that cared to look. Yet, most Icelander’s were caught with their pants down – not to mention financial institutions and even some of our local councils too.
More recently, we have of course had the Cyprus affair. Did this come as a shock? Well, to some, clearly it did. But it had been obvious for well over a year. The Cypriot banks were massive holders of Greek sovereign debt. And they got scalped! As I say, those Greek ‘haircuts’ came in well over a year ago.
These things shouldn’t shock us. And yet they still do.
Frankly, the only thing that shocks me is how obvious these inevitable train wrecks are, and how long they take to play out. The good news is, that gives us plenty of time to get out of the way.
This is a cycle that must not be ignored
The situation we face today may sound rather frightening, but I don’t want to be alarmist here. There are three important things on our side.
First, we’ve got the central planners on our side – at least, for the moment we have! In their eagerness to avoid a bust, the planners create opportunities. I’ve enjoyed some nice gains in commodities, bonds and equities since the planners got stuck in with their loose-money policies and money printing.
And as the planners get more desperate, so opportunities continue to appear. Take Japan, for instance. In desperation, the government launched a fresh bout of money printing in the first quarter of this year. And that has literally yanked the stock market up to a five-year high. The Nikkei is up 36% since the start of the year. That’s been quite a ride!
While gold has suffered hiccups, it too has been a fantastic investment over recent years. In fact, many commodities have experienced quite a bull market – and it’s mostly down to money printing.
The second point to consider is that there are ways to profit, even as the inevitable downdraught occurs. In this week’s issue of The Fleet Street Letter, I’ll be showing readers how I am aligning my portfolio to benefit from turmoil.
The third point to remember is that there will be warning signs – there always are!
For the moment, there’s no way of knowing exactly how the debt games will play out. After all, the central planners have many options open to them. In the light of Japan’s recent turnaround in fortunes, I fully expect central banks the world over to reinvigorate money printing offensives. And that includes Europe. I have every faith that the planners will do everything they can to keep the system together.
In order to keep the debt economy from imploding, the government will have to resort to inflation, and perhaps even grievous financial repression. Many will suffer during repeated bouts of inflation. Our currency will fall and our economy will suffer. And you will need to be ready for that.
Most market participants will ignore the warning signs. In exactly the same way that blinkered investors left cash sitting in accounts in Icelandic and Cypriot banks, so there will be many that suffer when the shock reaches our shores. You needn’t be one of them.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Every Monday, Wednesday and Friday, I send out our contrarian email, 'The Right Side', which cuts through market noise to deliver useful, shrewd and to the point advice straight to your inbox.
And with your permission, I'd like to send you The Right Side for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site.Good luck with your investments!
Editor, The Right Side