Fiscal stimulus in that decade was large in absolute terms, but small compared to the amount of money destroyed from loan losses. The previous chart above shows the similarities clearly, but this next section elaborates on the details.Īfter the debt bubble popped in 1929, the 1930s had a long deflationary private debt bubble deleveraging, resulting in sluggish economic growth and rising political populism. In terms of fiscal and monetary policy, the 2010s were very similar to the 1930s (disinflationary private debt bubble deleveraging), and the 2020s are shaping up more like the 1940s (inflationary fiscal-driven wartime finance). History can’t tell us everything, but along with analysis of current conditions, it can point us in the right direction.

In other words, when push comes to shove and the system is pushed to its limits, policymakers invariably print. The alternative to this process is a deflationary economic collapse, which is a route that the public and policymakers around the world rarely if ever choose. The mechanism to do this involves large monetized fiscal deficits, accompanied by a central bank willing to hold rates well below the prevailing inflation rate for a while, which effectively inflates portions of the debt away. 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.

Lyn may 2020