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Navigating the Economic Seas: Insights for a Secure Financial Future

Navigating the Economic Seas: Insights for a Secure Financial Future

Let us deep dive into some of the points exposed in the article we wrote earlier, The Bull Market has started, so what’s in front of us?. We want our community to have a profound understanding of the forces that drive our economies and how these directly impact their lives and probably on the lives of their families, friends, colleagues and eventually on the future lives of their kids. 

I’ll start with a simple stat: The top 10% pay 74% of all income taxes. This is today's fiscal (and financial) reality of the US economy. This top 10% holds ~65% of all financial assets but only ~8% of the debt. The bottom 90% has 92% of the debt but only 35% of the assets. 

These metrics provide a good overview of understanding how much governments around the world are trapped by the financialisation of the world and the demographic realities of today and tomorrow. Indeed, the breakdowns might vary from one country to the other, but the situation is analogous in most of them. 

Let me explain. Today, the world is in debt of around 350 trillion dollars. The world GDP is projected to be 105 trillion dollars in 2023. I let these figures sink in for one second. The total debt of our planet is more than 3 times what our entire world is capable of producing in one 1 year. This brings immediately the following conclusion. Financial markets are not anymore (like in the economic textbooks) here to allocate capital to the economy and the right companies; they serve now only as liquidity providers to roll over this debt, and as we produce less than we spend globally, interest has to be added to the pile, inflating this number year over year. So, the only thing that counts now is the financial system's balance sheet capacity to roll over the debt (roughly between 70 to 90 trillion per year, depending on the average maturity of the overall debt) to avoid the system collapsing.

Global gross domestic product
Global debt-to-gdp resumed its upward trend

How is this influencing the fiscal dilemma of governments stated just above? Because taxes pay for the running costs of governments, as we all know (right not only as it’s never enough and our governments are continuously in deficit, but you see the idea). As 10% pay for 75%, this 10% has to be satisfied (with returns), and these returns need to exist; otherwise, there are no taxes, and deficits increase even more. 

That being said, you understand now the ugly situation the governments are in, and this will not improve in the medium term as GDP growth looks grim.

Indeed, GDP growth can be summed up as Demographic growth + Debt growth + Productivity growth. 

Let’s start with Demographic growth. Demographics are collapsing all around the globe now. For multiple reasons, people have fewer babies (I’ll not get into these, but many factors are at play here, like costs to have kids, women working full time, women having their first child later, etc). This trend is anything but reverting, and the power to reverse this is monumental. GDP growth; therefore, we can’t count on population growth anymore. 

Debt growth will continue for all the reasons explained above (but maybe a bit slower if no debt already exists), and to sustain GDP growth, it is necessary to pay for a part of the interest of all this debt, but this will not compensate for the demographic decline. 

Productivity growth remains positive (around 1,5% on average/ year), but it’s not accelerating enough to compensate again for the demographic component.

For the digression, demographics and productivity will dramatically change in 5 to 10 years; we believe that AI, combined with robotics, will offer productivity gains unthinkable today and an infinite workforce with physical and intellectual power that will compensate for demography challenges.

But before this happens, current demographic trends will weigh heavily on economies (negatively on the GDP component and negatively as well on the spending of governments). Indeed, the older the population becomes, the higher the social costs. Governments already have very little room to manoeuvre as current spending (everything is already mandatory spending); therefore, the only answer is increasing the debt levels. 

The charts below illustrate that the demographic trend will not change anytime soon, making the obvious consequences explained above nearly certain. 

Japan is expected to be short of 11mn workers by 2024
Births are collapsing in most economies
World population: scenarios for different birth rates

Therefore, monetary inflation will continue to rise, monetary debasement will continue, and liquidity will continue to be added to the system. Debt demands liquidity, and liquidity facilitates more debt. This is a vicious cycle, and this is the current trap in which a big part of the world is. Economies are driven by asset markets that are driven by liquidity. Liquidity is needed for asset prices to rise, for states to get taxes to fund a part of their running costs and to avoid even more accelerated deficits. The government also needs liquidity to issue additional debt. Therefore, governments don’t have the choice to inject liquidity for the system to be able to refinance the debt, pay the interest on the debt, and collect taxes. Illustrating this, a chart below shows the Congressional Office projections (the orange bars) of the Fed liquidity until 2033. As a reminder, the Congressional Office is bipartisan; theoretically, it is not politically biased. The grey bars are CrossBorderCapital projections. Whatever you choose to focus on, the trend is clear: more liquidity will expand, and the Fed balance sheet will increase monetary inflation year over year.

US Fed liquidity
US Fed Balance Sheet

As we said in the article called The Bull Market has started, so what’s in front of us?, today, it is necessary for people to own monetary hedges. These last 2 years proved that Gold and Cryptos are the perfect ones. Indeed, while we saw the world experience high Mainstreet inflation, Bitcoin and gold didn’t do anything. Still, the moment the liquidity started to get back into the system in late 2022/ the beginning of 2023, they began to rise again. This is the perfect proof that these are the hedges you need. The chart below illustrates this perfectly, and because of all the reasons and forces explained in this article and the previous one, we know now that the trend is clear and the hedges have been identified.

Gold, global liquidity and US CPI

Once again, understanding the world is a hedge against getting debased and, therefore, robbed. There are amazing people like Michael Howell from CrossBorderCapital , Raoul Pal from Realvision and many others who are trying to spread the word to alert people to what’s happening. At SwissBorg, we believe that educating our community is inherently part of our mission. Sharing the knowledge with our community and hopefully beyond to help people escape the trap of central bank monetary debasement by investing in the crypto gift. It remains a very volatile asset class with exceptional risk-adjusted returns. It requires some skills, a cool head and a certain time horizon. Investment requires sacrifice and rigour. Let’s never forget this, but it is all worth it in the end. 

Join us , if you haven’t already and let us help you exit the trap! 

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