We know that the world is as highly indebted as it has been at any time in modern history. The previous peak occurring at the end of the second world war. The impact of debt is entirely contingent on the use that debt is put to, the asset side of the equation. Debt accumulation can fund growth (developed economies have been addicted to debt for decades for that reason) but if accumulated debts have failed to fund assets that can generate the required cashflows to service those debts then debt servicing can impede growth and in extremis, debt liquidation can lead to wealth destruction, bank failure, recession, and depression.

We also know that duration risk at low (the lowest) absolute yields obtained in recent times is also highly elevated representing a major risk to the economy. Central Banks cannot cap interest rates (supply cheap capital) to economies that cannot raise production. That way lies the dragon of high and chronic inflation.

There are two ways to deal with excess debt at an economy wide level: either debt accumulation is halted via spending cuts or investment is accelerated to raise the productive potential of the economy, stabilising debt ratios via growth raising the denominator rather than by reducing the numerator.

We have several examples of both: the debt liquidations of the 1930s and 2010s led to depression and prolonged below trend economic performance. Post-war investment and reconstruction, on the other hand, enabled economies to grow so quickly that in the UK the debt/GDP ratio fell by 75% in the period 1944-1972.

One of the great divisions between Europe (for this purpose including the UK) and the US is the willingness of the US to experiment, innovate and invest. In Europe, the emphasis is much more focussed on debt limitation, repayment and, for want of a better word, “austerity.” It is likely that events in the Ukraine will modify this and since the retirement of Angela Merkel (whose reputation has fallen sharply since her departure) there is already evidence of a marked change in German economic priorities.

All politicians want high economic growth and low inflation as this leads to wealthier and happier electorates. The debts that have been accumulated over the past fifty years will hinder the ability of many developed countries, and China surprisingly, to achieve this outcome over the coming decade based on forecasts from most prominent economists. It is for this reason that Tacit portfolios remain skewed towards markets outside of the UK and Europe as we firmly believe investors will need to look further afield to generate positive real returns in future.