This chart shows the incredible wealth that American’s have accumulated over the last few decades in particular. While this chart is of America’s household wealth, it is representative of many countries in the world.
A few days ago, I was catching up with a friend who manages money for the ultra-wealthy. His average client is a billionaire and it got us chatting about the value of assets around the world. His clients are not looking for growth; their primary concern is to protect their wealth and earn 3% above inflation.
It felt like we were speaking the same language; we kept saying valuations are crazy. Companies making no money or very little, with the hope that one day they will earn a windfall, drive many of the valuations.
So let me share with you one thing this picture is not sharing, and is often ignored because it feels so abstract and remote. Kind of like somebody else’s problem.
You can see that government debt has exploded to $34.5 trillion.
I personally thought that Covid would put a serious dent into asset prices. We witnessed the world’s largest economies grind to a halt for months. The damage to businesses, commercial property landlords, and many people’s income was devastating. However, the government stepped in and played an enormous role in spending the problem away.
I am not trying to be the party pooper. My goal is to paint a broader, more wholesome picture that shows nothing comes for free. You don’t have a one-in-a-100-year pandemic and get richer because of it. If you look at it that simplistically, you would say pandemics are good for a country’s wealth. Obviously, that is not true.
What is a further concern is that most of the interest was accumulated at ultra-low interest rates, and now the government is forced to borrow at higher rates.
Now for some not-so-bad news.
Fortunately, the percentage of interest payments as a percentage of GDP is not at levels we have seen in the past.
The big problem remains that the US economy runs a budget deficit and has no clear view in site when it will balance its books. This is clearly an unsustainable problem, which means that the easiest way for the government to deal with this issue is to let inflation inflate the debt problem away. This is one of the main reasons why gold is at all-time highs and bitcoin is also at all-time highs.
I think we need to be more cautious at the moment than chase the current dream that AI is going to be the solution to all our problems. Today, the Wall Street Journal discusses how so many of these AI solutions are going open source and providing their services for free to try and gain some market share from Open.AI. This means we will see many new AI companies with valuations in the billions go bankrupt.
Everything will be ok I believe in the fullness of time. Eventually, we will figure something out but my message is that usually it comes in cycles, and we should expect some pain (maybe alot) as the government’s debt explosion has simply bought us some time and hasn’t produced the miracle people think it has. Good luck.