In this post, we’ll unpack all you need to know about monetary inflation and global debt, defining what they are, their relationship, their impact and more.
What Is Monetary Inflation?
Monetary inflation refers to an increase in the supply of money.
It’s important to note that monetary inflation is different to price inflation, which refers to an increase in the price of goods and services.
Monetary Inflation & Global Debt
Global debt is increasing at an accelerated rate.
According to some estimates, $75 of every $100 transacted in World financial markets represents a debt refinancing transaction.
Debt refinancing is when a government replaces existing debt with new debt, ideally with conditions that are more favourable. This process requires Global Liquidity.
Financial stability requires a near-constant ratio between the total stock of debt and the total pool of liquidity of ~2.5:1. In other words, for every $100 of global debt requires roughly $40 of liquidity to refinance it.
Too much debt relative to liquidity leads to financial crises because debts mature and cannot be rolled-over. Too much liquidity relative to debt leads to financial bubbles because of monetary inflation. Every financial crisis that has occurred in the past was a refinancing crisis.
According to Congressional Budget Office (CBO), the ratio of U.S. public debt:GDP is projected to double by 2050 and approach 250% of GDP. This implies that GDP will grow by 5-6% and government debt will grow by 10-12% a year on average.
Liquidity will have to match these increases to maintain a stable debt:liquidity ratio. We can therefore expect Global Liquidity to increase by 10-12% a year.
In short: Increased debt will lead to increased liquidity. Increased liquidity will lead to increased monetary inflation. Increased monetary inflation will lead to increased price inflation — this includes goods, services, wages and assets.
What Is The Solution?
If government debt is set to increase by 10-12% a year, then that is your hurdle rate. In other words, this is the minimum yearly rate you need to be compounding your investments just to maintain your purchasing power, otherwise you are getting poorer.
No asset class outside of crypto and the NASDAQ has outperformed the 8% hurdle rate. Further still, when measured relative to Bitcoin, the NASDAQ has lost 99% of its value since 2012.
Summary (TL;DR)
Coming soon…