Q: “Since 1971 when
we became a Fiat currency Total Credit Market Debt rose from $1.7 Trillion to
$58 Trillion. From 2000 to 2008
the Total Credit Market Debt expanded nearly $30 Trillion.
Since 2009 it has only grown about $5 Trillion. Gold rose from $250 to
$1900 and is now back to $1170. During that period the Dollar Index
$USD fell from 120 to 72. The recent rally has it at $87. The
CCI Index rose from 180 to 680 and today it is back to 482. My point is
that all of this borrowing had a major impact on economic activity
around the world leading to a falling dollar and rising commodity prices.
Now as the borrowing has slowed dramatically since we can't afford to pay the
interest on existing debt nor add anymore debt, the dollar is rallying.
And as you know commodities are priced in dollars so they are falling as the
dollar rallies. I think it was this massive borrowing binge which is a
major reason for the rise and fall of the dollar and commodities. Does my
analysis have any merit?”
A: I tend to agree with your analysis in
that the debt bubble of 2000-2007 most definitely contributed to the
commodities bull market. Where I would differ is on the idea that we
can't afford to pay the interest on existing debt or add anymore debt.
Consumer debt levels have been pared down considerably since 2008 and can
be expanded if consumers get the "itch" once again (which I suspect they
will in the coming years).
Government
debt can also expand through deficit spending. The government, moreover,
can always handle the debt load since it is the one issuing the debt in the
form of Treasury bonds by printing even more. Don't forget the demand for
Treasuries has been voracious in the last couple of decades. If investors
ever decide to again increase their risk aversion and sell Treasuries, the
money would most likely go into equities and other riskier assets which in turn
would further along an economic expansion. This in its turn would
increase government tax revenues, hence shrinking the deficit. For the
U.S. to ever get into a position where debt expansion is impossible would
require another catastrophic credit crisis (or perhaps a series of them).
It usually pays to never underestimate the extent to which the debt game
can be played in a highly complex and ultra-sophisticated financial system such
as ours.
