Lyn may 1970s4/26/2023 ![]() This is because at the end of a long-term debt cycle, debt levels get so large relative to the size of the economy that it becomes impossible to deleverage them nominally without crashing the economy, so instead the denominators are increased: the monetary base, the broad money supply, and nominal GDP with a significant inflation component. What makes the end of a long-term debt cycle different than the end of a short-term debt cycle, is that the later stages of a long-term debt cycle both in US history and elsewhere, are generally characterized by a significant degree of fiscal dominance and currency devaluation. In both instances, there was a systemic banking crisis (marked in green), which led fiscal and monetary policymakers to expand the monetary base and take other measures to recapitalize the banking system. ![]() ![]() Rates hit zero and private debts hit extremely high levels in 2008 during the Global Financial Crisis, and the last time this happened was in the early 1930s in the early phases of the Great Depression. As many of those short term debt cycles string together, debt as a percentage of GDP keeps making higher highs and interest rates keep making lower lows, until debts reach untenable levels and interest rates hit zero. I’ll summarize the cycle again for folks who haven’t been following my work, but then also supply some new charts and tie it into some of the current trends we are seeing as of mid-2021 for those who are familiar with it.Įach normal five-to-ten year business cycle in modern US history has ended with higher debt as a percentage of GDP and lower interest rates than the previous cycle. One of my main topics over the past 18-24 months was exploring the long-term debt cycle, popularized years ago by Ray Dalio, which describes a framework for expecting trend-changes in fiscal policy, monetary policy, and inflation/deflation. So, let’s dive under the hood and see where some of this is coming from, and how it is likely to manifest going forward. The month-over-month figures filter out the year-ago base effects, but are also very heated: The year-over-year figures are coming in rather hot at the moment: This past week, the consumer price index came in well above consensus expectations, benefiting from low-base effects and faster-than-expected price increases. This newsletter extends the topic of inflation by analyzing how it is manifesting this year in particular, examines why the current situation is more comparable to the 1940s than the 1970s, and finishes with some of the investment implications of it. I recently published a longform research piece on inflation, and an article on some of the dynamics of market capitalization and asset bubbles.
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