Is 2018 theYear We Pay the Piper? ProbablyNot. AS THE YEAR MOVES FORWARD, INVESTORS SHOULD BE ON HIGH ALERT.
moving and borrowers keep paying their debts, the game works. The music stops only when depositors want their money back and do not realize it has already been lent out to multiple bor- rowers. If those borrowers default, there could be another big run on the banks – and another liquidity issue nationally. DEBT IS THE KEY INDICATOR FOR 2018 If people continue to get access to credit to buy homes and continue to be able to make their mortgage payments, the housing market will remain robust. So far, that is the case. Foreclosure starts are very low nationwide. However, U.S. debt overall is at all-time highs. The government itself is facing over $20 trillion in national debt. The national debt doubled from $5 trillion to $10 trillion during the Bush era, and then from $10 Trillion to $20 Trillion during President Obama’s two terms. With increased government spending combined with tax reform, it appears the Trump administration will continue to increase our national debt at a similar rate. While recent GDP numbers were impressive at more than three percent, it is only enough to cover the interest on our debt! In fact, our debt-to-GDP ratio is the third-worst in the world at 106 percent, with Japan and Italy in first and second place respectively. This is akin to a company borrowing over 100 percent of the funds needed to run a company, and still only earning a 3 percent return. For comparison, just 10 years ago, debt to GDP was 62 percent, for a similar output. Consumer debt has also skyrocketed, as has auto and student debt. We also have a record number of investors borrowing money to buy stocks. We know that the Federal Reserve is responsible for this boom because only the Fed has the power to create trillions
by Kathy Fettke
2008 recession. In an effort to revive the ailing U.S. economy during the mort- gage meltdown, the Fed started buying mortgage backed securities and U.S. Treasuries, a process known as quantita- tive easing (QE). The first round of QE was QE1. By June 2010, the Fed balance sheet was up to $2 Trillion. Such a rapid expansion of the money supply was unprecedented, but it still wasn’t enough to jump start an economy lacking liquidity. The Fed launched QE2, and then, QE3. By the end of 2014, the balance sheet was up to $4.5 Trillion. Additionally, short-term interest rates have hovered around zero for nearly a decade. This allowed the big banks to borrow money for next to nothing and build up their reserves. Once that mon- ey was lent out to the public and began circulating in the economy, we started to see a revival. When people have access to credit, they start businesses, make investments and buy goods and services. As more and more companies and individuals make money, they deposit their earnings back into banks. Those funds are then recircu- lated in the form of more credit. That credit is where we could find ourselves with a problem. Most people do not realize that banks lend out six or seven times the amount of money deposited. If capital keeps
s we move into the New Year, what can we expect from the
U.S. economy in 2018? We know the Dow Jones Industrial Average and the Nasdaq hit all-time highs in 2017, as did many U.S. housing markets. The big question on everyone’s minds is wheth- er we can expect more bullish growth, or if we're headed for a correction. Last year, I was surprised by the number of investors who poured their money into an already-inflated stock market. Usually, this would have led to rising interest rates, but because the new presidential administration created so much uncertainty, the Fed kept them low. In 2018, however, “manufactured” growth by way of federal stimulus could make things, well, a little tricky. Here’s the truth of the matter: Stim- ulus works, at least until it doesn’t. An increased money supply fuels the econo- my. The more stimulus we get, the more growth we experience...until we don’t.
LOOK BACKWARD TO LOOK FORWARD
Much of today’s robust economic growth has been manufactured by an unprecedented ballooning of the money supply. The Federal Reserve held around $800 billion in Treasury notes on its balance sheet before the
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