This article was originally written in early September 2018, and it came out accidentally today. I suddenly discovered that the current situation seems to have been clearly written 2 years ago, so Just post it again. I inferred at the time that 2019 was like 1970. It now appears that the Fed’s announcement of “unlimited quantitative easing” in March 2020 is actually destined to produce almost the same result as Nixon’s 1971 “rejection of gold exchange”. The devaluation of the U.S. dollar and the surge in gold also proved this idea.
Of course, this article can still be found on the Internet. The original name is “Now, what stage of history are we in?” The following is the original repost. This article is from the WeChat official account: rich family of surplus grain (ID: CaizhuFinance) , author: Road rich man, the original title:” now , Where are we in history? “, the title picture comes from: Visual China
To answer this question, we must first know history and understand the stages of economic development in history.
According to the deleveraging theory of Ray Dario, the helm of Bridgewater Fund, the reasons for economic development come from two aspects:
Technology advancement; credit promotion.
The effect of technological progress on economic development is continuous and permanent, but the economy that relies on credit has a cycle to follow. In addition to the short-term credit cycle led by the central bank and the government, there is also a long-term debt cycle— —Take the United States as an example, the time span is about 80 years.
In the figure below, the vertical axis is economic growth, the horizontal axis is time, the thick black diagonal line is the impact of technological progress, the thick black long curve is the long-term debt cycle, and a series of light black curves around the thick black curve is Short-term credit cycle.
By setting this framework, you can analyze the current historical stage.
From the perspective of technological progress, there was really no historical stage comparable to contemporary economics. However, if you have read the four articles in the “Deleverage Theory” by Ray Dario I shared in May 2017 (The original number has been sealed, see the link at the end of the article for the new article), I think two pieces of history can be used to synthesize the global economic situation in the past 10 years and in the future.
1929~1937 VS 2008~2014
The outbreak of the financial crisis in 2008 was a turning point in the contemporary global economy. Why such a financial crisis broke out? In the final analysis, it is the problem of long-term debt accumulation, which is the turning point of a long-term debt cycle from 1929 to the present.
In other words, the 2008 financial crisis was the culmination of the long-term debt cycle, and only 1929 can match it.
——All major financial crises that have affected the world economy erupt, behind which are debt crises.
Before the Great Depression, the United States was in the tumultuous 1920s after World War I. The economy continued to grow and debts continued to rise. However, the collapse of the US stock market in 1929 forced the United States to enter the stage of debt deleveraging;
Before Lehman Brothers went bankrupt, the global economy was in a stage of long-term economic growth after 1994, and debts continued to rise. However, under the influence of the subprime mortgage crisis, the US stock market collapsed and the US economy had to enter a deleveraging phase.
After the stock market crashed in 1929, the U.S. implemented the gold standard (20.67 U.S. dollars to 1 ounce of gold). The base currency cannot expand, so After the outbreak of the crisis in 1929, the U.S. economy contracted very severely and lasted until 1933. With the continuous economic contraction, the U.S. experienced a large number of unemployment and bankruptcies, the stock market continued to decline, and deleveraging appeared in a very drastic way.
It was not until Roosevelt’s New Deal in 1933 that the U.S. dollar depreciated 40% of the value of the U.S. dollar relative to gold, and 1 ounce of gold was adjusted from $20.67 to $35, which is equivalent to using the same gold to print 40% of the base currency out of thin air. A momentum.
In 1933, the stock market rose again.
By starting to print money, the US GDP growth rate and actual inflation rate were higher than bond yields. The debtor’s burden was gradually reduced, and the stock market began to rise again. By 1937, the United States basically came out of the worst stage of the Great Depression.(see picture below).
Generally speaking, when an economy’s debt burden reaches a certain level, it is necessary to get rid of debt deflation——
Either accept the debt clearance of the entire economy, accept the prolonged economic deflation and social depression;
Either print money to devalue the currency and reduce the real debt, so that the creditor bears the loss and the debtor reduces the burden.
After the outbreak of the financial crisis in 2008, in the face of the terrible economic downturn, the Fed resolutely offered QE Dafa (collateralized with undervalued bonds, Large-scale money printing).
Due to the decisive action of the Federal Reserve and the huge scale of printing money, the severe impact of the 2008 financial crisis lasted only half a year.(3 years in 1930) It is over.
Under the large-scale printing of money, the U.S. stock market quickly stopped falling and rebounded. The U.S. economy entered a stage of re-inflation and debt reduction, successfully avoiding the Great Depression of the 1930s. In order to consolidate this process (the United States once again experienced a severe recession in 1937), the Fed continued to implement QE for several years to increase nominal GDP growth And the actual inflation rate.
That’s right, it’s the same formula, and it’s still a familiar taste—printing money allows inflation to continue to exceed bond yields, and debt is slowly being eroded and reduced by inflation.
As can be seen from the chart below, since 2008, the U.S. inflation rate (blue line) has continued to exceed 10-year and 2-year Treasury bonds Yield rate (green line and red line).
According to the McKinsey report, a complete debt deleveraging process has the following four stages:
Pre-crisis stage;
Early decline stage;
The private sector deleveraging stage;
The economic recovery and the deleveraging stage of the public sector.
Use this standard to measure, when the Fed’s QE ceased in 2014, the deleveraging process triggered by the US subprime mortgage crisis was basically completed, and the private sector debt/GDP had been reduced from 212% in 2008 to 196% in 2013 %. In this process, the debt leverage of the US government has increased due to debt transfer, but the total debt leverage is still reduced.
From then on to today, the United States has entered the stage of economic recovery and deleveraging by government departments.
The problem is that under the credit currency system, the use of money printing to deleverage can alleviate the pain of debt clearing in the credit cycle and maintain economic growth, just like taking drugs to relieve pain. The process is too easy and too easy. It is easily addictive.
No, since 2008, the world’s major international currency economies (US dollar, euro, yen, pound, Swiss franc) belong to the central bank , The Dafa of printing money is used to the extreme. In just 10 years, its balance sheet size has soared from approximately US$3.68 trillion to the current US$16.15 trillion. The size of banknote printing is larger than the total amount of the previous decades in 2008. More than doubled.
At the same time, the government’s debt leverage is also growing rapidly, and the public sector deleveraging, don’t think about it!
The government’s debt leverage can be solved by “blending” with the central bank to directly print money. However, the debt leverage of enterprises and residents in the real economy has increased rapidly since 2013, which is really a death. According to statistics, since 2013 The world’s top six economies(U.S., China, Japan, Germany, Britain and France) The real economic leverage of “residents + enterprises”, with the exception of Germany, has declined slightly, but the other five countries have become more serious, especially China, which has increased leverage all the way.
Why is this so?
It’s not a thinking formed by past experience! It turned out to be wealthy through borrowing and leverage. Now the central bank has lowered interest rates to such a low level and asset prices have soared. Why don’t you let me borrow more debt to make money?
In this way, that is not the case-the old debt leverage has not been removed, and the new debt leverage has been added, and the debt problem has become more and more serious.
Deflation has been clearly suppressed, but low interest rates and easy money continue to be maintained. What consequences will this trigger?
This may require another period of history to compare.
1966~1970 VS 2015~2019
It should be noted that after the US economy initially emerged from the Great Depression in 1937, it soon encountered economic recession again. It was not until the outbreak of the Second World War that the demand for war materials really saved the US economy. In the foreseeable future, I don’t think there will be a large-scale hot war, so I considered finding another piece of history for comparison.
The U.S. economy briefly fell into recession in early 1960. The Fed quickly stabilized the market by cutting interest rates. After that, the U.S. kept interest rates low for a long time-until 1966, the Fed raised interest rates again.
Like raising interest rates at the end of 2015, when the Federal Reserve raised interest rates in 1966, it caused an economic downturn, but then the U.S. economic growth returned to normal. In the figure below, the pink line is the US federal funds rate and the light green line is The quarterly GDP growth rate of the United States, the two red circles are the comparison of the two periods.
As in 2015 till now, from 1966 to 1969, the United StatesThe national economy is basically in a state of moderate inflation-the picture below shows the US inflation rate, and the two red ellipses can be compared.
There is another similarity.
In order to prevent economic recession, the United States began to rapidly expand the supply of base money in 1963, and its growth rate jumped from less than 4% to more than 5%, which led to the rapid increase of base money in the economy. QE has no essential difference, but the speed is relatively mild and slow.
The stock market also behaves quite similarly-the picture below shows the 150-year valuation of US stocks based on the cyclical P/E ratio (CAPE). The green ellipse is the comparison between 1929~1933 and 2008~2010, and the red ellipse is the comparison between 1966~1970 and 2015 to present.
In short, just like 2015 to the present, the US inflation was moderate from 1966 to 1969, the economy grew normally, the stock market was in high order, and the ingenious tricks of the US government and the Federal Reserve seemed to be extremely enjoyable.
The trouble is that the United States still maintained the crumbling Bretton Woods system from 1966 to 1970. Gold was strictly priced at $35 per ounce, and foreign central banks and governments allowed exchanges. With the rapid rise in US inflation data after 1968, former European partners such as France and Switzerland took the US dollars paid to them by the US and exchanged them into gold at the price of 35 US dollars per ounce.
The economy showed signs of recession again, and interest rate hikes stopped in 1969. In order to prevent a recession, the Fed cut interest rates again in 1970, but it didn’t work. The issue of inflation quickly spread to the stock market, and the stock market began a deep decline in 1970. (The Dow Jones Index below), European countries even more It is taking advantage of the low price to step up to convert US dollars into gold.
On the whole, I tend to think–
The stage of the U.S. economy in 2018 is equivalent to 1969.
The situation in 1970 has just been said, so what did it look like after 1970?
Change the gold, and the United States found out, this is so bad!
We print too much money, how can gold be exchanged by European devils? !
What about? Shame!
In 1971, the President of the United States announced the closure of the gold exchange window, the Bretton Woods system completely collapsed, and Western economies, including the United States and Europe, have since fallen into a decade of stagflation-inflation is rampant, including gold, crude oil, etc.Domestic commodities began to surge intermittently, but economic development basically stagnated, unemployment was high, and economic development fell into a long-term mire.
Faced with the skyrocketing of commodities such as gold and crude oil, the Fed once again played a trick to raise interest rates in 1973, but more than a year later, because of the economic recession, it had to cut interest rates again. Soaring to 800 US dollars, and crude oil reached 40 US dollars per barrel (the black line on the left axis in the figure below is the price of crude oil, and the yellow line on the right axis is the price of gold)……
In this way, the original seeming perfect economic model finally returned all the benefits. As the saying goes:
The tears in my eyes now are all the water in my head!
Will the future after 2019 be the same as after 1970?
Be aware that the debts of major economies are already so high, and they have not been able to be cleared. If there is another round of economic recession, interest rates will have fallen and the world’s major central governments will have to implement comparisons. The larger-scale money-printing program from 2008 to date will likely cause more serious economic stagflation than in the 1970s.
In my opinion, it is indeed necessary to print money in the process of deleveraging, but excessive use of currency to stimulate this stuff is like an impotence patient who eats Viagra. After a refreshment, it is a longer period of weakness…
Of course, no one knows what the future will look like–
What about me, just to provide you with such a perspective from the historical stage to think and compare. If you want to understand the theory of the debt cycle, click the following two articles:
Ray Dalio: Understanding the framework of economic operation
Ray Dalio: On the reasons for the success or failure of the country’s economy
This article is from WeChat official account:The surplus grain of the rich man’s home (ID: CaizhuFinance) author: Road rich man