When Mario Draghi left the ECB, his rallying cry was that the ECB had done its work and it was the role of fiscal stimulus to help further. We live in a new era when it is not banks that primarily provide capital for growth, but governments. The foundation was laid in the global financial crisis of 2008-2009. A number of banks were overexposed, and over-leveraged, like giddy retail traders, were left out of capital. Who bailed them out? Governments.

Too big to fail bailouts of 2007/2008

The US government bailed out big-name mortgage lenders like Fannie Maie and Freddie Mac. In the UK, Northern Rock experienced a run on the bank that was only stopped by the UK Gov’t backing guaranteeing all Northern Rock deposits. The UK Gov’t went on to support NatWest, Lloyds, and Bradford & Bingley. Some banks were seen as too big to fail.

Too many to fail bailouts of Covid

Then, during COVID-19, the problem was not that some companies were ‘too big to fail’, but that there were ‘too many companies to fail’. The stimulus packages were enormous and they were shouldered by governments.

Global debt at record levels

All this government borrowing has meant that debt levels are now at huge levels. According to the IMF, global debt now reaches a record $226 trillion. The big jump has come in the form of public debt as outlined in the table below.

Look at these major countries below and how their debt-to-GDP ratio is increasing. Governments are taking on debt to deal with crises.

The problem is this, there will always be another crisis. So, more debt will be taken on and governments will be bailout time and time again until the debt levels become too bad. At this point, the whole house of cards collapses and we will see high inflation, low growth, and high unemployment. So, how long is it until we get there? It’s hard to say. It could be a decade or more. So, in the meantime, the smartest move would appear to stay away from government bonds and countries with high levels of debt. Gold could also start to shine again at some stage, so keep an eye on precious metals. A weaker USD naturally helps gold and silver higher, so a turnaround from the Fed could be a near-term boost if/when that happens.