The 80 year debt cycle?

I hear a lot of people talk about things feel different than they used to since the 2008 financial crisis. The key reason is we have moved from autumn to winter economic season. From 1950 – 2008 the USA was taking on more and more debt, until in 2008 the amount of total debt people had was more than the entire GDP of the USA. Once the debt got to a point that it couldn’t increase any more things have to change. What we are going through now is nothing new. Since the creation of central banks in Europe in the 1600’s, and then the perfection of the system by the Rothschild family in the 18^th century, we have had a cycle that happens approximately once per generation i.e. 80 years (the span of an average human life). The last deleveraging happened in the great depression (1928).

After a deleveraging period people get very cautious and slowly take on a little more leverage in their lives and in their businesses. People then get used to the risk and gradually take on more debt, until they get to the point of no return where society can’t pay it back. This is the point the USA reached in 2008. In order to get back in to growth mode the level of government and personal debt needs to drop significantly. This drop will change people’s appetite for risk and will allow room for growth again. Usually the de leveraging (reduction in debt) part of the cycle takes about 15 years which means that we are only halfway through, and will probably have a few more bumps in the road before this is over.

Deleveraging what is it?

Deleveraging is the reduction of debt, and is often accompanied by deflation (a reduction in prices).

In order for the debt level to be reduced one of 2 things need to happen. Debt needs to be written off through foreclosures and bankruptcy, (the government limited this through the bank bailouts) or expansion of the money supply (printing money QE) to reduce the value of the debt.

Money printing usually increases interest rates incenting people to borrow less and save more. The interest rate has been forced down to incredibly low level to incent people to continue to borrow and take huge risks, increasing the likelihood of another major shock to the financial system. The government does not want deflation to happen, but because of government debt can’t afford for interest rates to go up. This now means the risk in the financial system is higher than it was in 2008 it just needs a spark to ignite it.

More info on the cycle since the great depression is available at http://repec.umb.edu/RePEc/files/FisherDynamics.pdf

Ray Dallio has created a good video on the process at. http://www.economicprinciples.org/

About The Unintentional Economist

After living in 3 countries and experiencing different financial systems, I found myself questioning things that a lot of people took for granted. My uncle, who was an international currency trader in London, reinforced this by sharing stories of how a few individuals where able to change the forces of governments-take them on and win. In the process I became an unintentional economist. Thus, I have an alternative view of financial forces and headwinds that affect people’s lives such as the power of debt for good and bad, the true risks associated with different types of investing, and how different people hack the system. To do well today most people need to overcome the financial headwinds they are burdened with. By applying this knowledge it has allowed me to gain time back in my life to spend it on things that create meaning not just the daily grind of trading time for money. I have a great desire to share what I have learned along the way, mentoring others and helping them find their path and devising creative ways to capitalize on various market and economic events. Nowadays, having fun, presenting at conferences on economics and other financial topics, and building a coalition of the willing to take on the world, is my passion; I hope you can join me on this journey.