Investable themes: Real estate, physical alternatives, technology, gold
Eventually, something must be done about the global debt burden. There are only four ways that debt can be reduced: growth, inflation, currency devaluation or default. Only growth is truly attractive, so in the absence of sufficient growth, anything else constitutes a reckoning.
Given headwinds from demographics and a structural move away from physical capital towards information capital, ‘growth’ will look quite different in future (it will be inflationless).
So, governments have increasingly relied upon inflation and currency devaluations instead of growth to reduce the debt burden. This is being orchestrated through a campaign of financial repression (keeping interest rates low to effectively transfer wealth from the private to the public sector), by pursuing an inflationary bias, coordinating fiscal and monetary policy, and knocking on the door of modern monetary theory. This is instead of pursuing a policy of austerity, which is self-defeating and politically intolerable.
But the world is in a liquidity trap; financial repression is less potent than it once was, and structural deflationary headwinds are strong. Therefore, the burden of debt will manifest as an intergenerational transfer of wealth – an increase in intertemporal inequality as future generations pay the cost of earlier generations’ excesses.
As the global debt reckoning plays out, a transition in the philosophy of money will occur. That is, belief in the sovereignty of money will come under pressure.
Critically, the global debt reckoning can be offset if the technological revolution wins the standard of living race, in which case debt will become less relevant.
How can investors respond? Invest in real assets with non-rival consumable intrinsic value: real estate, art, collectibles, etc. and in technology.
We’d love to hear your thoughts.
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