Too late to save society, but you can save yourself

Tuesday, 14 February 2023 — Gold Coast, Australia

[9 min read]

Dear Reader,

Ever heard the saying, ‘same sh*t different day’?

The drudgery of the daily grind can make people feel like they’re on a hamster wheel. Forever spinning. Never going anywhere.

While our daily life spins, so too do much bigger life changing cycles.

Slowly revolving and evolving into forces that (unknowingly) influence every facet of our ‘hamster wheel’ lives…for better or worse.

Our so-called economic success has been the product of an eight-decade-long cycle…what Ray Dalio — founder of the world’s largest hedge fund, Bridgewater Associates — calls the ‘money-credit-debt-markets-economic dynamic’.

Unless you’re a child of the Great Depression, society knows nothing other than this formula for economic growth. Without historical context, we collectively think this ‘borrow to boost GDP’ model will continue into perpetuity.

But it won’t.

You cannot live on the NEVER-EVER forever

Ray Dalio recently released ‘Part 2 of a Two-Part Look at: 1. Principles for Navigating Big Debt Crises, and 2. How These Principles Apply to What’s Happening Now’.

If you’re familiar with Ray Dalio’s work, you’ll know he’s a deep thinker.

With wealth measured in the billions, Dalio doesn’t need to share his thoughts with anyone.

But he does.

And we, the investing community, are the better for it.

The ‘My Template’ section of ‘Part 2’ should be required reading for anyone interested in understanding the dynamics behind our obsession with never-ending economic expansion.

Here’s an edited extract from ‘My Template’ (emphasis added):

‘I have a template for explaining how “the machine” works that I hope to convey in an easy-to-understand way so you and others can assess it for yourselves.

‘Very simply a) money (i.e., the access to resources) + b) talented people + c) an environment that is conducive to conjuring up and building out developments = d) economic success (and economic success contributes to all sorts of other successes such as health, education, social, and military).

‘I believe that the money-credit-debt-markets-economic dynamic is the most important dynamic to understand and to stay on top of both for investing and for understanding the changing world order, so I will start with that.

‘…it is driven by borrower-debtors, lender-creditors, and central bankers that both produce and respond to incentives to lend and borrow that lead to two interrelated cycles—a short-term one that has averaged about six years in length +/- three years and a long-term one that has averaged about 75 years +/- 25 years—which evolve around an upward trend line in productivity that is due to humanity’s inventiveness.

‘By “short-term debt cycle” I mean the cycle of 1) recessions that lead to 2) central banks providing a lot of credit, which creates a lot of debt that initially leads to 3) market and economic booms that lead to 4) bubbles and inflations, which lead to 5) central bankers tightening credit that leads to 6) market and economic weakening. There have been 12.5 of these since 1945.

‘By “long-term debt cycle,” I mean the cycle of building up debt assets and debt liabilities over long periods of time to amounts that eventually become unmanageable. This leads to a combination of big debt restructurings and big debt monetizations that produce a period of big market and economic turbulence. I believe that we are now roughly about 85% through the one that began in 1945.’

This chart illustrates how the short-term debt cycle operates within the long-term debt cycle:

Since 1945, US total debt has ballooned to more than US$90 trillion — that’s Trillion with a ‘T’!

Can this disconnect between debt and economic output (which, it must be noted, has been artificially boosted by excessive levels of borrowing) continue indefinitely?

No, it cannot. We cannot live on the NEVER-EVER forever.

It’s simply NOT possible.

How productive became UNproductive

The debt super cycle that commenced in 1945 has two distinct periods — pre-1980 and post-1980.

Before 1980, the frugal Depression-era generation had a more responsible and respectful attitude towards debt. Debt was used primarily for productive purposes…not wanton spending on the latest consumer fad.

A dollar of debt generated (almost) a dollar of economic output (GDP).

Lending institutions were far more stringent in their loan criteria. Rising interest rates in the 1970s also contributed to keeping a lid on debt accumulation.

After 1980, these dynamics changed. Baby boomer consumers (eager to break free from the shackles of their austere parents) started to outnumber the older generation.

Financial institutions relaxed lending standards. And, as ‘luck’ would have it, interest rates fell…and fell hard — the perfect combination for a society of wide-eyed, debt-fuelled consumers.

Credit creation flowed through to asset price appreciation.

It’s no coincidence the ascendance of share and property markets also commenced after 1980.

Wealth was being generated like never before. Boomers were on a roll. In the midst of becoming wealthier, we rarely questioned why.

The world of prosperity — steadily increasing economic activity, rising share and property values — was taken for granted. This was how our world functioned. It was our norm.

Now, it’s become expected. Any disruption to what we’re entitled to has to be met with vast amounts of stimulus (more debt). Does anyone else see the idiocy in this?

We are living in a world of total make-believe.

But this is what happens when all you’ve ever known is a world where the blue line of Total Debt soars higher and higher with each passing year.

We have lived through an economic and investment purple patch made possible by credit creation and vacuous consumption on a scale never seen before.

The US$26 trillion US economy is supporting a US$92 trillion debt load…it takes (almost) $4 of debt to generate $1 of economic output.

Let’s join some dots here.

With interest rates on the rise, more money goes to servicing debt.

Which means less money to spend in the economy.

Which means more than US$4 needs to be borrowed to push GDP up US$1.

Which means (and this is the last ‘which means’) Total Debt goes exponentially higher.

And, you know what that means?

Yep…an unsustainable and unserviceable debt load that must inevitably collapse.

Unproductive debt is a cancer that’s eating away at the economic body.

How long before it becomes terminal?

Ray Dalio estimates the long-term debt cycle ‘averages about 75 years +/- 25 years’, and we are ‘now roughly about 85% through the one that began in 1945’.

With the average debt cycle being 75 years (plus or minus), we’re literally and figuratively ‘living on borrowed time’.

If Ray Dalio’s estimate of where we might be in this cycle (at 85%) is close to the money, then we have another decade left before this edifice to excess and hubris crumbles under its own weight.

But he could be wrong.

It could happen sooner and far more quickly than any of us expect.

In fact, one of our fellow editors here at The Daily Reckoning Australia, Jim Rickards, believes we’ll see a complete collapse and restructure of the economy as we know it today within just five years. He explains it all in his new book SOLD OUT!, which you’ll hear more about tomorrow. Keep an eye out.

I don’t know when this cycle ends, but history tells us it DOES end.

We are too far down the track to save society from the inevitable; however, at an individual level, we can save ourselves.

How?

By doing the opposite of what the majority are doing.

Reduce debt levels. Build up savings. Live within your means.

When this long-term debt cycle is over, people will, for a period, be living with a ‘different sh*t every day’.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

Sometimes, stupidity alone isn’t enough.

You also need to pay attention to what we call, pretentiously, the ‘Darwinism des moeurs’. That is, we follow the evolved rules, customs, and habits that have stood the test of time. It’s better not to kill or steal, for example, even if it seems like a good idea at the time. And that is true for governments as well as individuals.

But sometimes, the living thinks they know better than the thousands of dead generations that came before them. And lately, we’ve completely despaired of today’s human intelligence. So, we’re giving the artificial kind a chance. Specifically, we wanted to know what ChatGPT, the latest thing in AI, sees coming for the dollar. Does it draw on the wisdom of the corpses? Or look to the latest claptrap and wishful thinking from Paul Krugman and Janet Yellen? Here’s the answer (admittedly, after a leading question):

‘The US dollar was once the king of currencies, but [in 2023] its reign was about to come to an end.

‘Step 1: The monster rises: Government spending spirals out of control, creating deficits that ballooned to unsustainable levels. As debt levels reached new heights, the once-great American economy began to show cracks. Inflation took hold, wiping out the purchasing power of ordinary Americans. The cost of living skyrocketed, making it harder for people to make ends meet.

‘Step 2: The monster attacks: The once-strong US dollar was no match for the monster of inflation. Its value plummeted as investors around the world sought safer investments. Foreign countries, including Japan and oil-producing states, stopped buying US government bonds, reducing demand and sending the US dollar into a downward spiral.

‘Step 3: The aftermath: The collapse of the US dollar changed America forever. Prices rose to levels never seen before, leaving ordinary people struggling to make ends meet. The once-great American economy was in shambles, and the world would never be the same.’

Hey…humans guess. AI can guess too.

Like a crow outta Hell

We’ll spare you our own guess about the ‘end of the world’ until tomorrow. For now, let’s tell you about the flaming crow incident.

It began when we brought in some local lads to replace the wire on the top of our chimneys. There are thousands of crows that make their home somewhere nearby. They get into chimneys and build nests, clogging them up.

One of the men who came to solve the problem was a big man, beefy, with fleshy features and a shaved head. He looked a little like ‘Curly’ of the Three Stooges.

‘Are you going up the ladder to put these new protectors on?’ we asked.

The answer was obvious; of course, he was. That’s what he was here for.

The man looked at us blankly.

‘He must be Polish’, we said to ourselves. ‘He doesn’t understand a word we’re saying.’

Then, suddenly, as if a switch had been turned on, he came to life, and in perfect local patois, he replied:

‘Tat’s what um here for.’

He wasn’t Polish at all; maybe just a little slow.

Coming back down the ladder, he reported…

‘Ye have some crows in dere. Better smoke dem out before ye put de wire on.’

We filled the fireplace with lightly packed newspaper. We struck a match. In seconds, the weekend edition of the Financial Times was alight. It flared up fast, as intended.

And then came a terrible screech…and a rustling up in the flue…

...all of a sudden, a firebird appeared in the fireplace…its wings aflame…like a fowl from Hell itself. It flapped its wings amid the inferno; the flames shot higher. And still screeching it headed straight for us.

Confronted by this diabolical animal…and gripped by a cold fear, we gave out a cry of terror and fell back. The crow passed over us, still with its wings ablaze…its feathers thus consumed by the conflagration, it couldn’t fly. So, it raced around on foot. We had seen chickens run with their heads cut off, but never a crow whose wings had been scorched. Soon, the flames were out; a trail of ash and burnt feathers circled the room.

After a few moments, the crow had only tattered, stubby feathers left…still smoking. We jumped to our feet and chased the bird around the room…moving a canapé and an electronic piano to get at it. Finally, we cornered it and managed to trap it in a wicker trash basket. We took it out the door and gave it its freedom in the nearby woods. Its prospects were poor…but not hopeless.

Later that day…

We were working outside…painting our hand-made conservatory.

Suddenly, crows appeared overhead. It was like a scene from an Alfred Hitchcock movie. They gathered in the big oak tree near where we were painting. A few dozen. Then hundreds…and finally what seemed like thousands.

Quiet…and then calmly chattering…and then, in a great rush, they took to the air…calling to each other in anger as they circled overhead.

We guessed what they were squawking about…

‘You set our cousin on fire…and you’re not going to get away with it.’

‘It wasn’t intentional’, we replied meekly. ‘We were just trying to get him out of the chimney.’

The flock was unmoved by our excuses…extenuating circumstances meant nothing to this jury.

‘Besides, the bird is not dead. He’s in the trash heap, eating some of yesterday’s dinner.’

The birds seemed to take this in, perhaps wondering where the scrap heap was located. But inasmuch as defence yielded no progress, we went on the offense.

We clapped our hands…making a noise a little like the sound of a small calibre rifle. The birds dispersed and didn’t trouble us again.

Cluster incoming

But let us return to Mr Powell before signing off for the day. We’ve already subjected our long-term dear readers — who did us no harm — to no fewer than 5,000 of these commentaries. We’re not going to stop now.

And so far, we were mostly right. At least about the big things. In 2000, the dotcoms did crash as predicted. The real estate market took a dive during 2007–09, also as we predicted. And inflation rose in 2021…again, following the script we had laid out years in advance.

Now, we think the whole primary trend has shifted…from bull market to bear market…from disinflation to inflation…and from growth and prosperity (especially in the best zip codes) to stagnation and poverty (especially in the middle zip codes). This analysis stems not from our own native stupidity, but from the record of the past. Primary trends reverse…white shoes aim for mud…and the best of times become the worst of times.

We also think that this major financial shift will be accompanied by a whole ‘cluster’ of self-inflicted, cyclical, and inevitable political and social disasters.

Did you see the State of the Union, dear reader? Did you get a good look at our elected officials? Did they remind you of Franklin, Washington, Madison, and the others gathered in Philadelphia in 1787 for the Constitutional Convention? We didn’t think so.

And isn’t their way of doing business — spending trillions of dollars they don’t have — bound to cause disasters?

But we remind our long-suffering readers that most analysts think we are wrong. They see moderating inflation…softening Fed policies…victories against Russia, China, germs, and carbon…and blue skies from here to eternity.

Yes, we are in a minority. Held in contempt by the Krugman school of economists…despised by the imperialist war mongers…mocked by bulls…ignored by bears…scorned by Republicans…detested by Democrats…and dissed by earnest True Believers of all persuasions…

…hated by the crows…

…and wouldn’t it be nice if we were wrong?

Regards,

Bill Bonner,
For The Daily Reckoning Australia