To boot, debt has been monetised in many of these economies. For the US, this printing of money has resulted in money supply more than doubling between 2008 and 2009. Moreover, from history we know that excess debt and consumption is always followed by currency debasement. This poses a major risk to the stability of the US dollar, which has served as the world’s reserve currency since World War II.

In any event, it is evident that this cocktail is poisonous. If the principles of economics hold, there is a reasonable chance that the next crisis faced by investors will involve navigating the threat of sovereign debt default in some advanced economies whilst coping with the spectre of high consumer price inflation.

Experience shows us that some asset classes are reasonably well placed to deal with this tough environment. In particular, portfolios that hold physical and productive assets – which include commodities, especially gold, real estate investments and equities – are better equipped to deal with the debt, deficits and default than the purported safe haven asset classes of cash and government bonds.

Factors to consider

Moreover, while it can be argued that investors can look to investments in equities, real estate and commodities to deliver the goods in this new environment, they should note that not all such investments are the same. In particular, investors should consider at least three structural factors when scanning the environment.

Firstly, nations which are savers are better positioned than net consumers. This argument is a basic principle of economics: by definition, savings are produced where consumption is less than income, and savings are the fuel for investment. In turn, it is investment in its various forms — physical capital, human capital, infrastructure and research and development — that lead to economic growth and national wealth. No nation can achieve growth without access to savings.

Secondly, investors should consider national competitiveness in their investment decision. If a country’s production exceeds consumption, it follows that the country is a net exporter. Just as a firm’s market share is evidence of competitive strength, so a country’s share of world export markets is evidence of national competitiveness. Export-led growth has many advantages over other forms of growth, such as import-replacing growth. Amongst other things, export-led growth has greater sustainability and produces foreign sector surpluses that act as a store of national wealth.

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