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Ray Dalio - A Template for Understanding Big Debt Crises (Audiobook)

Ray Dalio - A Template for Understanding Big Debt Crises (Audiobook)
a

template

for

understanding

big

debt

crisis by Ray

Dalio

introduction I'm bringing this on the 10th anniversary of the 2008 financial crisis in order to offer the perspective of an investor who navigated that crisis well because I had developed a

template

for

understanding

how all that crisis work I'm sharing that

template

here in the hope of reducing the likelihood of future

debt

crisis and helping them be better managed as an investor my perspective is different from that of most economists and policymakers because I bet on economic changes the other markets that reflect them which forces me to focus on the related values and flows that drive the movement of capital those in turn drive these cycles in the process of trying to navigate them I found there is nothing like the pain of being wrong or the pleasure of being right as a global democracy to provide the practical lessons about economics that are unavailable in textbooks after repeatedly being bit by events I never encountered before I was dreaming to go beyond my own personal experiences to examine all the big economic and market movements in history and to do that in a way that would make them virtual experiences in example so that they would show up to me as though I was experiencing them in real time that way I would have placed my market bets as if I only knew what happened up until that moment I did that by starting historical cases chronologically and in great detail experiencing them day by day and...
ray dalio   a template for understanding big debt crises audiobook
month by month this gave me a much broader and deeper perspective than if I had limited my perspective to my own direct experiences through my own experience I went through the iteration and eventual breakdown of the global monetary system Bretton Woods in 1966 1971 the inflation bubble of the 1970s and its bursting in 1978 82 the leading American rationally depression of 1980s the Japanese bubble of the late 1980s and it's bursting in 1988 91 the global

debt

bubbles that led to the tech bubble bursting in 2000 and the greater leveraging of 2008 and through studying history I experienced the collapse of the Roman Empire in 5th century the United States

debt

restructuring in 1789 Germany's final republic in the 1920s the global Great Depression and ward that engulfed many countries in 1930 45 . many other crisis my curiosity and need to know how these things work in order to survive them in the future drove me to try to understand the cause-effect relationships behind them I found that by examining many cases of each type of economic phenomenon business cycles under leveraging x' for example and plotting the averages of each I could better visualize in examine the cause-effect relationship of each type that let me to create

template

s or catechol moguls of each type in example the your categories news cycle your catapult big

debt

cycle their catapult deflationary leveraging their cat upon inflationary tea leveraging etc then by noting the differences of each case...
ray dalio   a template for understanding big debt crises audiobook
within type in example each business cycle in relations that we are callable is a cycle I could see what caused it differences by stitching these

template

s together I gained simplify the 18th

understanding

of all of these cases rather than seeing lots of individual things happening I so fewer things happening over and over again like an experienced doctor who sees each case of a certain type of disease unfolding as another one of those I did the research and developed this

template

with the help of many great partners at Bridgewater associates this

template

allowed us to prepare better for storms that never happen to us before just as one study's 100-year floods or plugs that more easily Sivan calming and be better prepared we used our

understanding

to build computer decision-making system the laid out in detail exactly how would react to virtually every possible occurrence this approach helped us enormously for example eight years before the financial crisis of 2008 we built a depression Gorge that was programmed to respond to 50 developments of 2007 2008 which have not occurred since nineteen twenty nine thirty two this allowed us to do very well when most everyone else did badly while I once getting to preach waters detailed decision-making system in this study I will share the following one my

template

for the year catapult big

debt

cycle so three iconic case studies examined in detail the u.s. in 2007 2011 which includes two Great Recession the u.s. in 1928 and 37th...
ray dalio   a template for understanding big debt crises audiobook
which covers a deflationary depression and Germany in 1918 24 which examines an inflationary depression and 3 a compendium of 48 case studies which includes most of the big

debt

crisis that happened over the last 100 years I guarantee that if you take the trouble to understand each of these three perspectives you will see big

debt

crisis very differently now you did for to me watching the economy and markets or just about anything else on a day to day basis it's like being in an evolving snowstorm with millions of bits and pieces of information coming up me that I have to synthesize and react to well to see what I mean by being in the blizzard first is seeing what's happening in the more synthesized ways compare what's conveyed in part one the most synthesized

template

version with Part C then thus granular version in part three the version that shows 248 cases in turret form if you do that you will note how all of these cases transpire in essentially the same way as described in their catapult case while also noting their differences which will prompt to you to ponder would why these differences exists and how to explain them which will advance your

understanding

that way when the next crisis come along you will be better prepared to deal with it typically I appreciate that different people have different perspectives the mind is just one and that by putting our perspectives out there for debate we can all advance our

understanding

s I'm sharing this study...
today just at the archetypal big

debt

cycle how I think about credit and

debt

since we are going to use deterrence credit and that's a lie I'd like to start with a pet what they are and how they work credit is the giving of buying power this volume power is printed in exchange for a promise to pay back which is

debt

clearly giving the ability to make purchases by providing credits peace in and of itself a good thing and not providing the power to buy into good things can be a bad thing for example if there is a very little credit provided for development then there is very little development which is a bad thing the problem with that arises when there is an inability to pay back say differently the question of whether rapid credits are death growth is a good or bad things hinges on what that credit produces and how the depth is repaid in example how the depth is serviced almost by definition financially responsible people don't like having much depth I understand that perspective well because they share it for my whole life even when it didn't have any money I strongly preferred savings to borrowing because I felt the upsides of depth wearing tortex downsides which is a perspective I presume I got from my dad identify with people who believe that taking on a little

debt

is better it didn't take in a lot but over time I learned that third snots the thing it is not necessarily true especially for society as a whole as distinct from individuals because those...
who made policy for a good Society have controls them individuals don't from my experiences in my research I have learned that too little credit

debt

growth can create as bad or worse economic problems as having too much with the coast coming in the form of far-gone opportunities generally speaking because credit creates both spending power and depth whether or not more credit is desirable depends on whether the borrowed money is used productively enough to generate sufficient income to service the

debt

if that of course the resources will have been well allocated in both the lender and the borrower will benefit economically if that doesn't accord the borrowers and lenders once be satisfied and there's a good chance that the resources were currently allocated in assessing this for society as a whole one should consider that the secondary in direct economics as well as the more primary tire economics for example sometimes not enough money credit is provided for such obviously cost-effective things as educating our children well which would make them more productive while reducing crime and the cost of incarceration or replacing inefficient infrastructure because of the fiscal conservatism that insists that borrowing to do such things is bad for society which is not true I want to be clear that credit

debt

that produces enough economic benefit to paid for itself is a good thing but sometimes the trade-offs are harder to see if flaming standards are so tight that...
they require a near certainty of being paid back that may lead to fewer

debt

problems but to little

debt

development the to legal development if the lining standards are looser that could lead to more development but could also create serious

debt

problems down the road that erases the benefit let's look at this and a few other common questions about

debt

and

debt

cycles how costly is bad

debt

related to not having to spending that the Deb is financing suppose that you as a policy maker just to build a subway system that costs 1 billion you finance it with that that you expect to be paid that from a revenue but the economics turn out to be so much worse than you expect it the only health of the expected revenues come in the depth has to be written down by 50% does that mean you shouldn't have built a subway rephrased the question is whether it a subway system is worth 500 million more than what was initially budgeted or on an annual basis whether it is worth about two percent more per year than budgeted supposing the subway system is a 25-year life span look at it this way you may well assess the having the subway system on that coast this is a lot better than not having the subway system to give you an idea of what that might mean for an economy as a whole really bad

debt

losses have been when roughly forty percent of the loans value couldn't be paid back those bad loans amount to about twenty percent of all the outstanding loans so the losses are equal to about...
8% of total depth that total

debt

in turn is equal to about 200 percent of income in example the GDP so the shortfall is roughly equal to 16 percent of GDP if that Coast is socialized in simple boring the society as a whole they fiscal and or a monetary policy is spread over 15 years it would amount to beat one percent per year which is tolerable of course if not spread out the coast would be intolerable for that reason I am asserting that the downside risks of having a significant amount depth depends a lot on the willingness and the ability of policymakers to spread out the losses arising from back

debt

s I have seen this in all the cases I have laid through and studied whether policymakers can do this depends on two factors one whether detect is denominated in the currency that they control and see whether they have influence now over how creditors and

debt

ors behave with each other our

debt

crisis inevitable throughout history only a few well-disciplined countries have avoided that crisis that's because lending is never done perfectly and it's often done badly t to have the cycle effects people's psychology to produce bubbles and busts while policymakers generally try to get it right more often than not they earn on the side of being to lose with the credit because the mere term rewards faster growth seems justifying it is also politically easier to allow easy credit in example by providing guarantees easing monetary policies than to have tight credit that s...
the main reason we see big

debt

cycles why to death crisis common cycle I find that whenever I start talking about cycles particularly big long-term cycles people's eyebrows go up the reactions I elicit are similar to those I'd expect if I were talking about astrology for that reason I want to emphasize that I'm talking about nothing more neurologically dreaming series of events that require patterns in a market-based economy expansions and contractions in credit drive economic cycles which are core for perfectly logical reasons though the patterns are similar the sequences are neither pre destined to repeat in exactly the same ways nor to take exactly the same amount of time to put these complicated matters into very simple terms you create a cycle virtually any time you borrow money while you something you transport means spending more than you make you're not just borrowing from your lender you are borrowing from your future self essentially you're creating a time in the future which you will need to spend less than you make so you can pay back Karen Barbie spending more than you make and then having to spend less than you make very quickly resembles a cycle this is us free foreign national economy as it is for an individual borrowing money says the mechanical predictable series of events into motion if you understand the game of Monopoly you can pretty well understand how credit cycles work on the level of the whole economy early in the game people...
have a lot of cash and only a few properties so he pays to convert your cash into property I said game progresses and the players acquire more and more houses and hotels more and more cash is needed to pay the rents that are charged when you land on a property that has a lot of them some players are forced to sell their property at a discounted prices to raise cash so early in the game proxy is king and later in the game cash is king those who play the game best understand how to hold the right mix of property and cash as the game progresses now let's imagine how this monopoly game would work if we allowed the bank to make loans and take that posits players would be able to borrow money to buy property and rather than holding their cash idly they would deficit it at the bank to earn interest which in turn would provide the bank with more money to lend let's also imagine that players in this game could buy and sell properties from each other on credit in example by promising to pay back the money with interest at a later date if monopolies were played this way it would provide an almost perfect model for the way our economy operates the amount of

debt

finest spending and hotels would quickly grow to multiples of the amount of money in existence down the road the

debt

ors who hold those hold we'll become short on the cash they need to pay their rents and service in their attempt the bank will also get into trouble as their depositors rising need for cash will cause...
them to withdraw it even as more and more tectors are falling behind on their payments if nothing is done to ensure being both banks and doctors will go broke and the economy will contract over time as these cycles of expansion and contraction occur repeatedly the conditions are created for a big long term

debt

crisis lending naturally creates self-reinforcing upward movements that eventually reverse to create self-reinforcing downward movements that must reversing touring during the up swings lending support spending and investing which in turn support incomes and asset prices increased incomes and asset prices support for the borrowing and spending on goods and financial assets the borrowing essentially lived spending and incomes above ducking system productivity growth of the economy near the peak of the upward cycle lending is based on the expectation that the above trunk road will continue indefinitely but of course that can't happen eventually income will fall below the cost of the loans economies whose growth is significantly supported by

debt

finest building of based investments real estate and infrastructure are particularly susceptible to large cyclicals wings because of the fast rates of building those long-lived assets are not sustainable if you need better housing and do you build it the incremental liens have built more housing naturally declines as spending on housing slows down so those housings impact on the road let's say you have been spending ten...
million dollars a year to build an office building hiring workers fine steel and concrete et cetera when the building is finished the spending will fall to zero dollars per year as will you demand for workers and construction materials from that point forward growth income in the service depth will depend on other demands this type of psycho we're stronger oath upswing driven by

debt

finest real estate fixed investment an infrastructure spending is fall biood downswing driven by UTEP challenged slowdown in demand is very typical of emerging economies because they have so much building to do contributing forever to the cyclicality of emerging countries economies are changes in very competitiveness due to relates of changes in their incomes typically they have very cheap labor and bed infrastructure so they build infrastructure and have an expert boom experienced rising income but the rate of growth you need to exports naturally slows as their income levels rise and their wage competitiveness relative to other countries declines there are many examples of these kind of cycles in example Japan's experience over the last 70 years in bubble the unrealistic expectation and reckless lending results in this critical mass of back loans at one stage or another this becomes apparent bankers and central bankers and the bubble begins to deflate one classic warning sign that a bubble is coming is when an increasing amount of money is being buried su-mei dad service payments which...
of course compounds by raising

debt

weakness when money and credit growth are curtailed in or higher laning standards are imposed the rates of credit growth is painting slow and more depth service problems emerge at this point the top of the upward phase of the

debt

cycle is at hands realizing that credit growth is Stander's leave fast the central bank's tidal monetary policy to containing which often accelerates to decline though it would have happened anyway just a bit later in either case where the coasts of that service become greater and the amount that can be buried to finally spending the upward cycles refers only thus new landings loges an but the pressure inductors to make their painting is increased the clearer it becomes that depth Rises struggling the less new lending there is a slowdown in spending and investment that results slows down income proof even further and asset prices decline when borrowers cannot meet their

debt

service obligations to lending institutions those lending institutions cannot link their obligations to their own creditors policymakers must handle this by dealing with the lending institution firsts the most extreme pressures are typeof e experienced by the lenders the are the most highly leveraged and that's have the most concentrated exposures to fail borrowers these lenders pose the biggest risks of creating knock-on effects for credit worthy buyers in across the economy typically there are they are at banks but as credit...
systems have grown more dynamic at browser set of lenders has emerged such as insurance companies non-bank rest's broker dealers and even spacial purpose vehicles vehicles the two main long-term problems that emerge from these kinds of

debt

cycles are one the losses arising from the expected that service payments not being made when promised earth service payments can't be made that can lead to either smaller periodic payments or at the writing down of the value of the techs an example agreeing to accept lesson was owed if you were expecting an annual tech service payment of 4% and accounting at 2% or 0% there is that shortfall for each year were asking if the

debt

is market-town that year's loss would be much bigger in example 50% say the reduction of lending and the spending was financing going forwards even after a

debt

crisis as a result it is unlikely that the entities that borrowed so much can generate the same level of spending in the feature that they have before the crisis that has implications that must be considered Ken Loach

debt

crisis be managed so they were aren't be problems sometimes these cycles are moderate like monks and right sometimes Terry screaming and aning crashes in this study we examine ones that are extreme example all those in the last 100 years the produced declines in real GDP of more than 3% based on my examinations of them and the ways that the lever is available to policymakers work I believe that it is possible for...
policymakers to manage them well in almost every case that the doubts are denominated in countries on currency that is becomes the flexibility that policymakers have allows them to spread out the harmful consequences in such ways that the

debt

problems aren't really big problems most of the real terrible economic problems of

debt

crisis of cost occurred before policymakers to steps to spread the line even the biggest

debt

crisis in history in example the 1930s Great Depression we're gutting past once the right adjustments were made for my examination of these cases the biggest risks are not from the

debt

s themselves from a the failure of policymakers to do the right things due to a lack of knowledge or a lack of authority and be the political consequences of making adjustments the hearts and people in the process of helping others it is from them desire to help reduce these risk they're out of freedom there's Tony having saved that I want to reiterate that one when

debt

s are denominated in foreign currencies rather than the ones on currency it is much harder for countries policymakers to to the sorts of things that spread the

debt

problems and see the fact that

debt

crisis can be well-managed does not mean that they are not extremely costly to some people the pizza handling the

debt

crisis well lies in policymakers knowing how to use their leverage well and having the authority that they need to do so knowing at what rate parity buttons will have to be spread...
out and who will benefit and who will suffer any what degree so that the political and other consequence are acceptable there are four types of levers that policymakers can pull to bring

debt

and

debt

service levels down related to the incoming cash flows levels that are required to service them one austerity in example spending less to depth default restructurings three the central bank printing money and making purchases or providing guarantees for transfers of money and credits from those who have more than they need to those who have less each one of their levers has different impacts on the economy some are inflationary in stimulate growth an example premium learning while others are deflationary and help reduce

debt

burdens eg a sturdy in defaults the key to creating a beautiful leveraging reduction in tax income embraces accompanied by acceptable inflation rate rates which I explain later license triking the right balance between them in this happy scenario doctor income ratios decline at the same time the economic activity and financial asset prices improve gradually bring in the nominal growth rates of incomes back above the nominal interest rate these levers shift around who benefits and who suffers and over what amount of time policymakers are put in the politically difficult position of having to make those choices as a result they're rarely appreciated even when they handle the

debt

crisis well the

template

for the IRR catechol laundering big ten cycles the...

template

the follows is based on my examination l48 big

debt

cycle which include all of the cases delenn's to real GDP falling by more than 3% in large countries which is what I will call a depression for clarity I divided the affected countries into two groups one versa didn't have much of their

debt

denominated in foreign currency and that didn't experience inflationary depressions and to those who have a significant amount of their depth denominated in a foreign currency and be experiencing flashy merry depressions since there was about a 75% correlation between the immense of their foreign

debt

s and the amounts of inflation that they experienced which is not surprising since having a lot of thier

debt

s in nominating a foreign currency was because of their depressions being inflationary it made sense to grip those that have more foreign currency

debt

s with those that have inflationary depressions typically

debt

crisis of core because sex and

debt

service coasts rise faster and the incomes that are needed to service them causing them to leveraging while the central bank can alleviate timeful

debt

crisis by lowering real and nominal interest rates severe

debt

crisis in example depressions of course when this is no longer possible classically a lot of short-term

debt

cycles in example business cycles and up to a long-term

debt

cycle because each short-term cyclically high and each short-term cyclically is higher 1/8 stats of income ratio than the one before until...
the interest rate reduction to help fuel the expansion in depth can no longer continue the chart below shows the

debt

and

debt

service burden of principal and interest in the u.s. since 1910 you will note how the interest payments remain flat or go down even when the

debt

goes up so that the rising

debt

service Coast's is not as great as horizon

debt

that is because the central bank in this case a Federal Reserve lowers interest rates to keep the depth finest expansion going on till they can't do it anymore because your interest rate it's zero percent and that happens that the leveraging begins while the chart gives a good general picture I should make clear that it is in that equate in two respects one it doesn't come with differences between the varies entities that make up these total numbers which are very important to understand and so it just shows what is called that so it doesn't reflect liabilities such as pension and healthcare applications which are much larger having this more granular perspective is very important in causing a country's vulnerabilities value for the most part such issues are beyond the scope of these books our examination of the cycle in developing

template

we will focus on the period leading up to the depression the depression period itself and the earlier leveraging period that follows the button with the depression as therapeutics of B tax crisis the flash and airy ones an inflationary ones largely depending on whether...
a country has a lot of foreign currency

debt

s or not we will examine them separately statistics reflected in charts of the faces were derived by averaging 21 deflation reject cycles cases and 27 inflationary

debt

cycle cases starts in five years before the bottom of the depression I'm continuing for seven years after notably long-term

debt

cycles appeared similar in many ways to short-term

debt

cycles except that they are more extreme both because the tech burdens are higher and the monetary policies that can address them are less effective for the most part shorter entire cycles produce bumps many booms and recessions while be long-term ones produce big booms and busts over the last century the US has gone through a long-term

debt

crisis twice once during the beam of the 1920s and a Great Depression of the 1930s and again during the beam of the early two-thousands and the financial crisis train in 2008 in the short term

debt

cycle spanning is constrained only by the willingness of lenders and borrowers to provide and receive credit when credit is easily available there is an economic expansion when credit isn't easily available there is a recession the availability of credit is controlled primarily by the central bank central bank is generally able to bring become out of a recession by easing rates to stimulate the cycle anew but over time each button on top of the cycle finishes with more economic activity than previous cycle that would more depth why because people...
push it they have an inclination to borrow and spend more instead of paying back

debt

its human nature is a result of real long periods of time

debt

s raised faster than incomes this creates the long term

debt

cycle during the upswing of the long term

debt

cycle lenders extend credit freely even as people become more inductive that's because the princes are self-reinforcing on the upside rising spending generates rising incomes and rising networks which raises borrowers capacities to borrow which allows more buying and spending etc as everyone is willing to take on more risks quite often new types of financial intermediaries and new types of financial instruments develop that are outside of supervision and protection of regulatory authorities that puts them in a competitively attractive position to offer on your returns take on more leverage and make claims up have greater liquidity or other credit risk with credit plentiful borrowers tight police and more than is sustainable given them the appearance of being Spurs intern lenders who are enjoying the good times are more complacent than they should be but that's can continue to rise faster than the money an income that is necessary to service them for up so they're hard headed toward a tech problem one of the limits of that growth related to income greater reached the process works in Reverse as it prices fall doctors have problems servicing their

debt

s an investor get scared and cautious which leads them to sell...
or not roll over their loans this in turn leads to liquidity problems which means that people cut back on their spending and since once person spending is another person's income incomes begin to go down which makes people even less creditworthy as the prices fall further squeezing banks well that repayments continue to rise making spending drop even further the stock market crashes and social tensions rise along with unemployment as credit and cache tags companies reduce their expenses the whole thing starts to feed on itself the other way becoming a vicious self-reinforcing contraction that's not easily corrected that burdens have simply become too big needs to be reduced unlike in recessions and monetary policies can be eased by lowering interest rates and increasing liquidity which in turn increases the capacities and incentives to lend interest rates can't be lowering depressions they are already at or near zero and liquidity money can be increasing by ordinary measures this is a dynamic that creates long-term

debt

cycles has existed for as long as there has been credits going back to before roman times even the old testament described the need to wipe out that once every 50 years which was called the ear with the jubilee like most tremors this one both arises and transpires in ways to have real cure through how history remember money serves two purposes it saves a medium of exchange and a store hold of wealth and because it has two purposes it serves two...
masters those who want to obtain it for life's necessities usually by working for it and see those who have stored wealth tied to its value throughout history these two reams have been called different things eg the first group has been called workers the proletariat the have-nots the second group was being called capitalists investors and the haves for simplicity we will call the first group Clarett saurians worker and the second group capitalism gustin's proletariat workers earned their money by selling their time and capitalists and investors earned their money by lending others the use of their money in exchange for a very hey they promised to repay an amount of money that is greater than the loan which is a

debt

instrument or be a piece of ownership in the business which we will call equity or stocks or a piece of another assets into your real estate these two groups along with the government sets the rules are the major players in this drama well generally both dreams benefit from borrowing and lending sometimes one gains and one suffers as a result of the transaction this is especially true for

debt

ors and ready turns one person financial assets are another's financial liabilities I hate promises to deliver money when the claims on the financial assets are too high related to to money available to make them a big the leveraging mystic or than the free market credit system the finances pending cease to work well in Title II words in reverse way into...
leveraging necessitating the government to intervene in a big way as the central bank becomes a big buyer of

debt

I be a lender of last resort and the central government becomes a redistribution and wealth such songs turn needs to be a

debt

restructuring which claims on future spending ie

debt

are reduced related to what they are and claims on ie money this fundamental imbalance between the signs of the claims of money that and the supply of money example the cash flow that is needed to service the

debt

as a current many times in history it has always been resolved they are some combination of the floral Everest I previously described the process is painful for all the players sometimes so much so that it causes a battle between the chlorella to react workers and a capitalist investors it can get so bad that lending is impaired or even at the load historians that say the problems arose from credit creations we're white usually many money for interests was considering is sin in both Catholicism and Islam in this study we will examine BTM cycles that produce big

debt

crisis exploring how they work and how to deal with them but before we begin I want to clarify the differences but we need seen many times the flash' nari and inflationary depressions in deflationary depressions policymakers respond to the initial economy contradiction by lowering interest rates but when interest rate reach bail 0% that lever is no longer an effective way to simulate the economy

debt

...
restructuring and austerity dominate without being balanced by either question elation especially money printing and currency depreciation in his face that burdens

debt

s and

debt

service as a person of income rice because incomes fall faster than restructuring that's pay dance reduce the

debt

stocks and many borrowers are required to rack up still more

debt

s to cover those higher interest coasts as no to deflationary depression is time for the occur in countries where and most of you as aníbal dates was finest domestically in local currency so that the eventual death busts produces forces only and defaults but not a currency or rebalance of payments problem inflationary depression is classically core in countries there are reliance of foreign capital flows and so have built up a significant amount of

debt

denominated in foreign currency that can't be monetized in example bought by money printed by the central bank on those foreign capital flows low created creation turns into credit contraction in an inflationary to leveraging capital would growl dice of lending and liquidity at the same time the currency declines produce inflation inflationary depressions in which a lot of

debt

is denominated in foreign currency are especially difficult to manage because policymakers abilities to sprout the plane are more limited we will begin with deflation re depressions the faces of the classic deflationary

debt

cycle we chart below illustrates the seven stages of an Arab...
catapult long-term

debt

cycle by tracking to total

debt

of the economy as a percentage of the total income of the economy GDP and a total amount of

debt

service payments related to GDP over a period of 12 years throughout this section I'll include similar archetype charts there are built by averaging the deflationary leveraging cases one the early parts of the cycle in the early part of the cycle that is not growing faster than incomes even though

debt

growth is Trung that is because that growth is being used to finance activities that produce fast income growth for instance borrowed money may go to word expanding a business and making it more productive supporting rate and revenues

debt

burdens are low and balance sheet are healthy so there is plenty of room for the private sector government and banks to lever up deck growth growth and inflation are neither too hot or too cold this is what is called the Goldilocks period - the bubble in the first stage of the bubble that rises faster than incomes and they produce accelerating strong asset returns and growth this process is generally self reinforcing because it's rising incomes net worths and assets values raise borrowers capacities to pirate this happens because then there is to determine how much they can lend on the basis of the borrowers one project income cash flows to serve as a

debt

see net worth collateral the traces are set prices rice m3 their own capacities - linked all of these rights together although...
these set of conditions is not sustainable because it's a growth razor increasing faster than the income that will be required to servicing bar was filled reach so they spend more than that they can earn and buy assets a high prices which leverage here is some one example of how that happens suppose you earn $50,000 a year and have a net worth of $50,000 you have the capacity to borrow $10,000 per year so you could spend 60,000 per year for a number of years even though you only earn $50,000 for an economy as a whole increased borrowing and spending can lead to higher incomes and rise in stock valuations and other asset values giving people more cholesterol to borrow against people then borrow more and more but as long as the borrowing drives growth it is affordable in this up wave parts of the long-term

debt

cycle promises to deliver money I eat that burton's rice related to both the supply of money in the overall economy and the amount of money and credit secretaries of coming in via incomes wiring and sale of assets this art wave-type Khalid goes on for decades variations primarily due to central bank's periodic lightnings and easing zuv credit this are shorter in

debt

cycles and a bunch of them generally add up to a long-term

debt

cycle a key reason the long term

debt

cycle can be sustained for so long is that central bank's progressively lower interests raids which raises asset prices and in turn people's wealth we sift the present value effect that...
lowering interest rates has an asset prices these tips that service burden is from rising and it lowers the monthly payments coasts of white sands boats and credits but this can't go on forever eventually the

debt

service payments become equal to or larger than the amounts that cars can borrow and the

debt

s ie the promises to deliver money become so large in relation to the amount of money in existing thérèse to give but premises to deliver money in example

debt

can't rise any more related to the money and credit come in the process works in reverse and leveraging begins since borrowing is simply wave pooling spending forward this person spending $60,000 per year and earning $50,000 per year has to cut his spending to $40,000 per year for as many years as he spends 60,000 all else being able fell a bit of an oversimplification this is the essential dynamic that drives the inflating and deflating of a bottle the start of a bubble the bull market bubbles usually starts us over extrapolations of justified bull markets the bull markets are initially justified because lower interest rates money investment assets such as stocks and real estate more attractive so they go up and economy conditions improve which leads to economic growth and corporate profits improved balance sheets many ability to take on more

debt

s all of which make the company's worth more as assets go up in value networks and spending income levels rise investors business people financial...
intermediaries and policy makers increase their confidence in our government prosperity which supports the leveraging of process the boon also encourages new buyers who don't want to miss out on the action to enter the market fueling the emergence of a global might often an economic lending and the bubble occur because of implicit or explicit government guarantees that encourage lending institution to lend recklessly as the new speculators and lenders enter the market and confidence increases credit standards fall banks lever up and new types of lending institutions that are largely unregulated develop these non-bank lending institutions are referred to collectively as a shadow banking system these shadow banking institutions are time could be less under the blanket of government protections but they signed new types of lending vehicles are frequently invented and a lot of financial engineering takes place the lenders and the speculators make a lot of fast easy money which reinforces the bubble by increasing the speculators equity given them the collateral they need to secure new loans at the time most people don't think that is a problem to the contrary they think that what is happening is a reflection a confirmation of the boom there's phase of the cycle type Huli feeds on itself taking stocks as an example rising stock prices lead to more spending and investment it raises earnings which raises stock prices which lowers credit spreads encourages increased...
lending based on decreasing volleys of collateral and higher earnings which effects spending and investment rates etc during such times most people think the assets are fabulous treasures on and consider anyone who doesn't on them to be missing out as a result of this dynamic all sorts of entities built up long positions large asset liability mismatches increase in the form of a borrowing short seller so lengths long term be taking on liquid liabilities so investing illiquid assets and see investing in riskier dent where other risky assets with money borrowed from others and or D borrowing in one currency a lending in another all to pick up a proceeding sprint all the wine

debt

s rise fast and

debt

service costs rise even faster the charts below paint a picture in markets when there is a consensus it gets priced in this consensus is also typically believed to be good rough picture of what's to come even though history has shown that the feature II is likely to turn out differently than expected in other words humans by nature like most species tense amazing crowds and way recent experience more heavily than is appropriate in these ways and because the consensus view is reflected in the price mister populations tend to cure at such times increases in duk-soo income ratios are very rapid the above chart shows your catechol path object as a percent of GDP for the deflationary deleveraging we averaged detachable bubble sees leveraging hub at an average rate of 20 to 25...
percent of GDP over three years of so the blue line depicts the arc of the long term that cycle in the form of the total depth of the economy divided by the total income of the economy as it passes through its various phases the red line charts the total amount of

debt

service payments related to the total amount of income bubbles are most likely to a quart at the tops in the business cycle balance of payment cycles and or long term

debt

cycle as a bubble nears its top the economy's most vulnerable but people are filling the wealthiest and the most bullish and the case of study towards active income levels averaged around 300 percent of GDP so can be a few rough average numbers below we show some key indications of what the archetypal bubble looks like the role of monetary policy in many cases monetary policy helps simply to bubble rather than constrain it this is especially true when inflation and growth are both good and investment returns are great such periods are tactically interpreted to be productivity bidding but reinforces investor optimism as the leverage of sabelli investment assets in such cases central banks focusing on inflation growth are often reluctant to exactly tighten money this is what happened in Japan in the late 80s and in much of the world in the late twenties enemy 2000s this is one of the biggest problems with most central bank policies in example because central bankers target their inflation or inflation and growth and then target the...
management of bubbles the exact growth that they enable can go to finance the creation of bubbles if inflation and real growth don't appear to be too strong in my opinion it's very important for central bank's to target depth growth with nice work happening at a sustainable level in example at a level where the growth in income is likely to be large enough the service to

debt

regardless of what credit Easy's to by central bankers and times say that it is too hard to spot bubbles and that it is not their role to assess and control them that is their job to control inflation and growth but what they control is money and credit and when that money and credit goes into

debt

s that can't be paid back that is a huge implications for growth and inflation down a road the greatest depressions of chore when bubble burst and if these central banks that are producing the

debt

s that are inflating them one control him and who will the economic pain of allowing a large bubble to inflate and then burst is so high that it is imprudent for policymakers to ignore them and I help their perspective will change well central bank's time to lead to tighten money somewhat in short rates rise on average when inflation and growth starts getsy hearts time to call monetary policies are not adequate to manage bubbles because bubbles are occurring in some parts of the economy and not others thinking about the whole economy central bank's time to fully fall behind occurred during...
such periods and borrowers are not yet especially squeezed by higher

debt

service coasts quite often that these staged their interest payments are increasingly being covered by borrowing more rather than by income growth a clear sign that the trend is unsustainable all these reverses when the bubble pops and the same linkages that inflated the bubble make the downturn self-reinforcing folly asset prices decrease both the equity and collapse or Lally's of leverage it speculators which causes lenders to pull back this forces speculators to sell driving down prices even more also lenders and investors run an example with throw the money from risky financial intermediaries and risky investments causing it to have liquidity problems typically the affected market our markets or big enough elaborate Juden elif that the losses on the accumulated

debt

s are systematically threatening which is to say that they threatened to topple the entire economy sputtering bubbles well the particulars may differ across cases eg the size of the bubble whether it's in stocks housing or some other assets how exactly did bubble pops and so on the many cases of bubbles are the much more similar then they are different and each is a result logical cause-and-effect relationships that can be studied and understood if one holds a strong mental map of how bubbles form it becomes much easier to identify them to identify it beats at crisis before of course I look at all the big markets and see which if...
any are in bubbles then I look at what's connected to them that would be affected when they pop while I want going to exactly how it works here the most defining characteristics bubbles can be measured on one prices are high relative to traditional measures so prices are discounting a future rapid price appreciation from this high levels 3lauras broad bullish sentiment for purchases are being financed by high leverage five buyers have made exceptionally astounding forward purchases in example built inventory contracted for supplies etc to speculate or to protect themselves against future price gains six new buyers in example those who were in previously in the market have Android Market seven stimulated monetary policy threatens to inflate the bubble even more anti policy to colors it's popping at this point I want to emphasize that is a mistake to think that any one metric can serve as an indicator of an impending attack prices the ratio of

debt

to income for the economy as a whole or even

debt

service payments to income for in the economy as a whole which is better are useful but ultimately in as effect measures since it's a paid a

debt

crisis well one has to look at the specific

debt

service abilities of the individual and treaties which are lost in these averages more specifically a high level of

debt

or a

debt

service to income is less problematic if the average is well distributed across the economy than if it is concentrated especially if it is concentrated...
in key entities it's hot when prices have been written by lots of leveraged buying and the market gets fully long leveraged and overpriced it becomes Ronnie for reversal this reflects a general principle when things are so good the thing hunts get better everyone believes that they will get better types of markets are being made wild tops are triggered by different events mas often they occurred when the central bank starts timing and interest rates rise in some cases the tightening is sprayed about by the bubble itself because growth and inflation are rising well capacity constraints are beginning to pinch in other cases too tightening is externally driven for example for a country that has become reliance and borrowing from external creditors the pulling back of flensing duty sergeant as causes will lead to liquidity tightening the tightening of monetary policy in a currency in which

debt

s are denominated can be enough to cause a foreign capital to pull back this can happen for reasons unrelated to conditions in domestic economy in example psychological conditions in a reserve currency country lease you tightening in liquidity in that currency re financial crisis results in a pullback of cattle etcetera also a rising is currency that is in related to the currency incomes are in can cause an especially severe squeeze sometimes and it's a sapele shortfalls in cash flows due to any number of reasons can trigger the

debt

crisis whatever the cause of the

debt

service...
please it hurts access prices in art asset prices eg sub prices which has a negative wealth effect as lenders begin to worry that they might not be able to get their cash back from those they lent it to borrowers as squeezed as and increasingly shared their new borrowing goes to pay

debt

service and/or isn't rolled over and their spending down this is classically to result of people buying investment assets a high prices with leverage they send overly optimistic assumptions about future cash flow psychically these types of chronic

debt

problems start see emerge about halfa here ahead of the peak in the economy at first and its most vulnerable and free feed pockets the risk is dr. start see miss payments lenders begin to worry credits press starts to ticket and risky lending slaves rents from risky asset to less risky asset pickup contributing to threatening of the contraction psychically in the early stages of the top the rise in the short rates Nerys are eliminates the spread with long rates I need the extra interest rates earned for lensing on term rather in a short term lessening the incentive to lend related to the incentive to old cash as a result of the yield curve being flattered inverted ie long term interest rates are there allows related to use short term interest rates people are incentivized to move to cash just before the bubble pops slowing credit growth and causing the previously described dynamic early on in the top some parts of the credit system suffer...
but others remain reduced so it isn't cleared that the economy is weakening so while the central bank is still raising interest rates and tightening credit the seeds of the recession are being Sun the faster ray of the tightening cyclically comes about five months prior to the top of the stock market the economy is then operating at the high rate with the men pressing up against a capacity to produce unemployment is normally at cyclically lows and inflation rates are rising the increase in short-term interest rates makes holding cash more attractive it raises the interest rate users count the future cash flows your assets we can't risk you're a surprise is it slowing lending it also makes ice and spot on credits the factor more expensive it's low in demand chart rates typically peak just a few months before the top in its stock markets the more leverage that exists and the higher the prices the less tightening it takes to create a bubble and the bigger the busta follows to understand the magnitude of the downturn that is likely to occur it is less important to understand the magnitude of the tightening then it is to understand each particular sector sensitivity to tightening and how less is will kiss Kate this pictures are best seen by looking at each of the important sectors of the economy and each of the big players in these sector rather than at economy-wide averages in the immediate post double period the wealth effect of a surprise movements has a bigger...
impact at economic growth rates and monetary policy does people tend to underestimate the size of these effects in the early stages of a bubble bursting the stock prices fall and earnings have not yet declined people who say can we judge to decline to be a buying opportunity a fine stock exchange a relation to both past our earnings and expected earnings failing to account for the amount of decline in earnings days likely to result from was sooo calm but the reversal is self reinforcing as wealth Falls first and incomes fall later credit worthiness worsens which comes to rates lending activity which hurt spending and lowers investment rates while also making the less appealing to borrow to buy financial assets this in turn person's the fundamentals of the asset eg the weaker economic activity leads corporate earnings to chronically disappoint leading people to sell and driving down prices further this has an accelerating tower impact on asset prices income and wealth for depression in normal recessions when the monetary policy is still effective Fein balance but windy amount of money and the need for it to service

debt

can be rectified by cutting interest rates enough t1 produce a positive wealth effect to stimulate economic activity and 3yz

debt

service burdens this can't happen in depression because interest rates can't be cut materially because they have either already reached question 0% or in cases where currency outflows and currency weaknesses are great the...
foreign interest rates is higher because of credit or currency risk considerations this is precisely the formula for a depression as shown and this happening the early stage of birthday 1930 32 depression they 2008 2009 depression in well-managed cases like the u.s. in the 2007 and 8 the Fed lowered rates very quickly and then that didn't work we've done 2 alternative means of stimulating having learned from its mistakes and third seize on the fact was the lowering to ease and even tighten at times to defend the dollar respect loans as the depression begins death defaults and restructuring hate the various players especially leverage the lenders eg banks like an avalanche both lenders and depositors justified fears feeds on themselves leading to runs on financial institutions but Title II don't have the cash to meet them unless there are under the umbrella of government protections cuts the interest rates doesn't work idly because the floors on risk-free rates have already been hit and because US credit spreads rise the interest rates on risky loans go up making it difficult for those

debt

s to be serviced interest rates cuts also don't do much to help lending institutions that have liquidity problems and are suffering from rise this phase of the cyclone

debt

defaults on austerity an example the forces of deflation damina and are not sufficiently balanced with the stimulative and inflationary forces of printing money to cover

debt

s in example

debt

...
monetization what investor is unwilling to continue lensing and borrowers scrambling to find cash to cover their

debt

payments liquidity and example the ability to sell investment for money becomes major concern as an illustration when you own a 100,000

debt

instrument you presume that you will be able to exchange it for $100,000 in cash and in turn exchanged the cash for $100,000 worth of goods and services however since the ratio of financial assets to money is high when a large number of people rush to convert their financial assets into money and buy goods and services in bad terms the central bank either has to provide liquidity that's maybe by printing more money or allow a lot of defaults the depression can come from or cause either a solvency problems or cashflow problems usually a lot of both types of problems exists during this phase a solvency problem means that according to a planting and regulatory rules the entity does not have enough quantity capital to operate an example is broke and must be shut down so the accounting of those have a big impact on the severity of the

debt

problem at this moment the cash flow problem means that an entity doesn't have enough cash to meet its needs typically because it's our lenders are taking money away from it an example there is a run a cash flow problem can occur even one of the entity has adequate capital because the equity is an illiquid assets lack of cash flow is an immediate and severe problem and as a...
result the tree current and main issue of most

debt

crisis each type of problem requires a different approach if the solvency problem exists an example doctor doesn't have enough equity capital it has an accounting regulatory problem the cameras l quit by either a providing enough equity capital or be changing the accounting regulatory rules which has a problem governments can do this directly through fiscal policy or indirectly through clever monetary policies if the

debt

is in their own currency similarly if the cashflow prevalent exists fiscal and or monetary policy and provide either cash or guarantees that resolve it a good example of how these forces are relevant is highlighted by the differences between detect banking hyzer of two 1980s in 2008 in the 1980s there was not as much marketing market accountings because the prices involved loans that weren't traded every day in public markets so the banks were not as insolvent as they were in 2008 with the marketing market accounts in 2008 the banks require capital injections and/or guarantees to improve their balance sheet both

crises

were successfully managed though the ways they were managed had to be different going into the depression phase of the cycle by which I mean the severe contraction phase some protections learned from past depressions energy bank deposit insurance debility to provide lender of last resort financial supports and guarantees in to inject capital into systemically important institutions or...
initial isin article II in place and aren't helpful but they are rarely adequate because the exact nature of the

debt

crisis hasn't been well thought through psychically quite a lot of lending has taken place under relatively unregulated shadow banking system or in the instruments that have an anticipated risks and inadequate regulations what happens in response if these new realities depends on the cap but it is other policymakers in the decision drills and the on this isn't to allow them to do what is best some people mistakenly think that depressions are psychological that investors and leave their money from risky investments to say for once AG from stocks in high-yield lensing to government bonds and cash mister scared and that the economy will be restored if they can only be coax into moving their money back into riskier investments this is for two reasons first contrary to popular belief to the leavening dynamic is not primarily psychological it is mostly driven by the supply and demands of and the relationship between credit money and goods and services so psychology of course also does have an effect especially in regard scenes of various players liquidity positions still if everyone went to sleep and woke up with no memory of what happened it would be in the same position because deaf tears obligations to deliver money would be too large related to the money that they are taking in the government will still be faced but the same choices that won't...
have the same consequences and so one relates it to this if the central bank produces more money to allocate a shortage it will cheapen the value of money making a reality of creditors worries about being paid back an amount of money that is worth less than what they alone while some people think that the amount of money in existence remains the same and simply means firm risk for assets so less risky ones that's not true most of what people think is money is really credit and credit has appeared out of thin air during good times and then disappear at that time for example when you probably something in his tour on a credit card essentially do so by saying I promise to pay together you and distort honor creates a credit asset and accredit my ability so where did you take the money from nowhere you created the credit it goes away in the same way suppose the store owner rightly believes you and others won't pay - credit card company and that the credit card company will run to pay him then he currently believes that the credit asset he has isn't freely there it didn't goes on the rails it's simply gone as these implies a B parts of the devil origin process these people discovering that much of what they thought I was their wealth was merrily people's promises to give them money now that those premises aren't being kept that wealth no longer exists what investor trying to convert their investments into money in order to raise cash they test their...
ability to get pay and in cases where it fails Panik and G's torrents and sellers of securities a core naturally those who experience runs especially banks though this is truth of most entities that rely on short-term funding have problems raising money and credits to meet their needs so that default Cascades def defaults and restructurings hit people especially with out reached lenders ng banks and fear it cascades through the system these fears feed on themselves and lead to a scramble crash their results in a shortage I here liquidity crisis - dynamic works like this initially the money coming to death transferring incomes and borrowing is not enough to meet the tetras obligations assets makes it be sold as spending needs to be cut in order to raise cash this week's asset values - farm which reduces the value of collateral and in turn reduces incomes this borrower's credit worthiness is jointed but both ada volleys of their assets collaterals in a relationship

debt

s in example their net worth and B the sizes of their incomes relates it to the size of their

debt

service payments this is both their net worth their income fell faster than their

debt

s borrowers become less creditworthy and lenders reluctance Linde these goes on being a suffering for some manner the depression phase is dominated by flesh and resources of

debt

reduction ie defaults and restructurings and it started to occurring without material efforts to reduce

debt

burdens by printing money because...
one person's

debt

s are another assets the effects of aggressively cuttin the value of those assets can be to greatly reduce the demand for goods services and investment assets for a right sound to be effective it must be large enough to a loaded that tree service door is tracked through alone if the write down is 30% then the creditors assets are reduced by that much if that sounds like a lot it's actually much more since most lenders are leveraged eg they borrowed to buy assets the impact of the 30% writes out of their net worth can be much greater for example the creditor is leveraged of two to one what experience is sixty percent decline in his Network example their assets are twice their net worth so the decline in asset value has twice the impact since banks are a tightly leveraged about twelve to one or 15 to one that picture is obviously devastating for them and for the economy as a whole even as deaths are bringing down that burden is rise as penny and incomes fall death levels also rise related to net worth as shown in the table below as

debt

to income and

debt

to not worry Thrasher's go up and the availability of credit goes down naturally credit contraction becomes self-reinforcing under downside the capital is invested x-class experiences a tremendous loss of real wealth during depressions because the value of their investment portfolios collapses the clients inaccuracy prices are totally around 50% there are earning incomes fall in daytime...
Khalifa's higher tax rates as a result they become extremely defensive quite often they are motivated to move money out of the country which contributes to currency weakness dodge taxes and see safety leaflet non credit dependent investments eg low-risk government bonds of gold or cash of course the real economy as well as the financial economy suffers with monetary policy constraint the uncontrolled credit contraction producing economic and social catastrophe workers suffer as incomes collapse and job losses are severe hard-working people who once were able to provide for their families lose the opportunity to have meaningful work and suddenly becomes either destitute or dependent homes are lost because owners can no longer afford to pay their mortgages retirement accounts of wipe-down and savings for ecology are lost these conditions can persist for many years if policymakers not assets the depressions deflationary forces with sufficiently monetary stimulation of the need for managing depressions is mentioned earlier the policies that reduce

debt

burdens fall under four broad categories one austerity to

debt

defaults restructurings three that mana sensations money printing and for wealth transfers ie from the haves to the have-nots by using these kinds of levers well policymakers can mitigate the worst effects of the depression and manage boats of a lenders and borrowers and economic conditions but it's important to recognize that each of these levers has different...
impacts on the economy and credit worthiness the key is to get the mix right so that the deflationary and oppressive forces are balanced with inflationary and stimulated ones policymakers tactically get the mix between is charity money printing and redistribution wrong initially taxpayers are understandably angry at the depth errs and at the financial institutions whose excesses causes deep

debt

crisis and dumb ones government ie dear taxes to bail them out and policymakers justifiably believe that that excesses will happen again if lenders and borrowers done suffer did downsides of their actions which is called the moral hazard problem for all these reasons policymakers are usually reluctant as low to provide government supports and that construction and the agony produces increased quickly but the longer it they way to apply stimulates of remedies to the mix we are where did the leveraging becomes eventually they choose to provide a lot of guarantees Prince a lots of money and monetize a lot of

debt

which lifts the economy into a reflection Airy deleveraging if they do this things and get the mix right quickly the depression is much more likely to be relatively short-lived like the short period of depression following the u.s. crisis in 2008 if they don't the depression is usually prolonged like direct depression in the 1930s or Japan's the last decade following the bubble in the late nineteen eighties to realize rate the two biggest impediments to managing a

debt

...
crisis are a the failure to know how to handle it well and the politics or statutory limitation on the powers of policymakers to take the necessary actions in other words ignorance in a lack of authority are bigger problems than that themselves well we Nix is a successful investment manager his heart is not nearly as hard as being a successful economy policy maker we investors all we have to understand how the economic machine words and anticipate what will happen next policymakers have to do that plus make everything turn out well ie they have to know what should be done while navigating through all the political impediments that make it so hard to get it done to do that requires a lot of smarts a willingness to find and political savvy ie skills heroism and sometimes you know with all those things the constraints under which they work still prevent them from being successful below I'll walk through each of the four levers and how they are typically used in tea in the depression phase posterity in the depression phase policy maker is time to Calitri austerity because that's the abuse things today it's natural to want to let those who got themselves and others in trouble to bare the coasts the problem is that's indeed history doesn't bring

debt

and income back into balance a spending is cut incomes are also cut so it takes an awful lot of pain spending cuts to make significant reduction into

debt

income ratios as ikana contracts government revenues time to...
cliff all at the same time demands and governments increase as a result deficits total increase seeking to be fiscally responsible at this point governments tend to raise taxes both moves are big mistakes printing money to stop the bleeding and stimulate the economy pride often runs on lending institution accord especially those that aren't protected by government guarantees that puts the Central Bank and the central government in the position of the having to decide which depositors lenders should be protected from losses and which should be allowed to sustain them and which institution are systemically important and should be saved how to do these things in a way that maximizes the safety of the financial economic system while minimizing costs to the government taxpayers but such signs all sort of guarantees are offered to systemically critical financial institutions and quite often some of these institutions are nationalized typically there are a lot of laws and politics that affect how quickly how well this is done some of the money that is needed comes from the government ie it is appropriated through the budget process and some from the central bank's by printing government's inevitably do both though in varying degrees in addition to providing money to some essential banks governments also typically provide money to some non-bank answered seeds they consider essential next they most ease the credit crunch stimulate the overall economy since the government...
is likely having troubles raising funds through taxation and borrowing central banks are forced to choose between printing still more money to buy their government specs or allowing their governments and their private sector to compete for the limited supply of money which will be only tied in money further inevitably they choose different cyclically though not necessarily these moves call me progressively larger doses as more modest initial attempts failed to rectify the imbalance and reverse the do leveraging process however those early efforts to do typically caused temporary periods relief that are manifesting beer market rallies in financial assets and increased economic activity during the Great Depression there were six big rallies in the stock market of between 16 percent and 48 percent in a bear market that declined a total of 89 percent all of those rallies were triggered by government actions that were intended to reduce the fundamental imbalance when they are managed well those shifts and policies to print money buy assets and provide guarantees are what means the

debt

cycle from its oppression agreed the leveraging phase to its expansion beautiful deleveraging face the truck below shows how these money printing happens in the u.s. in the 1930s and again after 2008 while highly stimulating light airy policy is a critical part of a deleveraging it is likely not sufficient when breasts emerge are systemically important institutions will fail policymakers must take...
steps to keep these entities running they must act immediately to curtail panic and guarantee liabilities governments can increase guarantees on deficits and

debt

issuance central banks can provide systemically important institutions ie institutions whose failure who threaten the ongoing operating of the financial system and/or that of the economy with injections of money occasionally governments can force liquidity to remain in the banking system by imposing deposit freezes which is generally undesirable because it intensifies a panic but it's sometimes necessary because there is no other way of providing that money in liquidity provide liquidity but private credit is contracting and liquidity is tight the central bank can ensure that sufficient liquidity is provided to the financial system they're landing against a widening range of collateral or it's an increasingly wide range of financial institutions that are not normally considered part of their lending practices support the solvency of systemically important institutions the first step is usually to incentivize the private sector to address the problem often by supporting mergers between failed banks and healthy banks and by regulatory pushes to issue more capital to the private sector in addition accounting adjustments can be made to reduce the immediate need for capital to maintain solvency buying more time for the real institutions to earn their way out of their problems we capitalized nationalize...
covered losses of systemically important financial institutions when the above approaches are insufficient to deal with the solvency problems of systemically important financial institutions government must tap in to recapitalize failed banks moving to stabilize lenders and Monsanto credit supply is critical to preventing a crisis from getting worse certain institutions are parts of the meaning of the system one would hate to lose them even if they're not making money at the moment it would be like losing a shipping ports and a depression because the port goes broke you want the port to continue to operate and ships to common so you have to protect it one way or another whether through a nationalization loans or capital injections

debt

defaults and restructurings ultimately the process of cleansing existing about

debt

s is critical for the future flow of money and credits and for really return to prosperity the challenges for policy makers is allow that process to work itself as in an orderly way that ensures economic and social stability the best managed cases are those in which policy makers pay fifthly recognize the magnitude of the credit problems be don't save every institutions that he's expendable balancing the benefits of allowing broke institutions to fail and be restructured with the risks that such failures can have detrimental effects on other credit ready lenders and borrowers see create or restore robust credit pipes that allow for featured bahrain by...
creditworthy borrowers and D ensure acceptable growth and inflation conditions while the bad

debt

s are being worked out longer turn the most important decision that policymakers have to make is whether they will change the system to fix the root causes of of the

debt

problems or simply restructure the

debt

s so that the pain is distributed over the population and over time so that the

debt

is not imposing intolerable burden these things rarely happen right away policymakers psychically failed to recognize the magnitude of the problem initially instead announcing a number of one-off policies that are insufficient to move the needle it is only after what is usually a couple of years and a lot of a necessery economic pain that they finally act decisively how quick and aggressively policymakers respond is among the most important factors in determining the severity and length of the depression and the question of exactly how these coasts us are divided between two governments which means the society as a whole and bondholders or Verizon your ities equity holder depositors etc is an important one typically non-systemic callee important institutions offers to absorb their losses and if they fail are allowed to go bankrupt the resolution of these institutions can take several different forms in many cases about 80 percent of the cases were studied they are merged with elephant institutions in some other cases the assets are liquidated or transferred to an asset management company AMC...
set up by the government to be sold piecemeal in some cases policymakers recognize that ensuring the viability of the whole banking system is critical and liquidity and solvency measures are taken at the banking system level in recent years has become common for guarantees of bank liabilities to be issued in countries in developed world in rare cases government finest bank recapitalization he's done across all banks rather than focused souls leave on systemically important institutions there are relatively clear lines for which creditors receive protections one small depositors are given preference and experience minimal or no losses in nearly every case often this is explicitly defined as part of the deficit insurance scheme coverage is usually expanded during the crisis period in order to ensure liquidity for the banks even in the cases where the reasons an explicit deficits Insurance Scheme depositors are often prioritized in around 30% of cases studied depositors did take losses though they were often on foreign exchange deposits through conversions hadn't build a market exchange rates to in most cases when institutions fail equity subordinated

debt

and large depositors and sword losses regardless of whether the institution was systemic Lee important or not protection of the senior and subordinated

debt

holders and equity recapitalizations are simply diluted to existing equity holders are seen mostly in developed world 3 sometimes policymakers prioritize domestic...
creditors offer foreign creditors especially when their lungs are too private sector players and aural our it down in D capital structures this is especially true as deaf as a insurance parents are allowed with funds but at the same time governments often end a prioritizing the payment of loans from multinational institutions like the IMF and bis as it's important to maintain availability of support from these public entities who effectively act as lenders of last resort to countries under stress finally the process of dealing with the failing lenders is accompanied by his spate of regulatory reforms sometimes these changes are men taste and sometimes they're very large sometimes they're for the better sometimes they're for the words they arrange from it changes in how banks operate eg putting in deposit guarantees in the 1930s or dodd-frank and the Volcker Rule in 2010 in the u.s. to labor market reforms from requiring banks to improve cry standards to open the banking systems competition including foreign entrance to raising capital requirements and removing protections for lenders politics plays a big role in determining what reference are made in some cases so tree-ferns end up distorting private sectors and market-based incentives on the flow of lensing which can limit the flows of credits to credit worthy borrowers and/or increase the risks of future credit problem emerging in other cases they improve the flow of credits protect households and reduce the...
risk of

debt

problems in the future there are two main ways in which failed lenders assets or exist some lenders bad assets managed they are either a transfer to a separate entity an agency to manage the restructuring and asset disposal about 40% of the case studies or be there remaining the balance sheet of the original lending institution to manage about 60% of cases and there are several main levers for disposing of the non-performing loans a restructuring AG working out the lungs through incentive terms be that for equity swaps and asset seizures see direct sales of the loans for assets to third parties and D securitizations the use of an agency generally accelerates the management of the

debt

problems because it frees up existing backs to return to lending and helps consolidate the bad

debt

s to centralized entity that can manage sales and restructurings selling assets to AMC's also often serves as a mechanism to engaging transfers to bank by impressing them at above market prices AMC's article e publicly owned entities that are mandated to sold the assets weighing some treatment timeframe eg 10 years while minimizing kosa to the taxpayer and disruption of asset markets they do this by seeking to quickly sell after performing assets of failed institutions and working overtime to manage and sell-off non-performing assets in some cases AMC's have explicit goals to restructure the non performing

debt

s to reduce

debt

burdens they are generally finest by some...
foreigners IRAs or assumed of government

debt

issuance and they cannot work well when the legal political or funding constraints limit their ability to recognize bad

debt

s and restructure them allowing the original lender to manage its bad

debt

s often of course when the original lender is state-sponsored which makes closed retreat public gain MC in other cases losses may be allowed to sit on the lenders balance sheet if they not so large that the technical expertise to create a centralized AMC doesn't exist or if effective resolution mechanisms already exists matches with lenders there is usually a relatively clear distinction between how systemically or strategically important borrowers are handled and how those that are at our forces technically important borrowers are strategical important ones policymakers Charlie take steps to ensure that the business remain in taxes entities in general is of course through a restructuring of the

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s to make the ongoing

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service manageable this can occur through intent for equity swaps through reducing the existing

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s lowering interest rates were terming at the borrowing occasionally policymakers also introduce new lending programs to these borrowers to ensure they are ongoing liquidity this process is often explicitly one of the goals of AMC's set up to manage bad

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s non systemically important borrowers are usually left to restructure danger loans for private lenders or are allowed to go bankrupt and are liquidated...
central governments often take steps to help reduce the

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burdens from the outsole sector AMC's may also take steps to restructure

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burdens rather than foreclosing on the loans as parts of their goal of maximizing recovery values the table below shows how frequently two previously described policy moves are developed in our study of the 48 historical cases detailed in part 3 redistributing wealth wealth gaps increased during bubbles and they become particularly galling for the less privileged during hard times as a general rule for each people share a budget with poor people and there is an economy turn-turn there will be an economic and political conflict it is during such times that populism on both the left and the right tend to emerge how well the people in the political system and all this key to how well the economy into society whether in the period as shown both inequality and populace are on the rise in the u.s. today much as they were in nineteen thirties in both cases the net worth of the top zero one percent of the population imposed approximately that's of the button ninety percent combined in some cases raising taxes on the rich becomes politically attractive because the rich made a lot of money in the boom especially those working in the financial sector that are perceived to have caused problems because of their greed the central bank's purchases of financial assets also is proportionately benefit to rich because the rich on many more such...
assets big political shifts to the left typically has similar distributive efforts this tightly drives the rich to try to meet their money in ways and to plays that provide protection which itself has effects on asset in currency markets it can also cause an economic hollowing out of those areas because the big income earners were also the big income taxpayers leave reducing overall tax revenues and leading these areas to suffer sharp declines in property values and reduction and services type FLE increased taxation takes the form of greater income property and consumption taxes because these forms of Taxation are the most effective at raising revenues wealth in inheritance taxes are sometimes also increased though these tightly arrays very little money because so much wealth is a liquid that it's practically difficult to collect on and forcing to taxpayer to sell illiquid assets so make their tax payment undermines capital formation regardless transfers rarely occurred in a man's the contribute meaningfully to the leveraging unless there are revolutions and huge amounts of property are nationalized five the beautiful deleveraging be beautiful deleveraging happens when the foreign levers are moved in a balanced way so as to reduce intolerable shocks and produce positive growth were falling deaf burdens and acceptable inflation more specifically the leveraging become beautiful and there is enough stimulation ie through printing money that monetization and currency...
devaluation $0.12 deflationary leveraging forces austerity defaults and bring the nominal growth rate above the nominal interest rates but not so much simulation that inflation is accelerated the currencies devaluated and the new

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bubble arouses the best way of negating that the flash and airy depression is for the central bank to provide adequate liquidity and credit support and depending on different key entities needs for capital for the central government to provide that to recall that spending comes in the form of either the money or credits when increased spending cannot be financed with

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histories too much

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related to the amount of money the risk to service the

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increased span in

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service relief must come from increased money this means that the central bank has to increase the amounts of money in the system the central bank can do this by lending against a wider range of collateral both of lower quality and longer maturity and also by buying monetizing lower quality and/or longer-term

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this produces relief and if that's done in the right amount allows and de leveraging to a court with positive growth the right amounts are those that a neutralized what would otherwise be a deflationary credit market collapse and B get de nominal growth rate marginally above the nominal interest rate to sort of release print out the de leveraging process so what do I mean by that basically income needs grow faster than that for example let's assume that a...
country going through the leveraging as a

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to income ratio of 100 percent that means that the amount of

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she has is the same the amount of income the entire country makes in a year now think about interest rates on that

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let's say it's 2% if that is 100 and interest rate is 2% then if no

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is repay it will be 102 after one year if income is 100 acre is 1% the vein income will be 101 so the

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burden will increase from 100 to 102 102 to 101 sell for the britons from existing

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s not to increase nominal income growth must be higher the nominal interest rates and the higher the better provided it is not so high that it produces an acceptable inflation and or an acceptable currency declines people ask if printing money old raise inflation it wants if it offered sets falling credits and a deflationary forces are balanced with this reflation Airy force that's not a theory it's been repeatedly proven out in history remember spending is what masses it's honor of spending pay for with money has the same effect on prices as a dollar of spending paid for with credits by printing money the central bank can make up for the disappearance of credits with an increasing amount of money this printing takes a form of central bank purchases of government securities and non government assets such as corporate securities equities and other assets which is reflected in money growing at an extremely fast rate at the same time as credits and real economy...
activity are contracting traditional economists see that as the velocity of money declining but it's nothing of the sort what is happening at such times is the credit of destruction is being offset by money creation if the balance between replacing credits and actively stimulating the economy's right this isn't inflation Airy but there is such a thing as abusive use of stimulants because stimulants work so well related to the alternatives there is a real risk that they can be beached causing an early inflation Ares leveraging like the fire hyperinflation of the nineteen twenties or those in Argentina in Brazil in the 1980s the key is to avoid printing too much money if policymakers achieved the right balance each leveraging isn't so dramatic getting this balance right is much more difficult in countries that have the large percentage of

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denominated in foreign currency and owed by foreign investors as environment and South American countries because that set can be monetized or restructured as easily printing money

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monetization and government guarantees are inevitable in depressions in which interest rate cuts one work though these tools are of little value in countries that are constrained from printing or don't have assets say back printing up and can't easily negotiate redistribution of the

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burdens all of the deleveraging that we have studied which is most of those that have cord over the past hundred years eventually led to big waves...
of money creation fiscal deficits and currency devaluations against gold commodities in stocks and different cases policymakers have the right which exact combination of the lab receive used typically as a function of the nature of their monetary system the chart below convey stir kettle path of money currency in deflationary deleveraging over the 21 cases the money freezing occurs in two classic waves central bank's first provide liquidity to stressed institutions and then they conduct large-scale asset purchases to go at least emulate the economy cyclically governments with gold commodity or foreign currency pegged money systems are forced to have tighter monetary policies to protect the value of their currency than governments were for monetary systems but eventually detect contractions become so painful that they relent break the link and Prince ie either if they abandoned the system or change the amount pricing of the commodity that they will exchange for a unit of money for example when the value of the dollar and therefore the amount of money was tied to gold during the Great Depression suspending the promise to convert dollars into gold so that the currency would be valued and more money created was key to creating the bottoms in the stock and commodity markets and the economy printing money making asset purchases and providing guarantees were much easier to do in the 2008 financial crisis as they didn't require it legalized an official change in the currency...
of gem the chart below shows to a casebook path of gold prices in the US Great Depression gold froze overnight when Roosevelt broke the gold peg engineering the more the financial crisis fed news helped push down the value of the dollar versus all currencies including loans in the end policymakers always print that is because austerity causes more pain than benefits big restructurings wipeout team and 12 - fast and transfers of wealth from haves to have nots don't happen in sufficient size without revolutions also printing money is not inflationary if the size and character of the money creation offsets the size and character of the credit contraction it is simply negating deflation and virtually all pasture leveraging x' policymakers had to discover this for themselves after they first tried other paths without satisfactory results history is shown that those who did it quickly and well like the u.s. in 2008 and 2009 had derived much better results than those who didn't they like the US in 1930 and 33 the table below summarizes the tactical amount of printing and currency devaluation required to create the turn from depression to a beautiful deleveraging on average the printing of money has been around 4% of GDP per year there is a large initial currency devaluation of around 50 percent against gold and deficits wanted in about 6% of the GDP on average those aggressive stimulation comes to two to three years into the depressions after stocks have fallen more than...
50 percent economic activity is falling about 10 percent and unemployment has risen at around 270 15 percent though there is a lot of variation by providing these numbers all these roads indicators sensitive consensus were I consider Lee when looking at the differences which are very interesting but beyond the scope of this study it is clear that when monetary and fiscal policies are rolled out faster and smarter the results are much better than these averages so reiterate the key to having a beautiful deleveraging lysing a balancing the inflationary forces against the deflationary ones that's because too much money printing can also produce an ugly inflationary - leveraging which we will go through later the right amounts of stimulus are those that a neutralized what would otherwise be a deflationary credit market collapse and be get the nominal growth rate above the nominal interest rate by enough to relieve the

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burdens but not by so much that at least who will run on that assets in summary when all is said and done only a few things distinguish whether and leveraging is managed well or poorly haven't blind them below lots of pain can be avoided policymakers can learn from the common pitfalls and understand the policies characteristics of beautiful deleveraging sex pushing honest ring late in the lung fair and ethical central bankers sometimes struggle to convert their stimulative policies into increased spending because the effects of lowering interest rates...
and central banks purchases affect assets have diminished at such times the economy enters a period of low growth and low returns and assets and central bankers have to move to other forms of monetary stimulation in which money and credit go more directly to support spenders when policymakers faced these conditions in the 1930s they coined the phrase pushing on a string one of the biggest risks of these state is that if there is too much printing of money monetization and too severe a currency devaluation relates it to the amount of the deflationary alternatives an ugly inflationary the leveraging can Akula to help us understand the different kinds of monetary policies that can be used throughout the leveraging I think of them as coming in three different styles each where its own effects on the economy and markets monetary policy one interest rate driven monetary policy which I'll call monetary policy one is the most effective because it has the broadest impact on the economy when central bank's reduce interest rates they stimulate the economy by a producing a positive wealth effects because the lower interest rate raises the present value of most investments be making it easier to buy items and credits because the monthly payments decline raising demands especially for interest rate sensitive items like durable goods and housings and see reducing

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service burdens which improves cash flows in spending mp1 is tightly to first approach to

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crisis but when...
short-term interest rates hit around 0% it no longer works effectively so central banks must go to a second type monetary policy - quantitative easing to you II as it is now called in example printing money and buying financial assets Seikaly death assets is monetary policy - it works by affecting the behavior of investors savers as opposed to borrowers spenders because it is driven by purchases of financial assets typically that assets that impact investors savers the most when the central bank buys a bond it gives investors savers cash which they typically used to buy another financial assets that they think is more attractive what's they do with that money and credit makes all the difference in the world when they invest in the sorts of assets the final spending the stimulates the economy when they invest in those that don't such as financial assets there must be very large market gains before any money trickles down to spending and the spending comes more from those who have enjoyed the market gains than from those who haven't in other words Chile certainly benefits investors savers and example those who want financial assets much more than people who don't thus whitening the wolf gap while MPT is generally less effective than interest rate changes it is most effective when risk and liquidity premiums are large because because those premiums to fall when risk premiums are large and money's added to the system actual risks are reduced at the same time...
that there is more money seeking returns which triggers purchases of riskier assets there are often higher respective returns driving their prices off and producing a positive wealth effect but over time the use of quantitative easing to stimulate the economy declines in effectiveness because risk premiums are pushed down and asset prices are pushed up so levels beyond which they are difficult to push further and the wealth effect diminishes in other words a higher prices and a lower expected returns the compensation for taking risk becomes too small to get in there stupid prizes up which would drive prospective returns town Riddler in fact the rewards a risk ratio could make those who are long lots of assets view that terribly returning asset called cash as more appealing as a result Juhi becomes less and less effective if they provide QE and private credit growth doesn't pick up policymakers feel like they're pushing on a string at this stage policymakers sometimes monetize

debt

in even larger quantities in an attempt to compensate for its declining effectiveness while these can help for a bit there is a real risk that's prolonged monetization we lead people to question to currency suitability as a store holder value these can lead them to start moving to alternative currencies such as gold the fundamental economic challenge most economies have in these phases is that a claims on preaching power are greater and the abilities to make them think of it this way...
there are only goods and services financial assets are claims on them in other words holders of investment assets in example capital assets investors believe that they can convert their holdings into purchasing power to get building services at the same time workers expect to be able to exchange a units worth of their contribution to the production of goods and services into buying power for goods and services but since that's money currency have no intrinsic value the claim on them are greater than the value of what they're supposed to be able to buy so they have to be devalued or restructured in other words when there are too many

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liabilities assets they either have to be reduced wayde's after restructuring or monetized policymakers tend to use monetization at this stage primarily because it is stimulated rather than contractionary but monetization simply swaps one I owe you

debt

for another newly printed money the situation is analogous to a Ponzi scheme since there aren't enough goods and services likely to be produced to back up Olli io u--'s there's a worry that people may not be willing to work in return for all yo use forever low interest rates together with low premiums on risky assets pose a structural challenge for monetary policy with monetary policy one interest rates and monetary policy - once it's a - easing a theron limits the central bank has very little ability to provide stimulus through these two channels ie monetary policy...
has the legal gas in the tank this totally happens in the later years of the long-term

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cycles AG 1937-38 and now in the US which can lead to pushing on a string when this happens policymakers need to look beyond QE so the need forms of monetary and fiscal policy characterised by monetary policy three monetary policy three monetary policy three puts money more directly into the hands of spenders instead of investors savers and incentive Isis them to spending because wealthy people have fewer incentives to spend their incremental money and credits they get then less wealthy people when the wealth gap is large and the economy is weak directing spending opportunity at less wealthy people is more productive logic and history show us that there is a continuum of actions to stimulate spending that have the Ryan degrees of control to them as one ends are coordinated fiscal and monetary actions and which fiscal policy makers provide stimulus tiredly three government spending or indirectly by providing in census for non-government entities to spend at the other end the central bank can provide helicopter money by sending cash directly to citizens without coordination with fiscal policy makers typically though not always there is a coordination of monetary policy and fiscal policy in a way that creates incentives for people to spend on goods and services central banks have can also exert influenced very Mon croak Prudential policies that help to shape things in ways that are...
similar to how fiscal policies might for simplicity I have organized that continuum and provided reference to specific prior cases of each below one an increasing depth financed fiscal spending sometimes this is Perry with the QE that buys most of the munitions he change upon in the 1930s US during World War two US and UK ended to thousands seeing increasing

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fines to fiscal spending red the Treasury isn't on the hood of the

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because a the central bank can prints money to cover the payments eg Germany in the 1930s be the central bank can lend to entities other than the government that will use it for stimulus projects eg lending to development banks in China in 2008 three not bothering to go through issue in depth and instead giving newly printed money directly to government suspends past cases have included printing fiat currency eg in Imperial China numerical revolution the USA were were Germany in the 1930s and the UK during World War two or debasing hard currency ancient rain Imperial China 16th century England for printing money and joins I read cash transfers to households ie helicopter money when we prefer to early capital money we mean directing money into the hands of spenders eg US veterans bonuses during the Great Depression Imperial China how that money's attracting could take different forms the basic variants are either to direct saying announce to everyone or aim for some degree of helping one or more groups over others eg giving money to the...
poor rather than to a rich the money can be provided as one-off over time perhaps as a universal basic income all of these variants can be paired with an incentive to spending such as the money disappearing if it's not Spencer within a year the money could also be directed to specific investments accounts like retirement of Education oral cancer earmarked for loan business investments targeted towards socially desirable spending investment another potential way to craft a policy mr. distribute earns Holdings from QE to households instead of to the government big tech rights are accompanied by big money creation the Year in Jubilee as a quote in ancient Rome the Great Depression in Iceland well I want to offer opinions on each of these I will say that the most effective approaches involve fiscal monetary coordination because that ensures that both the providing and the spending of money will Accord if central bank's just give people money helicopter money that's timely less adequate than giving them that money with incentives suspended however sometimes it is difficult for those who save monetary policy it's a coordinated with those whose at fiscal policy in which case other approaches are used also keep in mind that sometimes the policies don't fall exactly into these categories as they have elements of more than one of them for example if the government gives a tax break that's probably not early capital money but it depends on how is financed the...
government can also spend money directly without a lung financed by the central bank that is le capital money through fiscal channels while central bands influence our coasts and availability of credits for the economy as a whole they also have powers to influence the coast ascent availabilities of credit which targeted parts of the financial system through their regulatory authorities these policies which are called macro prudential policies are especially important when it's desirable to differentiate entities eg when it is desirable to restrict credits to an overly active area with simultaneously stimulating the rest of the economy or when it is desirable to provide credit to some targeted entities but not provided prudently micro-prudential policies take numerous forms that are valuable in different ways in all seven stages of the big

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cycle because explaining them here would require too much of the depressions there are explained in some des indépendants seven thermalization eventually the system gets back to normal though the recovery in economic activity and capital formation tends to be slow even during a beautiful deleveraging it typically takes roughly five to ten years has the term lost a decade for real economy activity to Richards form a peak level any type Hui takes longer around a decade for stock prices to reach form the highs because it takes a very long time for investors to become comfortable taking the risk of holding equities again in example I...
could see at risk premiums are high now that you have this

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for deflationary depressions mind I encourage you to read to detailed accounts of the US 2007 2011 and 1928 1937 beat death cycles shown in part 2 and then look at the summary statistics in Auto text of the timing on case studies shown in part three inflationary depression and currency crisis in the previous section we looked at the archetypal deflationary depth crisis which we created by averaging the 21 deflationary cycles you can review in part 3 we will now look at their catapult inflation crisis which we created by averaging the 27 worst cases of inflationary cycles also shown in part three after reviewing this

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I encourage you to read about the hyperinflation in Germany's Vollmer Republic which is examined in depth in Part C to compare it to their catapults case described here before we turn to the charts and outer data please remember that currency and depth served two purposes so be one mediums of exchange and see store holds of wealth that is one person's asset in another's liability that is a promise to pay in a certain type of currency eg dollars Iranian pesos etc holders of

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assets expect to convert them into money and then it's a good and services down the road so they're very conscious of the rate of its loss of purchasing power ie inflation related to the compensation ie to interest rate they get for holding it central banks can only produce the type of money and...
credits that they control eg the Fed makes dollar denominated money and credits the BOJ makes Japanese yen money and credit etc through sign biotics relationship over time central banks and phim market borrowers and lenders technically create bigger and bigger ponds of

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s assets and

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liabilities the bigger to pile the greater the challenge for central bankers to balance the opposing pressures so the pile doesn't topple over into the flash and airy depression in one direction or an inflationary depression in the other policymakers those who control monetary and fiscal policies can usually balance these opposing for end up prices because they have a lots of power to redistribute the burdens so they are spread out though they can't always balance them well central bank's tactically relieved that crisis by printing a lot of the currency which attacks is Dena which while stimulating spending on investment assets and the economy also cheapens the value of the currency all else being equal if the currency Falls in relation to another currency has a rate that is greater than the currencies interest rate the holds are up the

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the weakening currency will lose money if investor expects weakness to continue without being compensated for higher interest rates a dangerous currency dinah will develop the last dynamic ie the currency dynamic is what produces inflationary depressions holders of

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denominated in the poorly returning currency are motivated to sell it...
and move their assets into another currency a renowned currency store hold of wealth like gold while there is a

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crisis and economic weaknesses in a country it is typically impossible for the central bank to raise interests rates enough to compensate for the currency weakness so the money leaves that country and currency for safer countries when so much money leaves the country that lending dries up the central bank is faced with the choice of letting the credit markets tighten or printing money which produces a lot of it while it is widely known the central banks manage the trade-offs between inflation and growth by changing interest rates and liquidity in the system what is not widely known is that the central banks trade-offs between inflation and growth are easier to manage one man is flowing into country's currency

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and more difficult to manage when it's flowing up that's because if there is more demand for the currency

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that will push the currency that prices up which all else being equal will push inflation down and growth up assuming the central bank keeps the amounts of money and credit study and there is less demand the reverse that will happen how much would changing demand there is for a country's currency

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will create changes in the currency versus changes in interest rates will depend on how the central bank moves its levers which I'll cover below for now suffice it to say that sometimes when my knees flowing go to the...
currency real interests raids meet sue riseling rates for more and vice versa capital outflows tends to happen when an environment is inhospitable eg because depth economic and/or political problems exists and they are tightly weaken the currency a lot to make matters worse those who fund their activities in the country the hostile weaker currency by borrowing the stronger currency see their depth coasts or that drives down the weaker currency related to the stronger one even more for these reasons countries with the worst

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problems lots of

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s a nominated in a foreign currency and hides eye pendants on foreign capital tightly have significant currency weaknesses the currency weakness is what causes inflation and there is a depression normally these all runs its course on the currency and the

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prices goes down enough to make them very cheap more specifically the squeeze ends when a the depths are defaulted and or enough money is created to alleviate the squeeze B the

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service requirements are reduced in some other way eg forbearance and/or see the currency depreciates much more than inflation picks up so that the country assets and the items it sells to the world becomes so competitively priced that its balance of payments improves but a lot depends on politics if the markets are allowed to run their courses the adjustments eventually take place and the problems are resolved but if the politics get so bad the productivity is thrown into a self-reinforcing...
downward spiral that spiral can go on for a long time which countries currencies are vulnerable to severe inflationary deleveraging x' or hyperinflations while inflationary depressions are possible in all countries and currencies they are far more likely in countries that don't have a reserve currency so there is not so global bias to hold their currency

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s as a stronghold of wealth have a low foreign exchange reserves the cushion to protect again capital outflows a small have a large foreign

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so there is a vulnerability to the coast of the

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rising var increases in either interest rates or the value of the currency fits after has to deliver or a shortage of the availability of dollar it's a nominated credit have large and increasing budgets and whole currents a account deficit causing the needs to borrow or prints money to fund deficits have negative real interest rates ie interest rates that are significantly less than inflation rate therefore inadequately compensating lenders for holding the currency

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have a history of high inflation and negative totally returns in the currency increasing lack of trusts and the value of the currency tax generally speaking the greater the degree to which these things exist the grace of the degree of the inflationary depression the most iconic case is determined by our republic in the early 1920s which is examined at a lens in Part C if you're interested in revealing actual case studies showing the reasons why...
inflationary depressions happen rather than deflationary ones it is worth noting the difference between the Weimar case study and the u.s. Great Depression and 2007 2011 case studies which are also examined in part so can reserve currency countries that don't have significant foreign currency

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having inflationary depressions while they are much less likely to have inflationary contractions that are as severe they can have inflationary depressions though they more slowly and later he did the leveraging process after a sustained and repeated RV use of stimulation to reverse deflationary into leveraging any country including one with a reserve currency can experience some movements out of his currency with the changes the severity of the trade-off between inflation and growth described earlier if reserve currency country permits much higher inflation in order to keep growth stronger by printing lots of money it can further undermine demand for its currency erode its reserve currency status eg make investors view as less efficient or hold of wealth and turn its the leveraging into an inflationary one the faces of the classic inflationary

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cycle classically inflationary deleveraging x' followed the ebbs and flows of money and credit through five stages that mirror into stages of deflationary deleveraging x' but that are different in important ways over the past few decades I have navigated through a number of inflationary develop urgings and researched many...
more they transpire pretty much as deflationary see leveraging - up until the fourth stage the depressions I'll begin this section with a look at the stages of the Orcas fail inflationary deleveraging just as they did in the prior section this archetype was created by averaging 27 inflationary deleveraging x' in which there was lots of

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denominated in foreign currencies then I'll compare the archetype to for specific hyperinflation cases in order to highlight very differences one the early parts of the cycle in the LC upswing favorable capital flowers are a result of gilt fundamentals ie because the country is competitive and there is potential for productive investment at this point that levels are low and balance sheets are healthy that simulates expert sails and hence foreign capital which funds investments that produce good returns and yield productive growth capital flows both within countries and among them are typically the most important flows to watch because they are the most volatile as the cycle begins

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and incomes rise as adding comparable rates and both

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and equity markets are strong which encourages investing often Wood borrowed money the private sector governments and banks start Sbarro which makes sense for them because incomes are rising quickly making it's easier to serve as a

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these trunk fundamentals and early levering up said the country up for a boon that in turn attracts more capital the positive self reinforcing cycle...
is enhanced when the demand for the currencies of improving if the currency is cheap enough to offer attractive opportunities to foreign investors cool type of Lidl NC or investing entities that can produce inexpensively in the country and selling to exports markets super into foreign currency to provide them with a good return as or in the country sells more to foreigners than it buys from them a country's balance of payments will become favorable ieave him enough for its currency will be greater than in supply this makes the central banks jobs easier ie it can get more growth per units of inflation because the positive inflows can be used to appreciate the currency to lower interest rates and order to increase reserves depending on how the central bank chooses to handle it at this time of early currency strength some central bank's choose to enter the foreign currency exchange markets to sell their own currency for their incoming foreign currency in order to prevent from rising and to prevent adverse economic effect of its rise if the central bank does this needs to do something with that newly acquired currency which is to buy investment as denominated in that's foreign currency as typically bonds and put them in an account hold foreign exchange reserves foreign exchange reserves are life savings they can be used to bridge imbalances between the amounts of currency demanded and the emancipation of the Kushans movements of the currency markets they can also be...
used to purchase assets that might be desirable investments where Alfred strategic returns the process of accumulating reserves is simulated to the economy because it lessens the upward pressures on their own currency which allows a country simultaneous drawing or expert competitiveness and puts more money in the economy since central banks need to create more money supply the foreign currency doing that increases the amount of domestic currency funds to either buy assets causing an asset prices to rise or lends out at this juncture the currency total return will be attractive because either a that those who once you buy what the country has to offer needs to sell their own currency and buy the local currency or be the central bank will increase the supply of its own currency and sell it for the foreign currency which will bank the currency assets go up when measuring in its own currency so during this time when a country has a favorable balance of payments there is a net inflow of money that leads to the currency appreciating and orth the foreign exchange reserves increasing listen flicks of money stimulates the economy and causes that countries markets arise those invested in the country make money from the currency return three combination of currency price changes in asset return differences and/or the asset appreciation the more the currency appreciates the less assets will appreciate to the bubble the bubble emerges in the midst of a self-reinforcing virtuous cycle of...
strong capital flows good asset returns and strong economic conditions the capital that came in during the early ab swing produced good returns as it was invested productively and lets you asset price appreciation which have tried to even more capital in the bubble phase the prices of the currency and/or the asset get beat up and increasingly financed by bet making the prices of these investments too highly to produce adequate returns but the borrowing of mine continues because prices are rising and so that's rise rapidly relatives incomes and there is a big wave of money coming into and/or staying in a country or currency typically the exchange rate is strong foreign exchange reserves increase and the economy booms or in some cases the currency raises lots and the economy grows more slowly this upswing tends to be self reinforcing until it is so overdone that it reverses its self reinforcing because the inflows drive up the currency making it desirable to hold assets denominated in it and desirable to hold liabilities they nominated amount of currencies and or produce for money creation that causes prices to rise mode in either case during these bubbles the total returns of these assets of foreigners ie as a prices in local currency plus the currency appreciation are very attractive that plus that country's hearts economic activity encourage more foreign inflows and fewer domestic outflows over time the country becomes a hard place to invest and its assets become...
over boat so depth and stock market bubbles emerge investors believe the country's assets are a fabulous treasure to own and anyone as in the country is missing out investors who were never involved with the market rush in when the market gets fully long leveraged and overpriced it becomes ripe for a reversal in the balance here and the ones that follow we show some key economic developments typically seen as the bubble deflates ballot one foreign capital flows are high on average around 10 percent of GDP ballot see the central bank is accumulating foreign exchange reserves ballot 3 the real effect is speed up and becomes overvalued on a purchasing power parity PPP basis by around 15 percent bullet for stocks rally an average by over 20 percent for several years into their peak all sorts of entities builds up structurally long currency position because there is constant reward for doing that most participants are motivated to belong the currency of the country that is enjoying a sustained wave of investment into it though they often find themselves into this position without explicitly taken it or fully recognizing it for example foreign businesses the sets of operations in the hot country might fund their activities with their own currency to keep the liability in the currency that they expect will be weaker but they might prefer to hold their deficits in the local currency and they might not hedge the currency exposure the come from the revenues of sales in that country...
similarly local businesses might borrow in the weaker foreign currency which the foreign bankers are eager to lend because the market is hot there are lots of different ways there is a saint's bull bull market rule it's a multinational entities gets in London that local currency 1 the influx of foreign capital finance is a billion in consumption say imports raise faster than exports and the current accounts worsens meanwhile investments in a country creates strong growth and rising incomes which make borrowers in a country more creditworthy and make them more willing to borrow at the same time the lenders are more willing to lend to them high expert Rises usually for commodities increase the country's income and incentivize investments as the bubble emerges there are fewer productive investments and at the same time there is more capital going after them the fundamental attractiveness of the country the sparked the boom fades in part because the rising currency is eroding the country's competitiveness during this stage growth is increasingly financed by

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rather than productivity gains and the country technically becomes highly reliant on foreign financing this shows up and foreign currency denominated Zep pricing these emerging countries typically borrowed primarily from the Broads with

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s denominated in foreign currencies because of combination of factors including the local financial system not being well developed less faith in lensing local currency...
and a small stock of domestic savings available to be lent out as it prices rise and the economy strong this creates both higher levels of spending in the economy and higher levels of obligations to pay and foreign currency in order to make such service payments as with all

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cycles the positive effects come first and the negative effects come later

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burdens rise past that t GD P R Rises an annual rate of about 10% over three years foreign currency that rises on average around 35% of total depth and around 45 percent of GDP psychically the level of economic activity ie the GDP gap is very strong and growth is well above potential leading to tight capacity as reflected in a GDP gap of around +4 % the chart below convey what happens to depth and the current account in the average the tiny 7 inflationary the leverage in cases which we will call the archetype just as I did the deflationary deleveraging archetype charts highlights each of the stages with the zero points and the charts representing the top in economic activity classically during the bubble death is a percentage of GDP rises from around 125 percent to about 150 percent and the current account deteriorates by about say percent of GDP during the bubble the gap between countries income and it's finding widens the country requires an increasing inflow of capital to drive continued growth in spending but levels of economic activity can remain strong at the top of the cycle only as long as continued inflows...
motivated by expectation of continuous high growth drive up asset prices and caused the currency to strengthen further at this point the country is increasingly fragile and even a minor event can trigger a reversal below we summarize the conditions through hump swings that led to the 27 inflection area to leveraging zulu cadets we break out the places where higher l our levels of foreign denominated

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and the cases that eventually have the least and most extreme economic outcomes as measured by measure severe decline in growth and equity prices and increases in unemployment and inflation as you will see the countries that were most externally reliant through the upswing and experienced the best asset bubbles ultimately experienced the most painful outcomes three the top and currency defense the top reversal currency defense occurs from the bubble bursts ie when the flows that caused the bubble and the high prices of the currency level the higher surprises and behind that growth rates finally become unsustainable this sets in motion a mirror opposite cycle from what we saw in the upswing in which we can in capital in fluid mean asset prices curves deteriorating economic conditions which in turn coasts capital flows and our surprises to weaken further the spiral sends the country into a balance of payments crisis and an inflationary depression because at the top people are so invested in the optimistic scenario and because that's optimism is reflected in the prices even...
a minor events can trigger is slowing or flowering capital inflows and increasing domestic capital outflows the worsening trade balances psychically play a role usually because of the high currency level and excessive domestic consumption the letter high imports and first shifts in capital flows are usually more important these circumstances that killed sets off such a crisis are akin to what might sets of financial difficulties for a family or individual a loss of in or credit tightening a big increase in costs such as a rising gasoline or hitting all black prices or having borrowed so much that repayments becomes difficult any one of these shocks would create a gap between the amounts of money coming in and the amount of money being spent which has to be closed somehow in the typical cycle the crisis arises because the unsustainable pace of capital that drove the bubbles lows but in many cases there is some sort of a shock like a decline in oil prices for an oil producer generally the causes of the top reversal holding too few categories one the income from selling goods and services to foreign foreigners drops eg the currency has rising to a point where it's made the country's exports expensive commodity exporting countries may suffer form of fault in commodity prices see the costs of items bowed from abroad or the coast of borrowing rises three declines in capital flows coming into the country eg foreign investors reduced their nets flensing or nests investments...
into the country this occurs because Eddy the sustainable pace naturally slows be something leads to greater worries about economic or political conditions or see a tightening of monetary policy in the local currency and/or in the currency those

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s are denominated in or in some cases tightening abroad creates pressure for foreign capital to pull out of the country for a country's own citizens or companies once you get their money out of their country currency weakening capital flows are often the first shoe to drop in a balance of payment crisis they directly cause growth to weaken because the investments in consumption they had been financing is reduced these makes domestic borrowers seem less creditworthy which makes foreigners less willing to lend and provide capital so the weakening is self-reinforcing growth slows relative to potential as the pay's of capital inflows as lowe's domestic capital outflows pick up a bit exports earnings fall sits a folding prices or following quantities sold typically experts are flats no longer rising the shift in capital and income flows drives asset prices down and interest rates up slowing the economy growth rates that way are depended on the inflows this worsens the fundamentals of companies and further drives out capital flows the economy suffers a depth bust as the prices fall and banks fail during this stage were increases on the part of both asset currency holders and the policy makers who are trying to support the...
currency asset currency holders psychically worried that policymakers will impose restrictions on their ability to get their money out of the country which encourages them to get their money out while the silk in which further increases the balance of payments problems policymakers worry about capital outflows and the possibility of a currency collapse as the balance of payments is Jiri rates central bank's job becomes more difficult ie it gets less economic growth per unit of inflation because the negative flows leads currency to depreciate interest rates to rise and or reserves to decline depending on how the central bank chooses to handle it at this stage central banks typically try to defend their currencies by a filling the balance of payments deficit by spending down reserves and/or be raising rates these currency defenses are managed currency declines rarely work because the settling of reserves and Lord erasing of interest rates creates more of an opportunity for sellers while it doesn't made currencies and interest rates to the levels that they need to be to bring about sustainable economic conditions let's look at this tactical defense and why it fails there is a critical relationship between a the interest rate difference and B this part forward currency relationship the amounts the currency is expected to decline is priced and so how much less the forward price is below the spots price for example if the markets expects the currency to fall by 5...
percent over a year it will need that currency to ldae 5% higher interest rates the math is even starker when depreciation is expected over short periods of time if the markets expects be 5% depreciation of Vermont then it will need that currency to ield a 5% higher interest rate over that month and a 5% monthly interest is equivalent to an annual interest rates of about 80 percent a level that's likely to produce a very severe economic contraction in an already with wake economy because a small expected currency depreciation say five to ten percent in a year would equal a large interest rate premium five to ten percent per year or higher this path is intolerable said differently a managed currency decline accompanied by falling reserves causes the market to expect consider future currency depreciation which pushes up domestic interest rates as described above acting as a tightening at a time when the economy is already weak also the expectation of continuity valuation we'll encourage increased capital withdrawals and devaluation speculation widening the balance of payments gap and forcing the central bank to spend down more reserves to defend the currency or abandoned plant gradual depreciation also a currency defense by spending reserves will have to stop because no sensible policymakers will want to run out of such savings in such currency defenses policymakers especially those defending a peg will typically make boldly confident statements vowing to stop the...
currency from weakening all of these things classically happen just before the cycle moves to its next stage which is letting the currency go it is psychical during the currency defense to City forward currency price decline ahead of the spot price this is consequence of the relative relationship between the interest rates differential and the spots for were currency pricing that I discussed above to the extent that the country tightens monetary policy to try to support the currency they are just increasing the interest rate differential to artificially hold up the spot currency wildly supports the spots the forwards will continue to decline related to it as a result what you see initially is a whip-like effect and forward tends to leave the spot downward as the interest rate differential increases the spot then eventually catches up after the currencies let's go and the following despot exchange rates allows the interest rate differential Janeiro which mechanically causes the forward to rally relative to the spots at this point in the cycle capital controls are a third often in last-ditch lever that seldom works they can seem attractive to policy makers since they directly cause fewer people to take their capital out of the country but history shows that they usually fail because a investors find ways to gets around them and be the very act of trying trap people leads them to want to escape the inability to get ones money out of the country is analogous to one's...
inability to get ones money out of a bank fear of it can lead to a run still capital controls sometimes can be a temporary fix though in no case they are they is the same fix usually this currency defense phase of the cycle is relatively brief in the vicinity of six months but reserves thrown down about 10 to 20 percent before the defense is abandoned for depression often when this currencies let go as mentioned above the country's inflationary deleveraging is analogous to what happens when a family has trouble making payments but one major difference I like a family a country can change the amount of currency that exists and hence its volume that creates an important level of countries to manage balance of payment pressures and that's why the world doesn't have one global currency changing the value of the currency changes the prices of a country's goods and services for foreigners at a different rate than it does for its citizens think about it this way if a family's breadwinner lost his or her job and would have to take a 30 percent pay cut to get a new one that would have devastating economic effects on the family but when a country devaluates its currency by 30 percent that pay cut becomes a 30 percent pay cut only relative to the rest of the world the wages in the currency the family cares about stay the same in other words currency declines allow countries to offer price cuts to the rest of the world helping to bring in more business without...
producing domestic deflation so after supporting the currency in unsustainable ways ie expanding reserves tightening monetary policy making very strong assurance that there will not be a devaluation of the currency and sometimes imposing foreign aid controls policymakers type girlie stop fighting and lets a currency decline though they generally try to smooth its fall here is what we talk felici after policymakers led to currency go the currency has a big initial depreciation on average decline in Iran 30% in real terms their decline in the currency is not upset by tighter short trades so that the losses from holding the currency are significant on average around 30 percent in the first year because the decline is very severe policymakers try to move it leading them to continue to spend down reserves on average by another 10% for a year into the bust central bank's should not defend their currencies to the point of letting their reserves get too low or their interest rates too high related to what is good for the economy because the dangers those condition pose are greater than the dangers of devaluation in fact his evaluations are stimulated for the economy and markets which is helpful during the economy contraction the currency decline tends to cause assets to rise in value measured in that weakened currency stimulate expert sales and help the balance of payments adjustment by bringing spending back in line to it income it also lowers imports by making them more...
expensive which favors domestic producers makes assets into currency more competitively priced and attractive create Spezza profit margins for its product Goods and sets the stage for the country to earn more income from the broke through cheaper and more competitive experts but currency declines are a double-edged swords how policymakers manage them greatly impacts the amount of pain the economy must injured during the adjustment not sure if the currency decline greatly impacts how much inflation increases and how the inflationary depressions plays out in all inflationary depressions currency weakness translates to higher prices for imported goods much of which is passed on to consumers resulting in a sharp rise in inflation the gradual and persistent currency decline causes the market to expect continued future currency depreciation which can encourage increased capital with travel and speculation widening the balance-of-payments gap a continual devaluation also makes inflation more persistent feeding and inflation psychology that's why it's generally better to have a large one of devaluation that gets the currency to a level where there's a two-way market for it ie where there is an improved expectations' that the currency will continue to awaken so people are both buying and selling it these means higher inflation is less likely to be sustained and if the one-off devaluation isn't expected by the market is a surprise then policymakers once have to...
spend reserves and/or allow interest rates to rise to defend the currency going into devaluation this is why policymakers generally say they'll continue to defend a currency right up until the moments that they stop doing it after policymakers first let the currency go singing savers and creating expectations fears of further devaluation people push to get out of their position in the currency many people have likely acquired big assets liability mismatches taken on because they were profitable at the time that makes the reversal self-sustaining because when the currency weakens the mismatches of all of a sudden go from being profitable to unprofitable when the capital is no longer available the spending is first to stop even those who aren't borrowing from abroad are impacted since once person spending is another person's income the effects ripple through the economy causing job losses and still less spending growth brings to a halt lenders especially domestic banks have

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problems foreigners become even less willing to lend and provide capital cyclically capital inflows try up falling fast by more than 5% of GDP in less than 12 months capital outflows continue at a pace of 3 to 5 percent of GDP target elite to pull back in capital is not offset much by the central bank printing money printing risks enabling more people to get out of the currency were sending copies of flights weaker growth causes investors to pull their money out so anyway the assets that had...
been seen as a fabulous treasure a short time ago now look like trash they quickly go from another boat to another salt and platon prices plummet nominal short rates rise typically by about 20% points and a yield curve inverts printing is limited one to two percent of GDP an average equities in the local currency turns fall on average by around 50% they perform even worse in foreign currency turns ass occurrence a decline exacerbates the equity sell-off one of the most important asset liability mismatches is foreign denominated

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as their local currency depreciations

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ors who all foreign currency depths face a rising

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burden in local currency there is not much the borrower's can do so they typically sell local currency to pay back

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s put on edges and move more savings into foreign currency all of which contributes to further to the cycle of downward pressure on the local currency

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services rise further on average by more than 5% of GDP because incomes fall and foreign currency denominated

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service becomes higher when measured in local currency further squeezing incomes and spending affects

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burdens rise on those who borrowed in foreign currency effects that burdens rise on those who borrowed in foreign currency

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to GDP Rises on average by about 20% from the decline in incomes on the currency the currency declines also push up inflation as imports become more expensive inflation Rises tightly by 15% picking around 30% inflation stays elevated...
for a while on average for about two years from the top during this phase two pendulum swings for most of everything looking great to most everything looking terrible different types of problem that economic political currency etc for us each other hidden problems like fraudulent accounting and corruption cyclically come to the surface during such times there's bad environments discouraged is fareed money from coming in encourages domestic investors to get their money out of the country this is when countries usually hit the button the button is the mirror opposite of the bubble stage while investors during the bubble are aggressively getting in investors during the catharsis are aggressively getting out those losing money in assets in currency positions flee from them in a panic those who have been thinking of getting in don't want to go near the place so a big supply demand imbalance of course in which a shortage of buyers and sellers of sellers drive prices lower this is the most severe and painful part of inflationary to leveraging as the downward spiral is self reinforcing and rapid it's in bottom aside cui is so painful that's it produces a radical metamorphosis in pricing and policies that ultimately produces the changes that are needed to turn things around that is why I use the word catharsis on describing hidsim button in theater or for that matter in one's own personal life crisis says the seeds for a change in ultimately renewal because the...
currency has become very cheap spending on imports is finally cut substantially enough to restore the balance of payments that's plus sometimes international aid eg from the IMF BIS and or other multinational organizations creating necessary adjustments often there are big political shifts from those who have been pursuing fundamentally bad policies to those who will pursue economically sound ones here are some key economic developments that characterized his face the level of economic activity GDP gap folds a lot on average by 8 percent unemployment crisis the bottom in activity comes after about one year with the three in the GDP gap cycling near minus 4% 5 normalization the reversal in eventual return to normalcy comes when there is a balance between the supply in the demand for the currency relates it to those of other currencies while this balance is partially made via trade adjustments it is Seikaly more determined by capital flows so it primarily comes on the central bank succeeds in making it desirable to hold the currency again and secondarily when spending and imports have fallen sufficiently to bring about an adjustment in the balance of payments so how can policymakers skip capital in the country by making it desirable to belong encouraging people to lend and save in the currency and not Sbarro in it most importantly they need to produce a positive total return for the currency it's an acceptable interest rate ie it's an interest rate that isn't...
too high for domestic conditions while most people including most policymakers think that the best thing they can do is defend the currency during the currency defense phase actually the opposite is true because your currency level a that is good for the trade balance B that produces a positive return and see that as an interest rate that is appropriate domestic conditions is the low one as explained earlier the best way to bring that's about is to let the currency depreciate sharply and quickly while that's will hurt those who are long that's currency it will make it more attractive for investors who will get the long of devaluation because the total return at holding the currency ie elispot currency appreciation plus interest rate difference is more likely to be positive and after shortly depreciated currency level it's one second intolerably higher interest rate to make the total return attractive in other words the best way to ensure that investors expect positive total returns going forwards at a relatively low interest rate which is what the weak domestic conditions need is to depreciate the current enough both balance-of-payments fundamental and essentials bags willingness to control money printing and currency depreciations determine whether the total return of the currency ie the currency changes plus interest rate differences will be positive or negative which will influence the willingness to on or be short the currency devaluing currency is like...
using a cane in that it provides short-term stimulation but is ruinous when a beast it is very important to watch what central banks do before you decide whether or not it's prudent to take a long position if investors are burns with negative returns for too long and the currency keeps falling that's frequently the breakpoint the determines if you're going to have an inflationary spiral or not the central bank's objective should be to allow the currency to get cheap enough that it can provide the needed simulation for the economy and the balance of payments while running a tight enough policy to make the returns of owning the currency attractive as you can see in the chart below returns to holding the currency for foreigners starts out negative then rarely about a year after the devaluation even if the country as a whole hasn't hit his

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limits frequently certain entities within the countries have and policymakers um's recapitalized systemically important institutions and provide liquidity in a targeted way to marriage but that's by providing this targeted liquidity technically by printing money where it needed they can help avoid a

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crisis that could be traction airy or could cause abductions of capital flight but the inflation in the air in nature of money printing needs to be balanced carefully here is what we type Lisi when the country reaches the bottom the collapse in imports improves the current account a lot on average by about 8% of...
GDP capital inflows top declining and sub you lies capital flight abates frequently the country turns to the for other international entities who support and a stable source of capital especially when its reserves are limited short trades start to come down after about a year but long rates continue to stay relatively elevated after peaking short trades fall back to their pre-crisis levels in around two years the decline in short trades is stimulative as interest rates come down the forward currency price rallies to related to the spots as the currency stabilizes inflation comes down usually it takes nearly two years after the bottom for inflation to reach pre-crisis levels of course there are all averages and the actual amounts dependent in each country's particular circumstance section the sizable and painful decline in domestic conditions also helps to clone the balance of payments gap they bring in down spending and imports through the crisis the average country's imports contracts by around 10% this growth collapses and the equity market Falls by over 50% classically the collapse in imports brings the current accounts into surplus of 2% of GDP rising from a deficit fir of minus 6% of the GDP about 18 months into the crisis in the earlier stages of the crisis experts play a smaller role they actually tend to contract during the worst of the crisis as other countries are sometimes seeing economic slowdowns too they rebound in the subsequent years typically it takes...
a few years for the country to recover investors who were burned on their investments from the last cycle are reluctant to return so elites can take some time before capital inflows because wrongly positive but the price of domestic goods and domestic labor fell with the currency so the country is an attractive destination for foreign investment and the capital starts to come back together hire experts on foreign direct investment growth if policymakers protects and recapitalize critical financial institutions the domestic financial pipelines are in place to support a recovery the country is back to the early part of the cycle and starts in a virtuous cycle where productive investment opportunities attracts capital and capital drives up growth and asset prices which attracts more capital income suspending pickup usually after about one or two years it then takes several years usually about three from the bottom before the level of activity is back to average the real FX is undervalued type lead by around 10% on a PP basis at the start of stabilization and stays cheap experts speak up a bit by a 1 to 2 percent of GDP capital in place starts to return a few years later on average four to five equities take about the same amount of time to recover in foreign currency terms the spiral form a more transitory inflationary depression to hyperinflation well in many cases policymakers are able to engineer a recovery in which incomes and spending pick up and inflation rates return Lord...
typical levels transitory balance of payments crisis a subset of inflationary depressions do spiral into hyperinflations hyperinflations consists of extreme levels of inflation goods and services prices more than doubling every year or worse coupled with extreme losses of wealth and severe economic hardship because these cases are more common than one might think it is worth walking through how inflationary depressions spiral into hyperinflations the most important characteristic of cases the spiral into hyperinflation is that policymakers done closed the imbalance between external income external spending and

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service and keep funding external spending over sustained it's of time by printing lots of money in some cases it's not voluntary Weimar Germany had a crashing external sort of that service Britain were recreation that for the most part couldn't be defaulted on the amount of capital that needed to flow to eyelids of the country was so great that it was all but destined that's why Murray would face big inflation problems see our case study from our collar in other cases policymakers choose to keep printing money to cover external spending in effect aiming to prop up growth rather than bringing spending in line with income if this is done repeatedly over the years and on a large scale a country might face in hyperinflation that could have otherwise been avoided as stated earlier contrary to the popular belief it's not so easy to stop printing...
money during a crisis stop it from printing on capitalist flour out can cause an extreme tightness of liquidity and often exhibit Kannamma contraction and the longer the crisis goes on the harder it becomes to stop printing money for instance in vienna germany there was literally a shortage of cash because the hyperinflation meant that the existing stock of money would buy less and less by late October 1923 to word the end of the crisis Germany's entire 1913 stock of who haven't just about gotten you a one killer love of rye bread to stop printing what half meant there was so little cash that commerce would have preferred chilly ground to a halt at least until they came up with an alternate currency in an inflation spiral printing money can seem like a prudent choice at the time but continuing to pre money time and time again fits the inflation spiral until there is no way out how the spiral plays out all the time as the currency declines and printing is used more and more people begin to shift their behavior and an inflationary psychology sets in currency declines inspire additional caps of light which causes an escalating feedback loop of depreciation inflation and money printing eventually linkages that drive growth in earlier rounds decline and money printing become less effective with each wagons of printing more of the printed money is transferred to real or foreign assets instead of being spent on goods and services fueled economic activity since investors that...
shorted cash and boats real foreign assets repeatedly better off than those who saved and invested domestically domestic currency holders shift from investing the printed money productive assets to real assets like gold and foreign currency in order to hedge inflation and a deterioration in their real wealth foreign investors stay away because the economy's weak and investors are buying real assets stocks suffer and no longer provide the wealth effect that drove earlier rounds of spending the result is a currency devaluation that doesn't stimulate growth this dynamic is important to inflationary deleveraging so we'll walk through it in detail when continual currency declines lead to persistent inflation it can become self reinforcing in a way that nurtures inflation psychology and changes investors behavior a key way this occurs is when inflation pressures spread to wages and producer wage costs to spiral workers demand higher wages to compensate for the reduced purchasing power compelled to raise wages producers increase their prices to compensate sometimes this happens mechanically because of wage indexing contracts in which employers agree to increase wages with inflation as it's normal in such cases of price and wage indexing a vicious cycle is a stab the currency depreciates internal prices rise the increase of the quantity of paper money once morold hours the value of the currency prices rise once more and so one with each successive currency decline...
savers and investors also change their behavior savers who weren't before now move to protect their purchasing power they are quicker to shorts cash and buy foreign and physical assets as inflation worsens bank depositors understandably want to be able to get their funds on the short notice so they shorten their lending to banks deposits move to short-term checking accounts rather than long return savings investors shorten the duration of their lending or stop lending entirely because they are worried about risks of default of Garet or getting paid back in worthless money during inflationary deleveraging z' average of

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maturities always fall it's also cheap too short cash as higher inflation and money printing lower real interest rates so the withdrawal of capital and faster borrowing cuz illiquidity in the financial system banks find it practically impossible to meet the demand for cash no longer able to fulfill their contracts because of cash shortages businesses also suffering at this point the choice for central banks or remembered the benefits of the previous round of currency declines is between extreme illiquidity and printing money that's an accelerating rate and a path is again outlives ie it's a print they provide liquidity by printing money to support the banks and often lensing directly to the businesses when interest rates are insufficient to compensate for future currency declines this provision of liquidity provides the funds that's...
enable investors to continue to borrow and investor breads and in inflation hedges like real assets or gold which further contributes to inflation and depreciation spiral because much of the country stats is denominated in a foreign currency that burdens rise on the currency Falls which requires spending cuts and asset sales while these effects was originally overcome by the stimulation of the falling currency it becomes increasingly devastating as that's effects fades and attempt Britain grows these higher

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burdens also mean foreign investors wants higher interest rates as a compensation for the risk of default this means that the currency declines Anne's inflation often increased at service and

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burdens making it even harder to stimulate through the currency many governments respond to rising

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burdens by raising taxes on income or wealth with their net worths already eroding because of the bad economy and they are falling investments the wealthy desperately tried to preserve their rapidly shrinking wealth that's all costs this leads to extremely high rates of tax evasion and increases the flights of capital of brides this is type kolinda leveraged ins as growth weakens further the lack of foreign lending shuts down an important source of creation and while there is a lots of the massive credit creation and borrowing this borrowing does not result in much growth because so much of it expensive roads on foreign assets of the spending that does occur...
locally much of it doesn't contribute to GDP for example investors buy lots of gold factories or imports even drugs in the case my Vimal republic as the story holds of wealth capital investments like machinery and tools are purchased the store's value nuts because they were needed it's easy to see how these forces can create a feedback mechanism that causes inflation and currency declines to escalate until people's completely lose faith in a currency money loses its role as a store of value and people hold at Mesa few days reserves the long list of zeros also makes it's an impossible unit of account money also breaks down as a medium of exchange because the currency instability makes producers unwilling to sell their products for domestic currency and producers of demand payments in foreign currency or Bota because there is a shortage of foreign exchange a liquidity reaches its peak and demand collapses this forum of illiquidity can't be relieved by money printing stores clothes and unemployment rises as the economy enters hyperinflation it contracts rapidly because the currency declines that where once beneficial now just creates chaos in addition seed causing an economic contraction hyperinflation wipes as financial wealth as financial assets failed to keep pace with currency depreciation and inflation hyperinflation also causes extreme wealth the redistributions lenders see their wealth gets inflated away as do doctors liabilities economic...
contractions extreme wealth redistribution and chaos creates political tensions and flashes frequently public servants like police officers gaol once tried because they don't want to work for worthless paper money disordered crime looting and violence thankfully reached their peak during this phase environment Germany the government's had to respond to the disorder by issuing a state of siege ransom military authorities greater power over domestic policies such as carrying out arrests and breaking up demonstrations investing during a hyperinflation has a few basic principles get short the currency do whatever you can to get your money out of the car buy commodities and invest in commodity industries like Gold's coal and metals buying equities isn't mixed back investing in the stock market becomes a losing proposition as inflation transitions to hyperinflation instead of there being a high correlation between the exchange rates and the price of shares there is an increasing the virgin's between share prices and the exchange rates say during this time Gold's becomes preferred to asset holds shares are a disaster even though they rise in local currency and bonds are wiped out once an inflationary the leveraging spirals into a hyperinflation the currency never recovers its status as a store holds of wealth creating a new currency with very hard backing while phasing out the old currency is the classic path that countries follow in order to end inflationary...
deleveraging war economies or economies are totally different from regular economies in terms of what happens with the production consumption in accounting for goods services and financial assets for example the increasing GDP arising from the great's of reduction of armaments which get destroyed in the war the reduced unemployment rate due to increases in military service shifts in production and profits ability arising from the top-down allocation of resources and the nature of borrowing lending and other capital flows are not the same as in periods of peace so

understanding

these statistics requires a whole different orientation trying to adequately convey how were econ amis work would take a whole different book so I'm not going to delve deeply into the subject now but I will touch on them briefly because they certainly are important in

understanding

the the crisis that's where captured within our sampling period and they are very important to understand if we enter another word period the economic geopolitical cycle of economic conflicts leading to military conflicts both within and between emergent powerful countries and established powerful countries is Oakley's to anyone who studies history it's been well described by historians though those historians typically have more of a cheap political perspective and less of an economic market perspective than I do in either case it is well recognized as classic by historians the following sentence...
describes it as I say it's in a nutshell when one within countries there are economic conflicts between rich capitalists political rights and the poor proletariat political left that's lead to conflicts that results in populist autocratic nationalistic and militaristic leaders coming to power while at the same time - between countries there are conflicts arising among comparable strong economic and military powers the relationship between economics and politics become especially intertwined and the probabilities of disruptive conflicts eg Wars become much higher than normal in other words economic rivalries within and between countries often lead to fighting in order to establish which entities are most powerful in these periods we have war economies and after them markets economies and geopolitics all experienced The Hangover effects what happens you're in wars and as a result of wars have a huge effects on which currencies which deaths which equities and which economies are worth what and more profoundly on the whole social political fabric at the most big picture level the periods of war are followed by periods of peace in which dominant power in powers get to see the rules because no one can fight them that's country - the cycle begins again because of arrival covering merging appreciating this big economic geopolitical cycle that drives the ascendency x' and declines of Empires and their reserve currencies requires taking in much longer 250 year in...
timeframe which I will touch on briefly here and in more detail in a future report typically though notes always a times of economic rivalry emotions went high firebend populist leaders who prefer antagonistic paths are elected or come to power and worries occur however that is not always the case history has shown that through time there are two broad types of relationships and that's what of course depends on which type of relationship exists the two types of relationships are a cooperative competitive relationships in which the parties take into consideration what's really important to the other and try to give it to them in exchange for what they most want in this type of win-win relationship there are often tough negotiations that are done with respect and consideration like to friendly merchants in a bazaar or to friendly teams on the field B which will be threatening relationships in which the parties think about how they can harden the other and exchange painful acts in the hope of forcing the other into a position of fear so that's they will give in in this type of lose-lose relationship they interact 3 work rather than the renegotiation either side can force the second path threatening war lose-lose on to the other side but it takes both sides to go down to cooperative win/win paths both sides will inevitably follow the same approach back of the minds of all parties regardless of which path they choose should be very related powers in the first case each...
party should realize what the other could force on them and appreciated the quality of the exchange without getting too pushy while the second case the parties should realize that power will be defined by the release of abilities of the parties to ensure pain as much as their relative abilities to inflict it when it's isn't clear exactly how much power either side has to reward and punish the other side because there are many and tested ways the first path is the safer way on the other hand the second way will certainly make clear through the hell of war which parts is dominant and which one will have to be submissive that is why afterwards there are timely extended periods of peace with the dominant country setting the rules and other countries following them for the time it takes for the cycle to happen all over again in terms of economic policy during the award period the most important priority is to maintain one's access to financial and non-financial resources that are required to sustain a good or effort because no country has the capacity to both fund a war a sustained tolerable non were related spending out of current income one must have access to borrowing and/or have very large foreign exchange reserves the access to borrowing very much depends on each country's creditworthiness and the development of its capital markets especially the soundness of its own local currency

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market similarly maintaining access to the critical non financial...
resources that are required to sustain both the war effort and acceptable domestic economic conditions is essential during the word period after the word period during the payback period the market consequences of the

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s and the outcome of the war whether it is water lost will be enormous the worst thing a country hence a country's leader could ever do is get into a lot of

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and lose a war because there is nothing more devastating above all else don't do that look at what it meant for Germany after World War one in the 1920s which is explained in part two and for Germany in Jeff and after World War two in the late 1940s and 1950s the following charts shows some of the Thai people shifts in the economy how countries shift much of their economies to war production borrowed lots of money to finance big fiscal deficits and move much of their workforces to each element of services and wood production the first chart shows the rapid rise in government spending related to private spending the subsequent charts show the increase in military spending and a number of soldiers averaging a number of war cases both military spending and number of soldiers as a percent of the population increased by around five times for instance during World War two twenty percent of the u.s. workforce shifted to military after a major word ends all countries both the winners and losers are saddled with

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and the need to transition from a war economy to a more normal economy the big...
contraction of military spending usually caused as opposed to a recession as factories are retooled once again and a large number of people formerly employed in the war efforts need to find new jobs countries tactically enter periods of deleveraging working through the big word

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s with the same bases dynamics visible in other depressions deleveraging z' coming into play here at soon however losers of war experience significantly worse economic conditions before we tried to demonstrate this dynamic losers experience in much deeper depressions resort to more money printing meaningfully spend down their savings reserves and see much higher inflation rates sometimes experiencing hyperinflation that's all I have to convey about war economies at this stage for more color on them I suggest you read the Weimar Germany and us Great Depression case studies in part 2 as the first pains a good picture of the post-war period for a loser and the second shows how economy conflicts initiate a seconds of events that's lead to shooting words I also suggest that you also look at the parts of the US and UK in the post-world War two periods two examples of winners avoids the reasons we tend have charts for Germany Japan and other world losers for the post-world War two period is that the consequences of for their currencies other markets and the economies were so devastating that statistics were either ridiculously unreliable or unavailable in summary I want to reiterate my...
headline managing

debt

crisis is all about spreading out the pain of the bad

debt

s and this can almost always be done well if one steps are in one's on currency the biggest risks are tactically not from the depths themselves but from the failure of policymakers to do the right things due to a lack of knowledge and or lack of authority if the nationís

debt

s are in a foreign currency much more difficult choices have to be made to handle the situation well and in any case the consequences will be more painful as I know from personal experience the

understanding

s and authorities of policy policymakers mirai's a lot across countries which can lead to dramatically different outcomes and data not to react forcefully enough until the crisis is extreme their authorities for I use a function of how powerful each country's regulatory in checks and balance systems are in countries where these systems are strong which brings lots of benefits there is also the risk that some required policy moves can't get done because they are inconsistent with the rigid drills and agreements that are in the place it's impossible to break the rules well enough to anticipate all the possibilities and even the most knowledgeable and empowered policy maker isn't likely to manage a crisis perfectly circumstances that we're enforcing must be responded to instantly often in-house with an illegal liquor regulatory system that doesn't have crystal clear rules the checking balances...
system normally a critical protection from too much concentration of power can exacerbate pricey because it can slow decision-making and allow those with narrow interests to block necessary policy moves policymakers who tried to take the necessary bold actions are tightly criticized from old sites politics his renders during

debt

crisis and distortions are out rise Miss informations are pervasive while these big

debt

crises

can be devastating to some people in countries over the short term to medium term meaning three to ten years in the long run they fade in importance related to productivity which is more forceful so less apparent because it is less volatile the political consequences eg increasing in population that results from these prizes can be much more consequential than the depth crisis themselves the charts below show real GDP per capita and helped to put this big dip crisis and the little ones that we call it recessions in perspective the contractions of more than three percents are shown in the shaded areas note how the growth rates over time we are far more important than the bumps along the way the biggest bumps came more as a result of wars than the worst depressions so a case can be made in that's those wars were caused by the political fallout from those depressions