What to watch for. New threat to economy spotted!

I've been pondering the situation with the US economy and its soaring stock market for some time. All the while, I've been only too painfully aware of the elephant in the Economies' room..........the burgeoning US Debt, which stands now $21.5 Trillion.
www.usdebtclock.org...

What's more important however is the Debt/GDP ratio which presently stands at 105.40
tradingeconomics.com...

To put that ratio into perspective, note that the highest its ever been is 118.00 and that was in 1946 just after WWII.

What does the 105.40 mean? It means that the Government spends 105.40% more than the value of the Gross Domestic Product. Check the link cited above and they tell us:

Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields. This page provides - United States Government Debt To GDP - actual values, historical data, forecast, chart, statistics, economic calendar and news. United States Gross Federal Debt to GDP - actual data, historical chart and calendar of releases - was last updated on September of 2018.

Generally speaking, GDP is the value of the goods and services a Nation's economy produces on an annualized basis.

So, again, what does the 105.40 mean? It means the US is upside down on its debt.

Is that catastrophic? Meh, some say yes, some say no. Some say that because the US is the world's reserve currency, the US can borrow indefinitely (borrow as in print endless funny money by way of Treasury bond sales). Typically my response would be that the US being upside down on its debt is troubling but that if the economy continues to grow at 3%~4% a year, the US Economy can grow itself out of that ratio. It would help of course, if the idiots in Congress would actually start paying attention to the problem and start slashing spending.

But, this Sunday, something caught my attention and its burbling about in the back alley's of the Interwebs and that is:
foreignpolicy.com...

Following a weeklong European tour during which he disparaged America’s closest allies and flattered its greatest adversary, there no longer can be any doubt that U.S. President Donald Trump wants to dismantle the liberal world order. That order—a system of multilateral arrangements, alliances, and institutions—was built in the ashes of World War II under U.S. tutelage and strength of arms. It extends from the European Union and NATO to the long-standing security guarantees Washington has established with Asian countries such as Japan and South Korea. The resulting Pax Americana laid the groundwork for the greatest period of peace and prosperity in human history.

First I'd heard about this, was week before on "Fareed Zakaria GPS" show on CNN. (O.k, yea its the only show on CNN I watch).

What's up with this? Here's the deal.

The aforementioned "World Order" built of multilateral arrangements, alliances and institutions ENABLED THE US DOLLAR TO BE THE WORLD RESERVE CURRENCY! Those arrangements are one of the major reasons the US Dollar has been retained as the World Reserve currency.

I"d have zipped past this problem as being unlikely simply because Trump can't really undo that "Old World Order"; it would take probably 10 or more years to do so. BUT then........we have the China Trade war and it just keeps getting worse, with more and more tarriff's that jack up prices for everything!

Trade wars can unravel World Orders pretty damn quick!

Here's the problem; if the Trade Wars with China and others escalate and continue to push prices of almost everything higher, eventually, the value of the Dollar vis-a-vis other world currencies is going to start to falter and fall. This has already started to happen vis-a-vis materials used in Home Building and Home Remodeling. One Home Re-modeler interviewed on CNBC today reported that he an others in his field when submitting a bid on a remodeling project, they include an escalation rider which gives them the ability to increase the price of the project because they don't know how far north the price of marble counter tops is going!

Ladies and Germs, that's called.............Inflation! And we know how the Federal Reserve Board responds to Inflation, they raise interest rates. And when they raise rates too high........the yield curve inverts signaling a severe market correction.

To sum it up? The Trade Wars will inflate the dollar which will fall in value relative to its purchasing power and ultimately choke off this economic rebound. At these Debt levels, that could spell disaster including world wide loss of confidence in the US Dollar as a world reserve currency. When that chicken comes home to roost, we could be looking at a near US Debt default which would render the dollar worthless. The mere threat of that would cause the Federal Reserve Board to drastically raise interest rates and that precipitates.......the next 1929 event.

What's a good hedge against this? Gold......maybe. Silver ......maybe. Buying stocks of multi-national Oil & Gas Producers.......my initial first choice. I think that will work through the first phase. Take those profits and buy.........Swiss Francs!

There are of course other ways this could play out. Who owns the US Debt via buying US Treasury Bonds at auction each week? Pension Funds, Hedge Funds, Banks, Germany, Japan and............China. If the value of those bonds tank......Deutsche Bank could be in near failure. The Italian Banks are already on the precipice of failure. If we have another Lehman Bank type failure, the Federal Reserve Board and the US Government, at these debt levels, is out of ammo!

Have to go for a bit.
Enjoy discussing amongst yourselves.
Cheers

The best hedge is commodities IMO. That being said, Lumber and building materials are at year lows. Building materials are really cheap ATM, its high demand for working class that is the problem. Too many projects, too little working bee's. Not to say that you are wrong, not at all. Im actually investing as a contrarian to the Fed unwinding of debt. Everyone expects the dollar to strengthen, I anticipate, as you do, the opposite.

I am long JJOFF (Coffee ETN), PPLT (Platinum ETF), and initiating a position into lumber this week.

If it isn't in your hands, then you don't really have it.

If there is a huge crash that shocks the world financially, then it seems illogical to invest in it. Your investments are just paper work (if you have the hard copies), more likely it's just computer data. Your returns are based on how much profits the business transactions make when you buy or sell. How well do you think that would work with a majority of financial institutions going belly up along with the U.S. dollar?

Start hording commodities that will become valuable in such a crash, your 'bird in the hand' so to speak.

a reply to: TonyS

Small wonder,when we were deemed insolvent in 1934,when the democrats sold out portions of the US,now US will be broke and the deed holders will collect on their notes,people who paid mortgages for 30 yrs will find out they only rent,truth is things are going to suck,especially if you live in a small state,only people who will have food and other sources will be Calif,NY,Florida,the states that have money,even though most will be slaves to the rich,things will suck real bad in about another 2 yrs

originally posted by: Oldtimer2
a reply to: TonyS

Small wonder,when we were deemed insolvent in 1934,when the democrats sold out portions of the US,now US will be broke and the deed holders will collect on their notes,people who paid mortgages for 30 yrs will find out they only rent,truth is things are going to suck,especially if you live in a small state,only people who will have food and other sources will be Calif,NY,Florida,the states that have money,even though most will be slaves to the rich,things will suck real bad in about another 2 yrs

Which is just another reason to learn to grow a garden and preserve foods. Stock up on cheap beans and rice and such.

People can make choices so they are not without housing and food. If anything, the last 20 years should have been a life lesson on financials and what NOT to do.

I don't get it though, markets go up and down....that's what they do. Inflation happens. Is there a way to really prevent it?

Well the US Federal Reserve bank is going to raise interest rates tomorrow and continue raising rates next year.
Higher interest rates mean a stronger US currency, but it will put a damper on the housing price boom even with the limited inventory of homes for sale. Trumps America first tariff policy is expected to be adopted by other countries which will increase inflation globally. Inflation reduces the value of foreign debt owed to other countries which might not be fair since some countries hold more foreign debt than others.

Precious metals and commodities usually stay pretty stable with a strong currency and inflation below 3 percent.
I've heard junk bond traders are considering buying government debt for safety if a recession looms.