As debt continues to soar, central banks around the world are scrambling to cut interest rates and boost stock markets, and the global financial system is approaching a point of losing control. An analyst said that the current situation is laying the groundwork for "unprecedented currency disruption".

Daniel Lacalle, an economist at the Mises Institute, wrote, "Since 2019, the global money supply has surged by $20.6 trillion. In addition, global debt surged by over $15 trillion in 2023, reaching a historic high of $313 trillion, with about 55% of the growth coming from developed economies, mainly the United States, France, and Germany

When delving into the details, Lacalle pointed out, "The US has an unsecured debt of $72 trillion, almost 300% of GDP. This may seem high, but look at Spain at 500% of GDP, France at nearly 400%, and Germany at nearly 350%

He said, "There is no escape from debt. Using paper money to pay for the government's fictitious promises will lead to continuous currency depreciation, making those who have wages or savings impoverished. Inflation is an implicit tax, which is very convenient for the government because they always blame shops or businesses and show themselves as the solution by printing more currency

Lacalle said that although politicians claim to lower inflation to help appease the public, behind the scenes, governments around the world actually "hope that inflation will rise to reduce the actual impact of massive debt and unsecured debt

He said, "They know they can't levy more taxes on you, so they will indirectly tax you by destroying the purchasing power of the currency they issue." "High taxes are not a tool to reduce high debt, but to make the deprivation of national wealth permanent. Countries with high taxes and large governments also have huge levels of public debt

For those who believe that they have witnessed excessive currency destruction in recent years, he warns, "Wait for the pain we will suffer in the future

He emphasized, "More than 70 elections have been held in the world in 2024, and no ruling party has bothered to propose a realistic debt reduction plan. Governments and politicians understand that they can make any promises with other people's money, and many voters easily accept the fallacy of taxing the wealthy. Currency depreciation naturally leads to widespread poverty

This was perfectly exemplified in the recent debate between presidential candidates Trump and Harris, where the word 'debt' was not mentioned at all. In fact, neither Trump nor Harris has paid much attention to this ticking time bomb, let alone made serious suggestions to dismantle it.

Lacalle pointed out, "Harris promised tax cuts for startups, first-time homebuyers, and families with children, which is so funny. Inflation, an implicit tax, consumes their income and savings, while high direct and indirect taxes absorb the remaining funds. Despite this, she promised tax cuts that most small businesses will never need because they will close before generating any profits

The data released by the government shows the most optimistic outlook, ignoring the possibility of an economic recession, but still indicating a sharp rise in debt over the next decade.

Lacalle emphasized, "The US Treasury Department expects that public debt will increase by $16 trillion between 2024 and 2034, without considering any recession risks. The massive government debt of $35 trillion, combined with the subsequent increase in debt, has the potential to destroy the dollar as a currency

He warned that "without plans to promote growth and strong support for monetary purchasing power, citizens will face rising debt, reduced opportunities to access goods and services, and ultimately the disintegration of the middle class." He pointed out that for the middle class, the government tends to have a dual personality.

He explained, "The government and politicians need the votes of the middle class to take power, and they also need to erode the savings and wages of the middle class to reduce the burden of actual public debt. When the government says they can print and issue more debt, you will pay the price for it

He stated that the accumulated trillions of dollars in debt will lead to an unprecedented wave of central bank easing, which will continue to include real negative interest rates and even direct debt monetization.

He said, "But they need an excuse to show that they are the solution to the problem they created." "An economic recession or significant slowdown will trigger the implementation of plans to destroy the purchasing power of currency. This time, inflation is already evident and persistent

He pointed out that the government is very willing to destroy the purchasing power of the currency they issue, as this is a form of nationalization of national wealth.

Lacalle stated that in order to achieve the goal, governments around the world need to "eliminate the option of getting rid of currency." This helps explain the strict measures taken to regulate the cryptocurrency industry in recent years, while the impressive rise of gold has been largely overlooked by mainstream authorities.

He concluded, "Legal tender is just a promise, and issuers know they cannot pay at today's value. Making you dependent and making the currency worthless is the best way to control you. Protecting your investments

At the same time, due to the alarming growth of global debt and the decline in available liquidity in the global financial system, asset prices are facing risks.

Kobeissi Letter asked, "How much liquidity has been withdrawn from the global financial system? In 2022, in response to the pandemic, the balance sheets of major central banks reached a record high of $25 trillion, equivalent to 25% of global GDP. Since then, the total balance sheet of central banks has shrunk to about $20 trillion, the lowest level since 2020

They said, "In other words, global financial liquidity is declining by the largest amount on record. At the same time, it is estimated that global central banks will reduce their holdings of assets by another $1 trillion next year. Global liquidity is rapidly declining

Overall, with the depletion of liquidity, traditional financial markets will face challenges. It is expected that central banks around the world will reduce their holdings by another $1 trillion next year, further reducing liquidity.

The stock market has been in an upward trend since 2020 and is currently approaching historical highs. Kobeissi Letter warns that if the central bank increases its quantitative tightening efforts, traders may suddenly awaken.

They wrote, "The size of the US stock market is enormous, with a new record of about 3.0 times the ratio of the US stock market to developed market stock markets, which has doubled in the past decade because the performance of the US stock market has greatly surpassed that of global stock markets

Figure: Ratio of Growth between US Stocks and Developed Market Stocks (Excluding US Stocks)

They added: "Since 2014, the S&P 500 index has risen by 186%, 6.4 times the increase of MSCI's global index outside the US by 29%. From this perspective, during the Internet foam in 2000, the proportion was only 1.4 times. At the same time, the long-term average over the past 75 years was 1.1 times. Is the US stock market overvalued?"

Despite the government's tightening measures, asset prices continue to rise, indicating that the government may be losing control of its ability to guide the market. This has led Anthony Pompliano to ask the question: "What will happen when loose monetary policy returns and global liquidity begins to grow significantly again

He wrote, "The simple answer is that asset prices will soar, as we have seen in 2020 and 2021. During the tense period of the past 2-3 years, investors who were able to persist in investing will receive returns. However, considering the current trends in the stock market and gold, it is difficult to say that central banks around the world are excited about returning to loose policies

He warned, "In a tightening situation, asset prices at historic highs will be a disaster for preventing excitement and speculation when the macro environment improves

The Federal Reserve announced a 50 basis point interest rate cut last week and hinted at further cuts in 2024, while China announced a massive stimulus plan that is expected to continue soaring asset prices until the inevitable 'Minsky moment' arrives. Because investors will compete to protect their purchasing power before the ultimate collapse of the global 'house of cards'.

Lacalle wrote, "The Federal Reserve's rate cutting cycle may continue, but it will also continue to weaken people's confidence in international demand for the US dollar and US bonds, making the loss of purchasing power of the US dollar permanent.