Date: November 03, 2020
“Financial Crisis 2021: This Is What Comes Next…
We are now in a period where central banks can no longer directly stimulate real growth in the economy. But they can stimulate growth indirectly.
So it’s quite obvious and should come as no surprise here that we are now at the start of the current short term debt cycle.
But more concerning is that I believe we are now at the end of the current long-term debt cycle as well
The reason this is concerning is because the end of a long-term debt cycle only really occurs once in our lifetimes. And the last time we reached the end of the long-term debt cycle was during the great depression of the 1930s, which lasted for a decade
So I’m going to suggest to you today that we may now be in a period of deleveraging as our debt to GDP ratio has now passed 100% and we cannot stimulate our way out of this with lower interest rates, because, well we’re already at as close to zero as we can get
But this doesn’t mean that it’s game over and that we are now trapped in a liquidity crisis with no way out, because there is still a couple of things that can be done as have been been tried and proven in previous situations like this…
So the next couple of things that can be done are as follows:
1. Continued stimulus:
I don’t accept the argument that we won’t see any more stimulus packages or that we are only going to see one more stimulus package. The reason I don’t accept this argument, is because firstly I believe there will be another stimulus package passed sometime after the US election
2. And secondly, now that we’ve run out of monetary policy actions that the Federal Reserve can do, they are now taking a supportive role as opposed to a leadership role.
Another thing that I haven’t heard anyone talk about yet but I can almost be sure will happen later on is a tax cut or a tax break or rebate. This is because they need to stimulate spending in the economy in order to hit their inflation targets. The way they support the government in doing this (and by the way this is any Central Bank), is for the government to issue bonds and the Central Bank will buy those bonds
When new currency is created, it indirectly causes assets already in existence to rise in price, and it happens like this: the central bank will buy assets, using currency that they create, so let’s say that they buy Government bonds, really easy example, they buy the Gov bonds and the Gov then gives this money to the people as something called stimulus.
All they can do is quantitative easing to buy assets like we’re seeing right now, they are buying government bonds, they are buying commercial bonds, housing, and to some extent they are buying the stock market, but not directly. This is because interest rates are at near zero and there is slow demand for credit, so they can’t create demand by lowering interest rates anymore, although they could go negative but that would be a recipe for disaster in the long run. So the only thing they can do is to directly deposit the money into the hands of people, so how do they do that, stimulus
So austerity would only make matters worse because if we cut spending, that will mean a cut in jobs or wages, and a cut in jobs or wages will mean an even bigger drop in GDP
I personal don’t think you need to worry about taxes rising, tax rises are not likely to happen because it would again be deflationary in nature
What is most likely to happen is that the government will tax the richest people, but not the richest companies. This is because by taxing companies, this will only exacerbate things as the stock price tumbles, and the companies would lay off staff
So overall, what we actually have right now is an over abundance of credit, and credit isn’t money. And that’s exactly the problem. Having an over abundance of money is never an issue, having an over abundance of credit is a huge problem, because one person’s credit is another person’s debt.
Overall I believe we are now going into a deflationary period for products and services, but we will also have inflation at the same time in some products such as food. Now how long this depressionary period would last if we did go into a depression, is hard to say. But if we were to look at what happened during the great depression, this came to be known as the lost decade, because it takes roughly three years for the economy to deflate, and then another seven years for it to inflate again…
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