Michael’s Daily Comment on the continuing rise of record debt levels.
Debt crisis is not over
Despite the fact that Syria’s been on the front burner you should be aware that the risk in the financial system that’s dominated news for the last five years is absolutely not over. I mean, trying to paper over the sovereign debt crisis by adding more debt is not a solution. It was simply a short-term band-aid.
Every Western nation including Canada has added to record debt levels since the crisis began. All that has happened is that in the absence of political leadership, central banks stepped in with record-low interest rates and programs designed to put massive amounts of freshly minted money into the system. Meanwhile the escalating debt necessitates higher government revenues, spurring higher levels of taxation which in turn reduces growth in the private sector.
France is the latest country to admit the shortcomings of that approach as their deficit continues higher than forecast, while unemployment grows and the economy stagnates. Since the crisis-hit the Federal Reserve has created over $10 trillion dollars, the US federal debt has hit record highs, the recovery is the worst on record in terms of full-time job growth and now there’s some disconcerting signs that even the anemic recovery is slowing.
Here is the point. There is still major risk in the financial system. Any investment that is heavily leveraged is vulnerable to sharp price declines. If borrowed money has been what led the prices higher then de-leveraging can bring them back down with a vengeance. We’ve seen it in real estate in many parts of the world. In the stock market and recently in gold.