How To Invest as the Sovereign Debt Shadow Lengthens


Is there a global debt bomb waiting to be detonated? If so, will it create rampant anarchy in America? Maybe in Great Britain, too? Does an apocalyptic world await? Is the coming world worth fighting for? Increasingly, people believe these questions are worth exploring, evidenced by the size and nature of audiences generated by writers like Marketwatch’s Paul Farrell. But wait: It is not just a few cranky men who are concerned about sovereign debt. The looming debt debacle is a headline story in many business magazines and economic publications (e.g., Forbes, the Economist, Bloomberg, BusinessWeek).

The detonation of a global debt bomb, although quite likely, is not a foregone conclusion. Some observers hope that the Fed is gradually solving the economic hangover by returning banks to “a pink-cheeked state of health” — the recovery made possible by a low interest rate environment that creates new money for banks as they play the yield curve (Irwin Kellner, Marketwatch, Feb. 09). Never mind the fact that this “free market money” for banks dilutes the savings and assets of everyone not benefitted by the bankers’ bonanza. Indeed, the Fed’s, “Here-we-go!” approach (think 2010 BudLight SuperBowl ads) is little different than a counterfeiting operation: The bogus money created for the beneficiaries allows them to leverage investments and seize control of coveted companies. But who really cares as long as the U.S. gets the magic elixir of “growth”? (sarcasm intended).

The Deception Of “Growth”

Americans are now habituated to the idea of growth as the silver bullet that won’t slow us down. ‘Not so fast,’ says Moneycentral’s Jim Jubak. According to Jubak, “Growth won’t dig us out of this hole” (Feb. 8, 2010). The environment is becoming less accommodative of non-inflationary growth as debt-to-GDP ratios rise. Many economic analysts are reaching this conclusion, including Fed experts. But the problem is bigger than the increasing difficulty of getting growth without excessive inflation. All GDP growth is not equal. Some types of growth consume a nation’s long-term wealth while other types of growth replenish and expand it. For the most part, the type of economic growth that lays ahead of the U.S. is a consumptive growth — a cancerous growth driven by entitlement spending, military imperialism, the gaming of the system, and jobs for the sake of jobs. Not efficient. Not smart. Not sustainable!

The traditional way of coping with a ticking sovereign debt bomb is what Jubak calls the IMF solution: cut wages in the public sector, undermine wages in the private sector (through accelerated immigration of low-skill workers), raise hidden taxes and trim citizen entitlements. While this approach may work to some degree in individual countries, it is an improbable solution on a global basis for it undermines the buying power of consumers that are the glue of the global economy. This leaves but one way to escape the sovereign debt time bomb: Major gains in business productivity.

Business productivity is a tricky item to measure. Corporate-driven layoffs in recent times have given the illusion of productivity gains as businesses provide products and services with fewer employee hours worked. However, these are largely deceptive productivity gains as the unemployed become an “externality” unloaded on the public treasury. The problem is analogous to the Alexis de Tocqueville observation about General Jackson’s ‘power perpetually increasing while the American presidency declines.’ Similarly, as the Fed uses easy money and the yield curve play to fatten big bank coffers, the national government’s sustainability declines.

The Likely Outcome

If the U.S. could acquire dramatic gains in productivity without sacrificing American workers (i.e., consumers), the debt time bomb might be avoided. While marked strides in productivity may be technologically feasible they are unlikely when considered on the grounds of cultural probabilities. Widespread evidence suggests that young Americans have less entrepreneurial spirit than their parents and grandparents, a reduced understanding of economic realities, and a greater willingness (among some) to step on others in the service of self interest. This is sobering when one considers that these people’s parents and grandparents represent the electoral generations responsible for bankrupting America.

The habituated insatiability of covetousness, self-gratification and entertainment fantasies promises that Americans will not fix the debt bomb before it fixes them. Furthermore, since Hollywood and Wall Street have transported our culture and sins to the world, solutions will not be generated by foreign cultures: They’re enmeshed in similar or related problems. The question is not whether more trouble is coming but what forms it will take and when it will arrive.

It is impossible to predict the coming shape of things with pinpoint accuracy because there are too many interactive dynamics. The increasingly likely debt bomb detonation could be one year away or ten. But whatever the timing, each unfolding chapter will be gamed and exploited by those who Paul Farrell says are “hell-bent on controlling America’s mind.” Don’t wait for one grand explosion. Expect a fireworks show with many cumulative rounds leading up to a grand finale.

How To Invest In This Environment

It is reasonable to expect sudden changes in the investment weather requiring intuitively driven adaptations in investment strategy. This raises the question: How should one invest when past metrics for good investment may be misleading? The answer is this: When investment for private gain is so uncertain one can still invest with an eye toward furthering the public good. After all, American statesmen and farmers who purchased bonds in support of George Washington’s army of the revolution had more in mind than maximizing private gains.

Americans have the chance to be distinguished investors, not just free-riding opportunists. While reasonable self-interest recommends certain aspects of the Swiss Family Robinson approach (widespread anarchy and pirating may eventually come), life is more than hunkering down in the face of worst case scenarios. The seeds of the future’s hopes must be planted and cultivated. This is an exceptionally good time to show oneself a friend of God, not just in religious observances but in matters of lifestyle and investing as well.

Look for ways to invest on behalf of a better world, especially at the regional level with credit unions and small banks that make loans to local businesses. Think less about maximizing private return on investment and more about public impact and the common good. Put prudent impact above return on investment (ROI). Get appropriate investment counsel because every person’s situation is unique. Consider reducing your exposure to the Wall Street stock market, assuming it is sensible in your particular circumstance.

As an alternative to Wall Street look for ways to organize private equity initiatives to buy small public companies and take them private (i.e., reduce the ability of Wall Street to manipulate the companies you are invested in). This is an important time for organizing collective activity on behalf of investors with traditional American values. Likewise, reduce holdings of U.S. Treasuries as they work to subsidize a debt-driven approach to monetary policy. Instead, contact friends, farmers, green entrepreneurs, small import/export companies and others who might allow you to take a stake in their businesses so as to reduce their dependence upon bank loans. Get a good business lawyer and insist upon terms providing at least a modest measure of liquidity that works for all concerned.

Stand firm for your moral conscience. Refuse to act obnoxiously like those driven by blind, insatiable greed. Don’t do the things you despise on Wall Street. Rise above common fears. Plant your roots in hope. Achieve moral greatness in an age of toxic selfishness. Make the second American revolution a rebirth of integrity and vision for the good. Influence friends and neighbors constructively. Pray for personal and national enlightenment. Do your part to give the mighty providential hand of God good reason to be revealed in earthly affairs, even in discipline as necessary. While we cannot turn the tide, we can make sure our boats will float and our backs will bend to row. This is the best way to prepare for a global debt bomb explosion.