A warning: This text is long and takes a while to read.
The majority of the long-term debt cycle is largely based on
changes in interest rates regulated by the central bank, which make
the above-mentioned processes work. Most of it is the sum of changes
in short debt cycles. They are mainly based on changes in interest
rates regulated by central banks, which reflect the willingness of
people and businesses to borrow or borrow money. The short debt cycle
will be discussed later. At the end of the cycle, the role of
interest rate changes diminishes and the focus is on printing money
with the central bank's key interest rates close to zero.
At the beginning of a long debt cycle, the parts of the above
equation are much smaller than when the debt bubble bursts in the
end. The money supply is often tied to fixed assets held by the
central bank. In practice, the amount of debt cannot grow
significantly faster than the amount of real assets. This affects the
right side of the equation, reducing the amounts on that side. The
growth rate of money in circulation and debt remain limiting factors
as the money supply is linked to the central bank's fixed assets.
At some point, policymakers will be pressured to increase money
supply to improve economic development. This is done by breaking the
link between the money supply and the fixed assets. In other words,
the amount of money is growing faster than before. The central bank
can tighten or loosen monetary policy by regulating interest rates
and money supply. The latter is rarely a significant factor. This
mostly happens at the end of the cycle.
The long-term debt cycle lasts 60-100 years. In the initial phase,
debt and consumption are roughly in balance with money and income.
The increase in the money supply allows for an increase in debt,
which enables increases in consumption and an increase in wealth. The
former allows additional liabilities. Creditors provide additional
debt as borrowers ’income, cash flows, and collateral values
increase. These increase the willingness of creditors to borrow.
Development strengthens itself and the economy grows.
The growth phase lasts most of the cycle. It progresses variably
according to short debt cycles. Through the key interest rate,
central banks regulate the willingness of creditors and debtors to
lend or pay the debt. Total debt is slowly increasing. The peak of
the cycle is manifested by high debt levels and / or the failure of
monetary policy to generate economic growth. One of the signs of the
peak is found in the granting of debt, which focuses more on
collateral values than on debtors’ income. Interest rates are close
to zero or at zero. Debt service costs are higher than the borrowers'
ability to borrow. This reduces consumption. Debt ratios are
declining. Too many businesses, households and financial institutions
are becoming insolvent. They need to reduce consumption which
increases unemployment, reduces people's incomes and increases other
problems.
Debt problems are often the sum of many stages. First, the
expectations of the general public about large cash flows in the
distant future arise. Secondly, expectations arise about the
increases in value in the near future and the gains they will bring.
Thirdly, the wildest paintings of a glorious future emerge,
exploiting the general public and eventually generating the
outrageous scams that make money for their developers.
The above development is compounded by the fact that the
investments are made by over-indebtedness and future cash flows are
not sufficient for debt management costs. The differences between
expectations and reality are the greatest when the debt bubble
bursts. Prior to this, the positive effects of rising asset prices
have been visible and not enough people have understood their
unsustainability. Before the bubble bursts, there is usually low
inflation and a debt-driven boom. The latter seems more of a boom
created by high productivity growth and prudent investment than the
absurd euphoria which will be revealed later to the general public.
Debt payment begins. Economies can do it in four ways:
1.
Austerity
2. Debt reduction
3. Increasing the money supply by
lowering interest rates to zero, continuing it with the central bank
purchases of bonds as interest rates fall to zero
4. Income
transfers
The first two reduce income and consumption. All are
necessary, although few are desirable. They also produce less
unwanted effects and, when going into excesses, more harm than good.
Financial discipline is necessary because there is no extra money.
Savings need to be made where they have the least impact on long-term
economic growth and quality of life. Excessive savings increase
problems. Some economic actors must save. They can be either public
or private actors. Without saving, there can be no needed investments
in the long run. Some of them can be financed with the central bank´s
bond purchases, but not all of them. The reason is that the
government usually has too much debt.
Debt write-downs take place through insolvency, debt restructuring
and forced asset sales. The latter have the greatest negative
effects. Debt restructuring reduces creditors' income because at the
same time the prices of assets also decrease, which also means the
decreased debt collateral. The ratio of debt to asset values and
income is increasing as a result. This leads to forced sales of debts
as they are diminishing assets of creditors.
Forced sales lead to the sale of other assets and the payment of
bank loans, which reduces the rate of money circulation, which
accelerates forced sales, which leads to deflation, i.e. an increase
in the value of money if the printing of money does not prevent it.
At the same time, paying off debts adds to the problem of paying off
debts as they increase as the value of money increases. The value of
the business decreases, reducing corporate returns, which in turn
reduces production and employment and increases bankruptcies. They
lead to pessimism and a lack of confidence which lead to hoarding
which reduces the speed of money circulation. The negative spiral
feeds itself, shrinking the economy if nothing is done about it.
During it, it is difficult to produce sensible indebtedness.
The worst thing that can follow from forced sales is a lack of
trust between creditors and debtors. This means that no companies or
governments can borrow money. Payment transactions cease to operate
and society is paralyzed for hours, days or weeks. Nothing can be
bought in stores and people depend on others. At the same time,
financial markets are likely to close for longer than regular
payments. The former do not happen suddenly but e.g. the stock market
is likely to have fallen for weeks or months. The situation has been
close before. The lack of confidence was caught up in the days or
hours of the previous financial crisis. The situation is recognized
by the fact that the prices of all asset classes are falling at the
same time. It may not last more than hours and offers the opportunity
to buy cheaply when the risks are high.
For this situation, I recommend buying quick-to-eat foods first
and taking tap water where it is possible for several days or buy
large amounts of water from somewhere. You can then follow which
direction the investment prices are going. At the same time, it is
worth following the news about the decisions of central banks to put
money on the market. If it works, the prices of asset classes will
start to rise. The length of the situation depends on how faith
returns to the markets.
Printing money is a necessary evil so that the financial system
does not collapse and there is no depression. It is needed to break
the deflationary cycle, but too much printing can produce bad
problems. It is not automatically a good or bad thing. As overshoot,
it can cause additional amounts of money to be transferred to other
currencies, which will increase the prices of imported products. In
addition, it can transfer too much money to inflation-hedged
investments. It can produce hyperinflation when the value of money
falls sharply. Its risk is greatest when the debts are in other
currencies and owned by foreigners, but the income of people and
businesses are not. Large economies with their own currencies have
the lowest risks, but they can also experience hyperinflation.
The
end user and uses of printed money mean a lot. Saving the economic
system and increasing the growth of economic activity are the main
reasons for the pressure on money printing. The end user can be the
state, other public actors, companies and citizens. There are many
possible uses: investing in tangible and intangible capital such as
infrastructure and know-how, maintaining bankrupt companies by buying
their loans, buying other assets, direct consumption, savings, etc.
The first use is usually to buy loans, without which the economic
system becomes too likely to collapse. Economic activity will
increase as asset prices rise and the potential for growth-generating
investments will increase as the availability of money improves. The
rationality of the state and public actors determines the usefulness
of the investment.
Ultimately, the question is whether the benefits of printing money
outweigh its less desirable effects. In the beginning, it produces
the greatest benefits. The more the operation is utilized, the lower
the relative benefit. The result is ever-increasing bond purchases.
In the end, the situation may be that the disadvantages outweigh the
benefits. The relationship between the disadvantages and the benefits
of printing money is impossible to determine no matter what central
banks or other financial experts say. One common denominator for
central bankers deciding on printing is that they have no idea of the
undesirable effects of their actions. They are missing from the
models they use. The following list tells about possible side
effects:
New massive revaluations of bonds and other asset classes
Non-functioning price formation in various assets
The emergence of an interdependence between priting and the
financial markets
Decreased long-term productivity growth
The growth of zombie-companies and the favoring of large
companies at the expense of small ones
Moral hazard
Negative side-effect of rewarding fools
Increased wealth disparities leading to internal conflicts
Money going into government and corporate bonds naturally
raises their prices. They can become insane. Market participants buy
bonds so that they can sell them to central banks at a higher price.
This will raise prices even further. If central banks buy too many
bonds, there will be absurd self-sustaining price increases. In the
end, prices are so absurd that bonds are mostly bought only by
central banks. This means increasing negative real yields on bonds.
At the same time, the prices of other asset classes are rising as
some of the printed money flows into their prices. Although the
intention is to put money into the real economy, the biggest benefits
flow elsewhere, to the wealthy.
Excessive monetary pressure means that the prices of bonds are not
determined by the market, but the real price makers are in the
central banks. It leads to the markets´ dependence on them. They
start making their biggest moves depending on how central banks
signal the amounts of printed money or bond sales. The latter is a
rarer phenomenon, but it happens when central banks believe they have
gone too far. The market may crash if this dependency exists. In that
case, the catastrophe is ready to happen if the central banks do not
stop selling. It might happen anyway.
When most of the money goes to rising asset class prices, the real
economy suffers in the long run. There will be no productivity growth
because no sensible investment is made and the money goes to other
uses. In the worst case, they go into the survival of companies that
should go bankrupt. These companies are unable to make investments
but keep themselves alive. Maintaining them is the same as peeing on
the leg in the winter frost.
Bond purchases favor large companies because small ones are unable
to obtain financing by selling bonds. They finance their growth
either with the owner’s assets or with bank loans. Smaller
companies are better able to adapt to change, but the benefits to the
overall economy diminish when purchases favor the large companies.
Few of them are as productive as more efficient small businesses
paying more for their loans.
Printing money rewards the wrong kind of risk-taking because fools
who buy too expensive assets don’t suffer so easily from their
mistakes. They get the reward even if they make mistakes paid for by
others. In this case, the others are taxpayers who receive the
invoice e.g. as rising costs of living. At the same time, executives
who have used the cash flows of their companies either for excessive
dividends or to buy their own shares are rewarded. When companies are
bankrupt because of these acts, the purchase of bonds in cash will
save them. At the same time, company executives will be able to
increase their share-based bonuses.
Wealth disparities will increase if money is not distributed to
citizens. The printed money is then mostly transferred to the prices
of the assets, which can cause internal conflicts. The feeling of
injustice is growing, although the majority of the population does
not understand why wealth disparities are growing. Printing enriches
the already rich more than the ordinary people. The latter relieve
their pain through violence or hatred towards the former. If the
situation persists, politicians may begin to feel tempted to
distribute money directly to citizens. This is one sign that
indebtedness is escaping central bank control. As an isolated case,
the situation is not bad, but the transition to a continuous
distribution of money will destroy the currency.
When citizens receive free money, they can put it for consumption,
investment, debt repayment or savings. The desired destination for
money is private consumption. In this case, some of the money is
forced to be saved because it is the result of a bad economic
situation. There is little to reserve for extra consumption. Where
the money mostly goes depends on the needs and wants of a large
section of the population. Different nations can consume, save, and
invest in different ways. In the United States, money is more likely
to go to investment than, for example, in Europe. This, too, produces
undesirable effects, as unemployment can be a prerequisite for access
to money. Not everyone wants to go to work because they can get
almost the same money for free. Again, an excessive distribution of
money does not make sense.
Over-indebtedness generates deficits in the economies and smaller
public actors, regardless of whether money is printed. It can also
produce currency escape. Capital can look for better returns abroad.
The state can create mechanisms to reduce it. One way may be to
restrict or prohibit the transfer of currency by imposing high taxes
on currency transfers. Smart money always finds a way to circumvent
these restrictions. On the other hand, ordinary citizens cannot do
it. This increases wealth disparities and tensions between the rich
and the poor.
Tax increases are one way to raise more money for the
administration to distribute. They are less popular with the public
than printing money because they are better understood. The lower
amount transferred from salary to personal account is a signal of
higher taxes. The same applies to the taxation of consumption. It is
easy to read the tax rate on trade receipts. The same is true when
higher taxes are passed on to product prices. If the withdrawals are
large, they will lead to tax planning for large capital. Ordinary
citizens cannot do it as effectively. People can move out of the
country or move to places with lower tax rates. The latter applies to
countries that do not have common national taxes. There are numerous
tools for tax planning, but the former are perhaps the most
important.
