Is Another Financial Crisis Due In The Coming Years?

The financial crisis of 2008-09 was one of the worst in decades. The global economy plunged into recession and unemployment surged.

Its more than a decade since the financial crisis and I believe that we are setting-up for a bigger crisis in the coming years.

I am not predicting any timeline. However, its very likely that a leverage triggered crisis will be witnessed within the next 5-10 years.

So what triggered the financial crisis of 2008-09?

The answer is simple – Easy money and over-leverage in the economic system.

How was the crisis solved?

The answer is equally simple – With more leverage.

Let’s look at two charts before discussing further.

Image One

The chart below gives the all sector debt in the United States. At the beginning of 2020, all sector debt was $54.5 trillion. Currently, all sector debt is at $80.8 trillion.

Image Two

The chart below gives the debt to equity for United States. The debt to equity is at the highest level since 2005.

What Are The Implications

The United States, as an economy, is over-leveraged. Be it the government or consumers. The economy is potentially entering into an inescapable debt trap.

To make things simple, as total debt increases, so does the cost of servicing debt. For the government or some individuals, there can be a point where more debt is needed to service existing debt.

In particular, if inflation surges and interest rates trend higher. And I believe that interest rates will trend higher.

Reason: The Federal Reserve has committed to keep interest rates near-zero levels through 2023. Easy money will imply that consumers and businesses continue to leverage. In addition, leverage can also be used for speculating across asset classes.

Investment Implication: When expecting inflation, it makes sense to remain invested in gold and silver. I also believe that cryptocurrencies will do well as fiat money continues to lose value. In addition, its important to have exposure to quality stocks and investment grade bonds for diversification and returns maximization.