Bill’s Blog September 22, 2020
In my last blog, I covered the warning signs of having a serious debt problem and some solutions to get yourself free from debt. Debt goes far beyond personal debt as you know. Debt is a global problem with growing excesses by governments and corporations. We continue to see extreme central bank polices and government stimulus worldwide to keep the debt cycle going. Many people believe that debt does not matter (the MMT, Modern Monetary Theory crowd), and you that can print and borrow to endless prosperity. I am NOT in that camp, since economic history teaches us otherwise. All debt bubbles eventually burst!
We live in a world that is 100% debt based. But you may retort: “Wait a minute – I have cash!”. Most people do not realize that all fiat currencies are debt instruments. Central banks create them out of thin air, lend them to banks and governments at an interest rate. Banks also create digital money through the fractional reserve scheme and make huge profits. Banks mark up the money they receive from central banks with generous interest rates to the consumers and businesses for sizable profits. In fact, since 1971 when President Nixon took the world off the Bretton-Woods gold exchange standard, we have been in a 100% debt-based system. So, back to my original question: “Does debt really matter?”
A very overly simplified answer would be, Yes and No. Yes, it does matter when debts become over extended and create huge asset bubbles like we are seeing today in stock markets, bonds and real-estate. And also “No”, it does not matter as long as you can pay back the debt. The problem is debt builds very slowly in the shadows, and the majority of people cannot see the dangers of excess debt. If you study economic cycles as I do, you will know there are short-term debt cycles and longer-term debt cycles called “Super-Debt Cycles”.
Short-term debt cycles happen usually over 5 to 7 years. This cycle produces mini-purges of the debt through restructuring of debt and/or bankruptcy. This can happen to individuals, businesses and even countries. As an example, Venezuela, a super oil-rich country, had the best performing stock exchange in the world in 2012. Yet, with corrupt government and massive borrowing against their oil reserves and gold, the party soon ended in tears. In the first stage, the currency started massively devaluing a few years ago due to the debt binge and the crash in oil prices. Stage two: to defend their failing currency there were large spikes in interest rates of over 50%. Devasting if you have to refinance your debt. Stage three: severe hyper-inflation and as of August 2019 it reached almost 300,000% per annum. This tragic story has been repeated over and over through history, and the common people suffer unimaginably and usually lose everything.
Long-term debt cycles usually last between 50 to 80 years. Historically, all super-debt cycles end badly for most people. When long-term debt-bubble bursts, they are often accompanied with a global currency reset and a new financial system emerges. The last super debt cycle happened during the Great Depression from 1929 till the end of WW2 in 1945. If you do the math, we are right on 75 years…the long end of the cycle. Those who prepare and have little or no debt can participate in the coming “Wealth Transfer” if you are in the right assets and have little or no debt. The global economic system needs a debt-purge.
To put it all in perspective, in 2000 the global debt (personal, corporate and government…excluding derivatives) had grown to a staggering $86 trillion US. The response by central banks to the tech bubble crash was to lower interest rates. This encouraged people to go on a new debt binge which ended up mainly in real-estate and the stock markets. By 2008, global debt had grown to $150 trillion US, and you probably remember the outcome. That “Great Recession” was a partial purge of the excesses of having too much debt. Still, instead of allowing a full cleansing and the removal of bad actors…the US government and the Federal Reserve rewarded many corrupt or irresponsible companies with massive bailouts. There had been a 50% crash in the stock market and huge loses in real-estate — mainly in the US and EU. Guess what the solution was? To lower interest rates to nothing (even NEGATIVE interest rates in many countries) and to start a new debt bubble. From 2008 to present, the global debt has exploded to a mind boggling 280 trillion and it’s growing rapidly daily. Let that sink in.
As I see it, this is not only unsustainable, but will cause a very serious economic crisis at some point in the near future. If I am wrong in my analysis, we’ll be forced to conclude that debt really does not matter. If I am right and debt does matter, then you have just a short time to get your own personal financial house in order. I highly recommend you do so quickly as possible. If you need honest guidance and real solutions, then please reach out to me. I specialize in asset protection and proper diversification. Please check out the many solutions I offer at www.fivefoldfinancial.ca .