A deepening global debt trap will handcuff central banks when the next financial crisis hits, making it potentially even more painful than the one in 2008.
That's not what investors want to hear. But knowing what lies ahead is the one advantage you have. And we're going to show you exactly what to do to protect your money and even profit from the chaos.
Urgent: How More Fed Rate Hikes Will Crush Your Retirement
"The economists and public officials will tell you the banks are safer now, that they have the reserves to deal with the next crisis," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "What they're not telling you is that the risks have been very methodically and very deliberately shifted to individual investors, pension funds, and insurance companies."
The latest troubling data comes to us courtesy of the Bank for International Settlements (BIS) in its just-released annual economic report. The BIS is an organization owned by 60 of the world's central banks, intended to foster cooperation between its members and to serve as "a bank for the central banks."
In its report, BIS points out that global debt of all kinds - government, corporate, and household - has risen from about $110 trillion in 2007 to over $170 trillion as of the end of 2017. That's a 55% increase in the decade since the 2008 financial crisis.
Meanwhile, the global debt-to-GDP (gross domestic product) ratio has also climbed to dangerous levels, rising from 179% in 2007 to 217%. That means the world's outstanding debt is more than double its annual economic output.
And it's created what the BIS calls a "debt trap." Here's how investors could get caught in it...
How the Global Debt Trap Could Fuel a Market Crash
The roots of the global debt trap go back to the 2008 financial crisis.
To stimulate the economy, governments around the world borrowed trillions of dollars. Central banks dropped interest rates to zero (or below zero in some cases). The cheap money has encouraged heavy borrowing by businesses and individuals.
You Must Act Now: America is headed for an economic disaster bigger than anything since the Great Depression. If you lost out when the markets crashed in 2008, then you are going to want to see this special presentation...
That was understandable (if risky) when the economy was struggling. But most central bank rates have hardly budged even as the world economy improves.
The Bank of England's rate is just 0.5%. The rate at the European Central Bank is 0%. And the Bank of Japan rate is still negative: -0.1%. Only the U.S. Federal Reserve has made any progress, recently setting its rate at 2.0%.
With rates that low, it's no wonder everyone keeps adding more debt. But the longer this goes on, the more likely it ends very badly for all parties.
And that brings us to the debt trap cited in the BIS report.
"The higher the debt, the more sensitive the economy and financial valuations are to higher interest rates, reducing the level of interest rates an economy can bear. This, in turn, makes it more difficult to raise them, favoring further debt accumulation - a kind of 'debt trap,'" the BIS report explains. "Higher debt - private and public - narrows the room for policy maneuver to address any downturn."
The irony is the easy money policies that "solved" the financial crisis have now become the problem.
And the markets have typically fallen when central banks hint at "normalizing" policy by ending the "quantitative easing" mass buying of bonds and raising interest rates back to historic levels. Wall Street is addicted to the cheap money.
And we're a long way from normal. Even in the United States, the current Fed rate of 2% is less than half its long-term average of about 5%.
But the longer the central banks delay bringing their balance sheets and interest rates back to normal, the less flexibility they will have to deal with the next economic downturn and accompanying market crash. The lack of options will make that crisis much worse.
And time is running out.
Any number of flashpoints could trigger the next financial crisis...
Why a Financial Meltdown Could Happen Sooner Than You Think
Before we even get to the possible triggers, it's important to point out the current bull market is one of the longest in history. Long overdue for a major pullback, it's particularly vulnerable to any kind of shock to the system.
The BIS envisioned three scenarios that could set off a major financial crisis:
- Trade Wars: The BIS report warns that protectionist moves would hamper markets and slow investment - possible first steps toward a crisis. In the few weeks since the BIS report was released, the trade mood has grown much darker as countries respond to tariffs imposed at the request of U.S. President Donald Trump with tariffs of their own.
- Bond Yield "Snapback": The BIS thinks a surprise jump in inflation, particularly in the United States, could push the Fed to raise rates more rapidly than it had planned. The tightening would hit emerging markets particularly hard, as it would cause the U.S. dollar to strengthen. A stronger dollar could cause capital to flow out of these countries and their central banks to raise rates - both bad for a struggling economy. Higher U.S. interest rates would also make borrowing more expensive, reducing global liquidity.
- Reversal in Risk Appetite: This would happen as a result of several factors, the BIS said. Investors could start to shy away from risk as a result of lower corporate profits, anticipation of an economic contraction, concern about the fate of emerging markets (especially if the second scenario above is happening), and political instability in major countries.
None of these scenarios are far-fetched. In fact, the first one is already unfolding. The central banks have set up investors the world over for a catastrophic fall.
"Capitalism by its very definition includes success and failure. History is littered with the bones of failed companies, and the pure fantasy, all-gain, no-pain recovery that the financial alchemists have created will ultimately end badly," Fitz-Gerald said. "You just don't know when."
But that doesn't mean you shouldn't start preparing now. Fitz-Gerald said investors should make these three moves...
How to Protect Yourself from the Global Debt Trap
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"You're not alone if your first instinct is to run for the hills - but that is exactly the wrong thing to do," Fitz-Gerald said. In fact, he advises the opposite.
"You've got to squeeze every last cent of profits out of the system before it retrenches," Fitz-Gerald said. "Go along for the ride until the market gives you a reason not to. In case you're wondering 'when,' like a lot of folks are, I think Q1 and Q2 earnings are probably baked in; it's a quarter or two from now that I worry about, because that's when expectations will get harder to meet."
He also advocates making some pre-emptive defensive moves. He suggests buying specialized inverse funds, like the Rydex Inverse S&P 500 (Nasdaq: RYURX) or an ETF version, the ProShares Short S&P500 (NYSEArca: SH).
"Both rise as the S&P 500 falls, so having exposure to one or both of these choices will take the sting out of any sudden drop," Fitz-Gerald said.
Finally, he said investors need to be ready to buy when the markets do go south.
"The world's best investors go bargain hunting during periods of market madness. Sir John Templeton, for example, became fabulously wealthy by buying at points of maximum pessimism. Same with Warren Buffett and the legendary Jim Rogers," Fitz-Gerald said. "None of those men get caught up in the hype that inevitably surfaces when the you-know-what hits the fan. Neither should you!"
There Aren't Any "Safe Spaces" to Protect You from the Next Financial Disaster
America is headed for an economic disaster bigger than anything since the Great Depression.
If you lost out when the markets crashed in 2008, then you are going to want to see this special presentation.
Because if you don't act soon, the effects on your financial future could be more severe than anything you have ever experienced.
Don't wait - You can see all the details right here.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.