Financial orthodoxy and abiding by the mantra of “a Lannister always pays its debt” has supposedly won you respect and many friends over time. Looking at the behaviour of Governments, corporates and individuals, such mantra has become all relative, and “repaying” doesn’t mean “reducing” debt anymore.

Across the world, total debt represents an average of 200% of GDP for Emerging Economies and 250% for advanced economies, the higher percentage being explained by the privilege of borrowing in one’s own currency. It seems that “modern monetary theory” now prevails and claims that debt is good as long as nominal GDP, and inflation stand over interest rates.

By this measure, even the Fed’s balance sheet, which is often lambasted for its gargantuan $4tn size, has only grown in line with the US GDP during the post crisis era. Looking at Europe, the economic orthodoxy imposed by Germany over the last decade may have come at grave economic consequences, and are certainly responsible in part of the social unrest that convulses Europe.

The US Government’s attitude of overspending despite trade deficits is an interesting application of this new heterodoxy, in sharp contrast with penny-pinching corporates that have been deleveraging conservatively.

One proviso though, leveraging up is the strategy of the winner as long as his/her wealth keeps up. What if suddenly rates belittle inflation and growth?

360 Advisory – Markets