Economic Imbalances: A Warning for Investors
Posted October 24, 2024
New Macro Watch Video Released for Q4 2024
In the latest Macro Watch video, we dive into the growing imbalances in the U.S. economy. On the surface, wealth in the U.S. has surged to an unprecedented $164 trillion—$47 trillion more than at the end of 2019. While this increase in wealth has been a key driver of recent economic growth, beneath the surface, troubling signals are emerging.
Key Insights from This Video:
1. Credit Growth is Slowing Sharply
The main driver of economic growth in the post-gold standard era has been credit expansion. However, the growth of total credit has weakened significantly. In Q2 2024, credit grew by just under $4 trillion compared to over $8 trillion at the peak of the pandemic stimulus. Historically, such weak credit growth has led to recessions.
2. Government Debt is Propping Up the Economy
The bulk of this credit growth has been fueled by rapidly increasing government debt. Without this increase, total credit growth—and economic growth—would be much weaker, potentially triggering a severe recession.
3. The Wealth to Income Ratio is Alarmingly High
The ratio of wealth to disposable income is now at 785%, far exceeding historical peaks that preceded previous market crashes, such as the 2000 dot-com bubble and the 2008 financial crisis. Should any significant shock occur, we could see a sharp decline in asset prices and a subsequent recession.
Potential Shocks to Watch Out For
Investors should be alert to various risks that could trigger a market downturn, including geopolitical events, renewed inflation, or political instability in the U.S. The economy is walking a fine line, and understanding these risks is critical for navigating what lies ahead.
The Best Way Forward
As I discuss in the video, both political parties have recently shown support for the establishment of a U.S. Sovereign Wealth Fund, aimed at investing in future industries on a massive scale. Investing in this way is the best strategy to accelerate economic growth while safeguarding national security in the face of global competition, particularly from China.
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