The huge overhang of sovereign borrowing limits our options for austerity, inflation, or default, says Anthony Mirhaydari, founder of the Edge and columnist for MSN Money.
Everybody's talking about debt, of course, and deleveraging in the world, but what does it mean to use an investor? My guest today is Anthony Mirhaydari, to talk about that and what we can do to find some good opportunities. So, Anthony, first of all, what do you mean by deleveraging in the world here?
Yeah, sure. Really, deleveraging is one of the two main structural problems kind of dragging down the economy around the world, and you're seeing it in the situation in Europe, and it's also hitting us here at home; we had the August debt downgrade.
I just want to throw out one kind of statistic to bring it home for people. The problem in the United States is so bad that in 2024, based on current trajectories, Credit Suisse estimates that 100% of tax revenues will go just to interest payments and entitlement payments-nothing else.
So it's a big problem. Nobody's really addressing it yet, and it's going to be kind of dragging the economy down until something's done with it.
Yeah, when you talk about people talking about the end of the world type of scenarios and then you hear statistics like that, you think they're not wrong. I mean, how are we going to get out of this?
Well, there are really three ways to get out of a deleveraging or a debt situation. One is austerity and deleveraging, which is what we've been trying-not really the United States, but mostly in Europe, so the United Kingdom and Spain and Greece, those countries-and with predictable results. They're falling back into technical recession again.
This same strategy was tried during the Great Depression here in the United States, and it resulted in the 1937 double dip that extended the Great Depression. So that's not really an attractive option. It's slow, it's painful, and when people can pick their own leaders, they tend to get rid of it pretty fast; as soon as the pain starts.
The second option out is called financial repression, and this is kind of a new idea. It's pretty much just inflating your way out. It was done here at home after World War II in the 1950s.
The Fed, I think, is trying to do that now, but they're constrained because housing prices are keeping inflation kind of down, and also the rise of global trade has kept down inflation. Computers are really cheap, iPhones are pretty cheap, iPad same price for three generations, so the final way out.
That's what Greece is moving toward, is default or restructuring. There's actually a study by the Boston Consulting Group that suggests that we could do that here as well; we could fund it with a one-time wealth tax. It might not be politically popular, but we need to figure out a way to reduce mortgage debt for households, and do something about government debt, kind of around the world.
So these are issues that are going to be important in the years to come.
And none of those alternatives sound great; there's more pain coming no matter what we decide to do. But is there a way to profit from this? Is there an area that will make money when this is happening?
Yeah, it's a tough question to answer; I mean it really depends on which of these three options is kind of pursued.
For instance, if the Fed really doubles down on the financial repression option, then all the inflation hedges would be best, so gold, precious metals obviously. If they pursued the austerity approach, stocks would be hurt, along with all the other kind of economically sensitive assets. Industrial commodities would be weak, so you would want to look for short opportunities there.
And then as far as a third option, any of the safe-haven assets would probably still do really well. Treasury bonds, even though interest rates are very low, there's still some potential for profits there. The Japanese example has shown us that even though rates are really low, bonds can still perform pretty well.
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