There was a lot of talk about reducing risk, and preventing another financial shock after 2008, however most of the reforms didn’t address what really caused the crisis – debt and the access to easy money. When people, companies and governments, borrow more and more, we eventually get to a point where things can’t go up any more. We reached that point in 2008 which marked the start of the economic winter season that usually lasts about 15 years. (click here for more info on the 80 year debt cycle.)Post 2008 we went from individuals getting access to easy money, to the financial system and government getting access to easy money, resulting in the same or greater risks now than existed in 2006-2008. The only way for risk to drop is for the relative level of debt in the system to reduce, this is why we hear a lot of talk about deleveraging, which is normally a painful process, because 80% of what we think of as money is really credit, and changes in credit cause changes in the economy. To reduce the pain QE has the effect of inflating prices of financial assets, which operates like blowing air into a balloon, the one problem with a balloon is the harder you blow the higher the risk of bursting.
In addition to the long term debt cycle, there is another 5-8 year pendulum that goes on in the markets, currently we are in year 7 in the short term debt cycle, and at all-time highs. i.e. The pendulum is due to swing back in the next year or so. However nothing ever happens without an unpredictable cause. The nature of computerized trading means that anything that fits a model or is predictable doesn’t cause anything to happen, because of this unpredictable events that cause problems now cause problems at a faster rate but are harder to trigger. These events tend to be political or economic, events in other countries such as China or Greece, wars, or a major corporate bankruptcy driven by high risk taking. The smoking gun is never the same twice.
For most people in the US the real effect is that wages have stayed the same because of the competition for jobs, money printing at the same time causes prices to rise so people have less disposable income to create real growth in companies, and because interest rates are so low people are forced to take more risk to preserve the value of their money. For the next few years learning how to play the money game is probably one of the most important things you can do. People who know how to play the game will make tremendous wealth. People who don’t will have their standard of living eroded like never before.