The last three decades have been a crazy period for investors. We’ve seen the stock market bottom in the early 1980s and hit a peak 10 years ago, moving sideways since. We’ve also seen the end of the Berlin Wall, the downfall of the Soviet Union, the rise of emerging economies like China, and the increased use of leverage and government debt.
What will happen over the next decade?
There are two fundamental winds that will blow the sails of investor ships. The first deals with the current economic crisis; extreme levels of government debt.
Countries have always had some government debt. This government debt level was usually increased at certain periods, mostly for wars. But not at the continued and parabolic rate we’ve seen over the last 30 years. Usually after an “emergency” period to raise money, the government did the right thing, cut spending and paid down the debt, as they should. This common-sense logic seems to have been lost with the current generation of politicians.
During the 1920s, U.S. government debt as a percentage of gross domestic product (GDP) was approximately 20%. Due to the Great Depression and WWII, government debt after WWII rose to well over 100% of GDP. But then it dropped over the next 30 years, hitting a low near 30% by the late 1980s. Since the 1980s, we’ve seen the U.S. government debt rise ever higher to almost 100% of GDP today, with no sign of slowing down!
I don’t seem to recall any world war that needed to be funded since 1980. It is true that we were in the cold war, which did cost both the U.S. and the Soviet Union billions of dollars. So much that it bankrupt the Soviet Union, a path that the U.S. seems to be following.
They used to say that the existence of nuclear weapons and MAD (mutually assured destruction) would protect both sides from attack. It appears that the government debt both sides added has assured the economic destruction of both nations.
The problem isn’t just in the U.S. As we see in Europe, pretty much every nation is incurring the same problems to one degree or another: way too much government debt!
To stem a massive “end of the world” scenario if every major nation defaults on their government debt, they will eventually crank out the printing press. Printing more paper to pay off their government debt and effectively reducing the value of the outstanding obligations. A nice trick, except it erodes the value of any money its citizens have worked so hard for.
But there are bigger issues when you consider the development of the BRIC countries—Brazil, Russia, India and China—over the last 10 years. This would be the second “fundamental wind” blowing along those investors’ ships. A recent Goldman report highlighted that, during the past decade, the share of the global economy that these nations contributed increased from 11% to 25%. That is a huge improvement in economic conditions, which means more money for their citizens.
More money also means more demand for goods. When you combine the continued development of the BRIC nations with the push by First World nations to print more money, we end up with higher prices for commodities.
The best way to play this is through gold. But you will see rising commodity prices in most categories. We’re already seeing meat prices move up, as people now can afford more protein in their diets. Of course, more people eating more food means more demand for all of the input costs, such as the feed they use to fatten up the animals.
It is possible that politicians around the globe will decide to reverse their usual spending habits and perhaps the hundreds of millions of people earning more money decide not to buy any new goods or consume any more than they did during the previous generation, but that is highly unlikely and it goes against human nature.
Stick with the trends when it comes to human nature. Humans consistently tend to repeat both the good and bad behaviors.