Debt to GDP ratio spike in the US

An already high Debt to GDP ratio has seen a spike upwards due to the rapid global spread of COVID-19 this year. The virus has resulted in a fundamental shift in all our lifestyles, with many businesses restricting their operations as a result of governments rightfully mandating said restrictions in order to mitigate the spread of this novel virus. The results of this was that less fortunate people lost their jobs and a significant number of businesses were unable to cope with this new normal.

Government stimuli arrived as usual and, financed by debt, there were handouts and “emergency response benefits” to soften the blow. This has resulted in a spike to an already high Debt to GDP ratio.

While there is significant debate as to the extent a government needs to be involved, when personal responsibility and a culture of saving needs to step up, and whether social programs of this nature are beneficial to the economy and/or the individual, the fact remains that this policy continues to have ramifications in particular with global debt levels, serving only to increase the challenges of an already challenging situation.

Debt to GDP

We are now seeing a new high in global debt levels. This graph of the US Debt to GDP ratio can only be described as an example of the beginnings of the infamous “hockey stick chart”:

While some may argue the situation is less dire in Canada, it is important to remember that Canada’s GDP is heavily dependant on the US. 75% of Canada’s exports go to the US which represents 20% of their GDP. This is Canada’s Debt to GDP ratio:

source: tradingeconomics.com

Record levels of Debt

The coronavirus crisis pushed global debt levels to a new high of over $272 trillion in the third quarter, the Institute for International Finance said, as it warned of the “attack of the debt tsunami.”

The institute said global debt would break new records in the coming months to reach $277 trillion by the end of the year. This would represent a debt-to-GDP ratio of 365%.

It comes after governments across the world stepped up support for companies and citizens in the face of a global pandemic which led to widespread stay-at-home orders. Businesses also had to look for alternative funding as activity came to a halt in the wake of Covid-19. Both events translated into higher borrowing and, therefore, more indebtedness.

“Spurred by a sharp rise in government and corporate borrowing as the Covid-19 pandemic wears on, the global debt load increased by $15 trillion in the first three quarters of 2020 and now stands above $272 trillion,” the IIF said in its latest Global Debt Monitor, out on Wednesday.

Among advanced nations, debt surged above 432% of GDP in the third quarter — a 50 percentage points increase from 2019. The United States, which has implemented one of the biggest stimulus packages in the world, accounted for almost half of this rise.

While it’s easy to point the finger at COVID-19, the fact remains that heavy debt loads have been normal course of action for a much longer period of time.

However, the coronavirus pandemic is not the sole factor to blame for the massive level of global debt.

“The pace of global debt accumulation has been unprecedented since 2016, increasing by over $52 trillion,” the IIF said.

This would explain why the US Federal Reserve is using all tools available to them, and have even so much as said that they now want to average 2% inflation. This means if inflation falls below 2%, they will allow it rise in order to get an average of 2%, giving them more breathing room to cut rates in the future.

Conclusion

With Debt levels increasing over time, there is a strong long term thesis for investing commodities – particularly precious metals like Gold and Silver. The best way to approach this is by purchasing the producers of tomorrow that have valuable assets today. We remain bullish on Tocvan Ventures (CSE:TOC) given the fantastic geological attributes of their Pilar property. The company is worth over $1.53 based on the geology alone, with similar mines fast-tracking to production.