There is a new crisis at hand, that not many people are paying attention to. If we don’t address this soon it’s impact could be huge. Let me explain…
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In 2020 we had one of the worst pandemics that the world had ever seen. Now this had a big effect on the economy. Businesses shut down, people lost their jobs, GDP growth went into the strong negatives. This is something that we haven’t seen in over 80 years since the 1930 great depression.
But since then, we have recovered a lot. People are generally back into their jobs, businesses have started to open & GDP’s now in the positives. But there is something going on behind the scenes which has helped this somewhat unnatural recovery & it can cause an even greater crisis in the future.
You see, when the pandemic hit, and all of these bad things started to happen with the economy we were in real trouble. We were at risk of seeing one of the worst recessions we’d ever seen. Nowhere in the history of the world have we shut everything down, to prevent an illness from spreading.
And the government didn’t know what to do. The fed didn’t know what to do. Economists were squabbling amongst each other for solutions. And in the end they had to play the one card that no one really wants to play. They pushed the red button, the trump card that saves things for the moment but causes severe damage down the line. And that card that I’m talking about is the debt card.
You see when these businesses were shutting, and people were getting employed, they needed money. If they didn’t have money, businesses would close for good, people would be on the streets, and we’d be talking about a great depression like the 1930’s.
So the government steps in and says something unprecedented. Something never said in history before. “I’m going to give everyone money for free”. If you’re a business and you have a poor credit history, it doesn’t matter, you can have the money too. If you’re junk status, with a c corporate credit rating, we’ll bail you out that’s fine no problem. If you are a citizen of the united states, you’ll get free money.
And this strategy actually worked. The government borrowed money and gave it out to everyone and anyone. The economy started to recover. The 2020 recession, we started getting lifted out of. The stock market magically changed direction and started shooting up, and then it started breaking record highs…
The day had been saved by the government and the federal reserve. No great recession. No economic troubles. No worries. Hmm… Unfortunately with economics just like in physics every action that you take has a reaction. And it doesn’t necessarily come right away. But it will always come back to bite you.
So what’s happened is we’ve decided we’re going to get in more debt. And not just a little a lot. During the fiscal year 2020, debt held increased by $4.21 trillion dollars—the largest annual dollar increase in history. Our debt to GDP ratio is now sitting at 129%, essentially the largest it’s ever been in history.
No the 2008 housing bubble it wasn’t close to this amount it was 65%. We’re almost double that. 2000 technology bubble it was 57% we’re more than double that. In-fact you’d have to go all the way back to world war 2 to try find levels of debt similar to this. At the highest point in world war 2 it was 121% in which we are higher than that right now. As you can see, at no point in history have we seen levels of debt anywhere near this.
The Average debt to GDP for the U.S is 63% over the past 80 years. This is interesting because the world bank conducted a study in 2013 and found that any mark above 77% slows economic growth in the future. We’ve always been below that mark until the past decade.
And now we’re well above it at 129%, 52% above the tipping point of 77. This means with these high levels of debt, our economic growth in the future is going be dramatically impacted.
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