Entering into big Financial Crisis
It’s like a disease that happens over and over again. There’s a process everything that happens has a cause and by understanding that process in cause you know the red flags and with those red flags and you know, how to calculate whether people can pay their debts back and how the Dynamics going to work. When there’s a certain rate of debt growth, that is unsustainable. And that Going to be a problem, paying that back.
You can see that you have a problem when you start to have a debt problem and you’re close to zero interest rates, that means that the Central Bank, the federal reserve’s ability to deal with that won’t work, you’ll hit zero and then you enter a new world, okay? The last time that happened was 1928 to 1929 . That’s what happened. What happened in 2002, seven and nine, because the exact same thing, a debt crisis, too much.
Debt in Hibbs, zero, interest rates, and out of luck. And then what happens, there’s a classic way of dealing with that is that the central bank has got to print money and go buy Financial assets. And so, that’s what all the entities did. And so, by being able to watch it day by day, as to how they went about doing that, allowed us to navigate the crisis so that we could see the rates of deterioration. And then the actions taken to end that in much the same way as federal Reserve ended in 1932 1933 for the same reason. Now that printing of money causes Financial assets to go up in price, puts money into the economy and produces the type of reaction that we’ve now seen in terms of that economy and those market, then we’re at the stage of the cycle where we are now.
Web Financial Assets
And what happens classically is that those financial purchases help those web Financial assets more than they help those who don’t Don’t it causes a greater wealth Gap and very classically that causes populism and then you move into a situation. That’s very similar. So being able to see mechanically how that Dynamic work allowed us to navigate it. Well, the early part of the debt cycle is the great part of the debt cycle because the borrowing, the money is clean, put into assets that are going to be able to pay back that debt and grow and asset prices go up.
Why America Is Entering A Catastrophic Financial Crisis
Then you enter the bubble stage when he is extrapolating that because it happened in the past because those assets went up, they’re going to continue to go up and they’re going to continue to rise and the pace to borrow money to do it. But they are not able to actually pay off their cash flow. The top of the cycle usually happens when the bubble exist and also the Federal Reserve, or the Central Bank against the Titan money to slow that bubble at the high part of the cycle.
So as we take a look at that, we are approaching more of the The top of that cycle. I don’t think we’re there yet. I think we’re in the seventh inning, when you have that typing and then you have the turn down. I’ll call the depression phase that depression phase happens because you hit zero interest rates and because they’re less effective monetary policy, that’s why 2008 was like, it was in much the way 1930 death. And so, that’s the depression phase in my opinion, on this long term debt cycle.
We are relatively late in the longer term, debt cycle will relatively late in a business cycle. That doesn’t mean imminent. I mean, I think there’s two or three more years. Probably in this, I’m not sure for sure, but we are then going to have a downturn at some point downturns always conversations. Always come. And what we have is a situation in which the capacities of the central banks to reverse it a more limited because interest rates are close to zero at zero in Europe and Japan and also the effectiveness of Of monetary policy quantitative easing is largely behind us because they have put that money in those assets prices have risen.
Wealth Gap & the Populist Issue
We also have another issue which is the wealth Gap and the populist issue, which is I think worse than it was back, then they set out a path for tightening interest rates to raising interest rates and rate of tight. And every track that they set out, they didn’t adhere to. In other words, they tighten monetary policy, much more slowly than they projected and also the market for you. And, It was appropriate.
I think that they’re questioning their own decision appropriately. When you hit zero, interest rates, you have a different type of debt crisis, you have more likely to have a depression. So I think the period that we’re in a very similar to the 1935 1940 group, let me just explain that in a minute, 1929 to 1932 we had a debt crisis and interest rates at zero 2007 to 2009. We have a debt crisis hits, zero them in both of those cases Has there’s only one thing for central banks to do and that is to print money and buy Financial assets.
They print money by Financial assets and both of those times that pushes financial asset prices up puts a lot of liquidity and, and also contributes to a greater wealth Gap because those who own Financial assets benefit, when those who don’t own Financial assets, as a result in both periods of time of the wealth Gap, and the economy, not improving for a large segment of population.
Populism issue is unavoidable
We have populism, so the last time say when was populism popular, it would be in that period of time. That populism issue is an important issue. So, as we look forward and we say, when the next downturn comes, which will happen probably in a couple of years, we’re going to have a different type of downturn, very similar to the one that happened in 1937 to the 1940 period. We are in the part of the cycle. Now that the fed and other central banks in varying degrees are beginning to tie.
Tighten monetary policy asset prices are sensitive to monetary policy because the duration of those assets is lengthened. Central banks have to be very careful not to raise interest rates, much faster than is built into the curb, but with that populism we have an issue. So if we think about what the next downturn will be like the don’t are and I think will be very different than the one in 2008. It’ll be one in which I think that the social and political problems will be great because of that wealth Gap.
Also, I think they’ll be more conflict. I also worry about the effectiveness and monetary policy in reversing that because monetary policy has interest rates and we can’t lower interest rates as much and it has quantitative easing the purchases of financial assets to push other Financial assets out and get would put it into the system and that is at its maximum. So when we have a downturn, we’re not going to have it to be as affected, I think also the downturn And in art form of debt crisis, won’t just be debts.
It’ll also be pension obligations Health Care, obligations unfunded obligations. Well, I would say two years out is when I’m worried about. And I would think that’s for these various reasons, all of these obligations will be a problem to be funded and I think it’ll be more back there of a dollar crisis than it would be a debt crisis and I think it’ll be more of a political and social crisis when we have to sell.
Treasury bonds makes big differences
Out of Treasury bonds and we as Americans will not be able to buy all those treasury bonds. And if interest rates rise too much, the way it usually works is that constricts credit we borrow less and that creates a weakness in the economy. So instead because we’ll sell to foreigners from a foreign perspective. When they look at it, they care, not about inflation. They care about currency depreciation, when they look at the interest rate. So, if a currency goes down, the bonds become cheaper.
I think the Federal Reserve at that point, we’ll have to print more money to make up for the deficit. Have the monetized more, and that’ll cause a depreciation in the value of the dollar. You easily can have a thirty percent depreciation in the dollar through that period of time. I just do the calculations and the fiscal stimulation that we’re having is coming at a higher rate of capacity utilization a higher rate and so we’re getting that stimulation at the
A part of the cycle and that’s a stimulant that will. Last feeling good is not an indicator of the future, troubles and made of euphoria, by the way. So they feel the best, right? What I’m saying is that right now the fiscal stimulus is coming in and that’s good. Productivity is enhanced by corporate tax cuts a lot of money going to the company’s there with they have lots of cash. That is good for the time being. If you do when that stimulus passes through and then diminishes, But the borrowing doesn’t so the borrowing will be in. Marketplace about that time. I’m not trying to be precise as to exactly what year or what month that has.
I think we’re nine years into the cycle and the Cycles are the cycles, the balance of payments, display them in a credit, is what it is. And so I’m saying that we’re probably in the seventh inning of this game and therefore, I’m not particularly worried at the moment, but if I was to take as we get to the ninth inning of the game and the important thing I think, I think is not even what I think about this.
How these Cycles work for investors?
The important thing is for you and each person to really study how these Cycles work investors, have a choice of whether they’re trying to be active investors and Market time, which most of them are not going to be able to do well, that’s a professionals game and it’s tough to do it as a professional and then their emotions and all of the things that enter into it. So I would say that generally speaking, they should not be active.
And to invest or if they do, I would not recommend it. But if they do then they have to go opposite their instincts, you know, by when the blood is in the streets. And so when times are good, but what I would say is important is to be able to know how to have balance and a portfolio.