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Debt – It's More Than a 4-Letter Word

People with forums far larger than KoCAA discussed in great detail how the Fed’s position on transitory inflation was completely wrong. At the risk of immodesty, we were on that many months before it became regular fodder for the financial press. Regular readers also know that we have continued to discuss the debt and deficits that are growing. Of significant concern is that neither Harris nor Trump have any serious plan to tackle the debt issue that is in front of us. In fact, because we have allowed for a permanent political class, given the lack of term limits for the Senate or Congress, it means that no one appears to have a vested interest in actually solving a problem that really is existential.

In a Bloomberg report, reported on MSN, global debt is exploding and is on a path to very meaningful increases over the coming decades. According to the analysis, only Germany is expected to see its debt debt-GDP ratio decline. The U.S. is already at a level we saw only during World War II. If we are bad, Japan is far worse. Japan’s demographic situation is even more precarious because there is fundamentally no immigration in Japan and their population is rapidly aging with more people dying than being born. A story for another day.

What does this mean for investors? There are two significant things at play here. First, if debt explodes at this level, there will be a crowding-out effect whereby governments will need to borrow so much money that there could be little capital available for funding corporate or mortgage debt. The second impact is inflation. If you have significant debt coming to market, the only way to attract more capital is for the level of interest to rise to attract investors. If inflation and interest are increasing, it will trickle down into virtually everything and cause the general level of inflation to increase. Finally, if governments are forced to use their tax receipts to pay for debt, they will either need to materially increase taxes to fund other priorities or need to materially decrease services provided. It is unfortunate math, but it is a path the world seems to be on at this time.

More and more, we are seeing news outlets and other market prognosticators discussing the implications of the global debt issue. There are things that we can do, and these are fairly similar for most countries and center around a blend of tax policy and spending priorities. Each country will choose how to best serve its populace by the choices that are made. Our concern right now is that choices will need to be made and neither party seems to be taking this seriously enough. The voting public has said in poll after poll that the economy and debt are of major concern. It is my sincere hope that someone is listening.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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