Potential Financial Crisis?

Several weeks ago,  I wrote about the US Government’s debt and deficit [1]. I was quite concerned at that time. The US government debt is growing at an alarming rate. So far the government debt is funded by international bondholders. The rate of the increase is high in the last few years. Sooner or later the debt may reach a level that few want to buy the bond.  

The Republicans winning the election and reports that the new administration would pay attention to debt and deficit make this less urgent. Hopefully, it will adopt pro-growth policies and cut some expenses. The best scenario is that the twin effort will keep the total debt in check (as a percentage of GDP). This scenario was preferred by Mohamed El-Erian [1]. Larry Fink also advocated a similar approach [2].  

Since my last writeup, I came across a video, Why Your Money Is Losing Value [3]. It is easy to understand. I highly recommend it. 

The motivation for me to write the earlier write-up is to warn you. The worst case could be a lot worse than the GFC because the debt is much bigger and the US dollar is the reserved currency. If you watched [3], you would know that money is guaranteed by the government. If the government does not have the resources to guarantee it, then people will lose faith in money. What would happen if that occurs? If there is some dislocation and/or fault lines, then a major crisis would occur. Otherwise, slowly and firmly the interests will rise. This will allow governments all over the world to devalue currencies. As an aside, Niall Ferguson recently proposed the so-called “Ferguson Law” [6]. (It was a good talk.) If an empire spends more on debt payment than defense, then the empire will not last long. I think that he tries to warn too much debt. 

What should you do now? As said above, this would be urgent if the Democrats retain power. The Republicans are fiscally more conservative. However, it is unclear what they will do. So I would say wait and see. 

Some relevant information. First, Warren Buffett has sold shares and sits on a huge amount of cash. It could signal a few things: 1) the stock market is overvalued, 2) he senses some financial stress (we do not know but he pays attention to that), or 3) tax consideration (Harris proposed change of taxation). Second, the interest is unlikely to remain low. If you need to borrow and can fix a long-term rate, you might do so. Third, keep a certain amount of cash. 

References: 

1. US Government Debt and Deficit 

2. Larry Fink 11-5 How to Grow Out of America's Debt Woes - WSJ

3. Why Your Money Is Losing Value (11-15)

4. Billionaire Investor Warren Buffett Sold Apple Shares for a Fourth Straight Quarter. Should Investors Be Worried? | The Motley Fool

5. Why did Warren Buffett sell more Apple shares?

6. Is Democracy Doomed? | Robert Menzies Institute Oration (11-2024) (Niall Ferguson)