The 19th century belonged to the UK, the 20th century belonged to the US and it appears that the 21st century will belong to China. A consistent theme in the emergence of a new global power is a large and growing pool of domestic savings with a focus on investing in the capital base of the economy rather than increasing consumption. The world’s western economies find themselves heavily in debt with deteriorating demographics. It has been said that “demographics are destiny’. Unfortunately, our governments are attempting to fix our problems by accelerating the very policies that got us into this mess in the first place. The US federal funding gap is growing at an alarming rate.
• Over the past six years unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion
• At the same time revenue rose by only 12%.
The US government is now in the position of increasing its liabilities four times faster than its tax receipts. At some point governments in the increasingly indebted, consumption oriented and aging economies of the west are going to be faced with an unpalatable set of options:
• Tax – higher taxes are politically impractical in the face of stagnant growth
• Shrink – reducing the size of government is politically impractical in the face of large and influential state sectors
• Default – possible but inflation, at least initially, is much less noticeable
• Inflate – printing money is almost invariably the preferred option for cash strapped governments
The US Federal Reserve recently disclosed that it purchased half of the newly issued US Treasuries in the second quarter of this 2009 – all of which would have been purchased with newly printed money.
Stephen Johnston, managing director at Equicapita, commented that “Inflation was always a key driver of our investment premise when we launched our energy fund. Oil returns have historically shown a high positive correlation to inflation which simply means that oil is a good inflation hedge.” He further added that “Keynesian deficit and money printing economic policies are now being pursued globally on a scale without precedent. If history is a guide, printing modest amounts of money creates modest amounts of inflation and printing large amounts of money creates large amounts of inflation. Central banks have an almost unbroken track record of being able to devalue their currencies and create inflation. We believe that this episode will be no different.”