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it's worth understanding how debt cycles work the periods of time between financial collapses so that we can predict when the next one will come governments and central banks need to know how to foresee debt crises and plot a successful cost through them for us investors we just need to know how to take advantage the telltale signs are all there but we're heading into the next in a long line of debt crises with similar events in the run-up mirrored across history whether the great depression of 1929 the japanese bubble bursting in 1988 the dot-com crash of 2000 or the great recession of 2008 all was showing symptoms of a debt crisis long before asset prices plummeted building on the theories by ray dalio why are we heading into the next debt disaster and what can we do as investors to prepare let's check it out welcome to money in shackled.com the investment and finance channel and website that said to you and your finances free that was andy and i'm ben and if you like what we say hit the like button and click subscribe first we want to give a special shout out to commission free trading platform stake who are sponsoring this video state specializes in u.s stocks for uk investors and offers 3 000 off them stake is fca regulated and has fractional trading and they are giving away a free u.s stock worth up to a hundred dollars to everyone who signs up via our link we'll put the link to the office page in the description below so be sure to check that out now let's get into the video debt cycles an economy's relationship with debt moves in predictable long-term and short-term cycles a short-term debt cycle typically lasts around 12 years in length on average with a boom and bust pattern of affluence and overspending followed by austerity and bruised consumers sitting on their cash long-term debt cycles run far longer typically around 75 years or could run the full length of a country's rise to greatness through to its inevitable decline a country like china would sit somewhere around here on the rise with a large but reducing inequality in its population's wealth gap and gobbling up credit to build infrastructure and fuel growth ray dalio puts america and the uk as over the hill america still near the top with their still booming stock market but relying more and more on money printing to get by deflationary debt cycles in the west our debt cycles tend to be deflationary which we're covering in this video the crisis causes investment assets to lose value and cash to become a safe haven on the flip side there are inflationary debt crises like what happened to germany after world war one where a wheelbarrow of cash was needed to buy a loaf of bread credits what we think of as money is often not money at all but credit you can go into a shop and buy a nice hat with a credit card the shopkeeper thinks you have the money but all you've really given is a promise to pay the bank that money later when a debt crisis hits and you can't afford to pay off that card the truth becomes clear for all to see the money never existed and has now disappeared from the economy short-term debt cycles credit used correctly is a good thing and an essential economic tool for growth during the good times people use more and more credit because it makes sense to since growth opportunities are everywhere it doesn't matter that they are racking up debts too as they can be easily managed and the banks are all too happy to lend money to anyone as there is good profit to be made from doing so this is what a typical short-term debt cycle looks like taken from ray dalio's book big debt crises which we'll put a link to in the description below the bottom axis is in months and runs for 12 years from recovery through the bubble phase to the inevitable decline and debt deleveraging the red line is interest payments but the blue line is the main one to focus on being the total debt as a percentage of gdp 2020 and 2021 sit around here in the depression phase after a good second half of the 2010s leading up to the peak of debt to gdp this tallies with the government's massive printing of money during the corona crisis according to debt cycle theory we'll soon enter the phase of the cycle when debt has to be reduced no matter how painful as it is unsustainable note that debt typically ends a cycle higher than when it began several short-term cycles will balloon into a long-term cycle starting and ending with economic catastrophes why debt moves in cycles self-reinforcing movements during the good times lending gathers momentum like a runaway train that becomes unstoppable except for a head-on collision into something solid that knocks it off the tracks lending supports spending and investment propertying capacity prices and fueling incomes bigger asset prices and incomes gives banks more confidence to lend more money as borrowers have more collateral but all the while debt is building and eventually outpaces incomes at some point some event will happen which triggers banks to panic who reign in their credit lines projects pause incomes stagnate outlooks for asset price growth look bleak bad debts mount and banks stop lending this makes the problem worse and the debt cycle spirals downward into the end phase how debt crises can be managed there are five ways to manage a debt crisis number one austerity cameron and osborne tried this in 2010 after a recession with limited effect the problem with austerity is that it is deflationary and it discourages growth at the same time as the debt crisis is already doing both of those things it does help to reduce debt but it lowers incomes too so it can be counterproductive number two debt cancellations just cancelling debt is not great as the lenders lose out and this just reinforces the downward spiral of deflation but the crisis can be so severe that it might be sometimes necessary it's widely believed that this needs to happen to solve the greek debt crisis in the eurozone ongoing since 2009 number three slash interest rates slashing rates makes it easier for people to pay the interest on their debts at the same time discouraging people from holding their money in a bank savings account in this way it encourages investing into the economy again number four the magic money tree the central bank just prints more money this only works if the country's debts are in their own currency but it does encourage growth and spending in the economy which really does help get things moving again but is this storing up a currency problem for a later date number five raise taxes raising taxes may be necessary eventually to pay for the country's debts but raising taxes whilst in a crisis is a big mistake this makes everyone poorer at a time when you need money to flow freely again the tax hike doesn't even help the less well-off as the money is not being invested to help people but wasted on debt payments however this is the inevitable final destination for a country in ever rising net debt long-term debt cycles remember that each short-term debt cycle leaves the country a little more indebted than it was before and after many short-term cycles the problem adds up to result in a mega crash like the great depression in 1929 many believers but were pulled by central banks to help resolve the last several short-term debt crises become less and less effective each time after the 2008 recession we lowered interest rates to almost zero even a decade later rates haven't recovered so that lever cannot be pulled again and the uk is now in over two trillion pounds of debt over three times higher than in 2008 where are we now in the debt cycle it has now been over 12 years since the start of the 2008 credit crunch also now called the great recession the uk recovered unemployment went to historic lows the banking sector was reformed and city centers underwent massive renovation projects the debt built up and the kindling of the next debt crisis was waiting to be lit by something and the coronavirus was more of a flamethrower than a match now we've seen banks pulling low ltv mortgages at the height of kobit we've seen the bank of england base rates slashed to 0.1 percent businesses forced to close down and people forced to stop spending taking credit out of the economy we believe we're in the end phase of the short-term debt cycle but as for the long-term cycle 2008 might not have been the end phase that some people assumed it was it was a body blow but is the knockout punch still to come the levers that were pulled at the time to resolve it have been exhausted and haven't recovered since austerity has already cut back public spending as much as is politically tolerable taxes have been raised by stealth to what we feel is the upper limit of what can be tolerated by most families and interest rates have been slashed to the max worst of all the money printing was not rolled back at all over the last decade and then was dramatically increased in 2020 there is little room left for maneuver when the next debt crisis hits we may be just years away from a full-blown 1929 style disaster can investors take advantage of a debt crisis during good times of growth and demand productive investment assets like stocks and property are favored during a debt crisis these assets stop being as productive and money runs into cash and precious metals like gold and silver it may be too early to say but crypto currencies like bitcoin should logically do well during a debt crisis as well as they act in many ways like a digital version of gold we've said before how cash itself should be given respect as an asset class in your portfolio with perhaps a 10 allocation and perhaps a further 10 to precious metals and some of you may even want a small portion in cryptocurrencies during times of deflation cash is naturally well placed to outperform as many other assets lose value relative to it we'll still hold the vast majority of our portfolios in well-diversified equities and other productive assets but to ignore cash and precious metals entirely is to ignore the real risk of a major debt crisis coming down the road as long as the government keeps printing magic money that day keeps getting closer are debt crises unavoidable almost lending is never done perfectly and tends to be done badly the short-term rewards of funding faster growth with credit helps governments to justify the rising debt and it is politically more popular to let people have easy credit than to take it away what politician would impose austerity and title restrictions on the voters during good times before a crash had even happened question of the day are you worried about the debt bubble let us know in the comments below thanks for watching and this time i'm talking about personal finance investing in all things money and if you want to see more great content please click the subscribe button below this is moneyonshackle.com see you next time
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