Earlier this month, the Congressional Budget Office said that federal debt held by the public is projected to reach or exceed 100% of U.S. gross domestic product in the fiscal year that begins on Oct. 1. That would put the U.S. in the company of a handful of nations with debt loads that exceed their economies, including Japan, Italy and Greece. This sounds somewhat technical for most but let’s break it down and explain how one of our favorite games can help us understand the real world and how governments are playing with Monopoly™ money.
To illustrate how credit/debt cycles work on a whole economy level, we only need to look to one of our favorite games, Monopoly™. Early in the game, people have a lot of cash and only a few properties, so it pays to convert your cash into property. As the game progresses and players acquire more and more houses and hotels, more and more cash is needed to pay the rents that you are charged when you land on a property that has a lot of them. Some people are forced to sell their properties at discounted prices to raise the cash. So, early in the game, “property is king” and later in the game, “cash is king”. Those who play the game the best understand how to hold the right mix of property and cash as the game progresses.
Now let’s imagine how Monopoly™ would work if we allowed the bank to make loans and take deposits. Players would be able to borrow money to buy property, and rather than holding their cash idly, they would deposit it at the bank to earn interest, which in turn would provide the bank with more money to lend. Let’s also imagine that players in this game could buy and sell properties from each other on credit (i.e., by promising to pay back the money with interest at a later date). If Monopoly™ were played this way, it would provide an almost perfect model for the way our economy operates and how governments are essentially creating Monopoly™ money.
The amount of debt-financed spending on hotels would quickly grow to multiples of the amount of money in existence. Down the road, the debtors who hold these hotels will become short on the cash they need to pay their rents and service their debt. The bank will also get into trouble as their depositors’ rising need for cash will cause them to withdraw it, even as more and more debtors are falling behind on their payments. If nothing is done to intervene, both banks and debtors will go broke and the economy will contract. Over time, as these cycles of expansion and contraction occur repeatedly, the conditions are created for a big, long-term debt crisis.
This sounds like sort of a doomsday scenario but we discussed in past articles how the printing presses are running full-time as we pump more and more money into the economy. So, what does that mean for you? If you don’t want to be stuck with a handful of Monopoly™ money, you need to figure out how to hedge your investments and preserve the value of your investments. There’s no better time to start learning before it is too late. Let’s figure out your plan NOW. Schedule a free consultation by clicking here.