Will This be the Next Great Depression?

in 1929, the years of rampant debt that fueled speculation about company stocks came to a halt with the worst economic disaster in history in 2001, the years of rampant debt that fueled speculation about technology companies that were apparently going to revolutionize The future stopped when most of them were proven worthless and in 2008 years of debt fueled speculation by borrowers who just needed that fifth investment property and bankers who were more than

will

ing to accept

this

to sell more mortgage bonds. They stopped completely when people realized that everything underpinning

this

speculation was based on absolute rubbish. At the time of making this video, we just experienced the fastest 30% market decline in US history, surpassing all the examples I just listed above, and it's easy to think this one is a little different than all of them. .

Those examples were clearly based on wild speculation and bad investments, while this crisis is caused by an invisible enemy that must not be properly named. In reality, this disease has been a fantastic excuse for governments, companies and individuals to shift the blame for causing this economic crisis, everyone agreed to pat themselves on the back and say: this is just a 1 in 100 event years we could never have seen coming, it wasn't our fault, but make no mistake about two things: the lockdown. The actions taken by governments around the world in recent weeks

will

cause an economic recession.

This was not caused by those actions. It really took a long time to arrive. Today we find ourselves in the same debt-driven speculative bubble that we find ourselves on the brink of every other economic situation. recession the only difference is that this time we have something else we can try to blame instead of ourselves, what makes it much worse is that unlike all other economic recessions in modern history, governments are not acting exclusively to rectify the economic problem because they need to balance their response to the economy with their response to public safety and in many cases those two actions are at odds with each other.

This video is the expanded second part of the two-part series on the economics of a crisis in the first. In the video in this series we explore how governments typically react to economic crises like the one we are about to face. In this video we will explore the mistakes that really got us here and how we are destined to repeat those mistakes over and over again. with many financial problems it all starts with debt debt is something almost all of us have dealt with in our lives, we use it to buy houses, cars and boats and new plasma screen televisions and even in education these days we can now Break This debt is divided into two main categories, good debt and bad debt.

Bad debt is exactly what you would expect. Guess what? If you rack up a credit card bill by purchasing a jet ski and a beautiful designer wardrobe, you'll be saddled with very high interest rates. and a bunch of crap that will depreciate in value as fast as the rider bill piles up, now good debt is a little different from this if you borrow money to buy a house or take out student loans to get a decent education. In a marketable field, you will likely be able to make more money in the long run than you would have been able to make without that loan.

These days, a home loan can charge around 3% or even less, depending on the country. You are in and the hope is that this property will appreciate in value faster than the interest rate payments, meaning you will be richer in the long run after you have taken out this type of loan. The same goes for the larger institutions that governments around the world have taken on. more and more debt in order to be able to execute budgets that provide prosperity to their economies in the short term, with the hope that this economic growth will exceed the payments on the debts they are paying and, perhaps most pressing of all, companies have found themselves increasingly reliant on debt Corporate debt has always been seen as the ultimate form of good debt.

The reason for this is that companies are ultimately profit-seeking institutions and it is assumed that companies would never go into debt if their interest expenses were

great

er than the additional profits they would make. be generating by taking on that debt, to put it in a less confusing way, take the following test to see if a company can borrow $100 million to build an automated supply chain that will save it $10 million a year in personnel costs. and payments on that line would only be five million dollars a year, then it would be seen that it is a sensible economic decision and the company would request this loan.

The assumption that companies are always extremely prudent with their borrowing has meant that most economists see no level. of business debt as a problem, in fact, in many schools and universities around the world today, a high level of business debt is considered a really good thing because it is evidence of a strong and prosperous business sector that has the ability to grow rapidly and you know what for the most part what you've been through most companies are very, very responsible borrowers, but you have to remember that in 2007 people would have told you that mortgage loan debts were basically the ultimate form of good debt and one that no one would ever default on.

Regarding this, the truth is that these days we have seen an increase in commercial loans as interest rates remain at historic lows, but regulations on lending Mortgage laws have become much stricter in the shadow of the 2008 mortgage crisis, the actual progression is eerily similar to that of mortgages in the In the early 2000s, banks and financial institutions were the first to look for borrowers very, very safe. They provided project financing to profitable companies that could easily repay loans even in shorter repayment periods. These would be provided through corporate bonds or simply through private agreements between banks with liquidity around the world.

Around the world, this was extremely profitable for these institutions, especially considering that they were able to obtain cash from their central banks potentially even at negative interest rates and then transfer it to companies and pocket the difference, as happened with mortgages in 2008, to through the offer of this type of loans. Loans quickly outstripped genuine business demand, so investors in banks and financial institutions began scraping the bottom of the barrel, moving from serving highly reputable and profitable businesses to offering loans to anyone with a registered business, Regardless of credentials they have cheaper credit and more relaxed loans.

It means that companies can take on more and more debt and simply sell it to shareholders. Take advantage of the fact that the majority of corporate debt in the US today is rated triple B, which for those of you who don't know is basically God, so this assumption that corporate debt is A Debt Always good and does not represent a risk to the economy is not something we can trust. Corporate debt like this is temperamental at the best of times, but add to the complication that there won't be a national shutdown to cause a pause in cash flows even for Well, within a few days you'll have a recipe for disaster.

This debt is no longer exclusive to businesses, although in many ways it seems as if irresponsible lending has spread throughout our global economy and perhaps more specifically in a nation that can I didn't learn my lesson last time, we explore Australia's economy before on this channel and we discovered that the average net worth of the average Australian was higher than any other country in the world, which is

great

, but ultimately it was driven by two issues, the first was their ingenious savings system for retirement, which has meant that every working adult in the country saves about ten per cent of their income as a requirement and the second was the housing mark as a Sydney resident, let me tell you.

About this property market, it was one of the most expensive in the world and most houses within walking distance of the CBD were selling for over 1 million Australian dollars. Now there have been a few things that have driven this, the first being that the tax law in Australia is very geared towards favoring real estate investment over investments in other asset classes, there has also been a large amount of skilled migration to the country which has increased demand and , therefore the cost of housing, but it gets a little murky when you consider underlying fundamental house prices. They are ultimately a function of two things: income and how easy it is to access credit.

If more people in an area receive higher incomes, it stands to reason that they can afford more expensive homes, and therefore home prices rise to naturally reach that income level. demand since ultimately there is a limited supply and this is great for the most part, not many people have much of a problem with this because it is a genuine indicator that people are getting richer, but that's what happens in most modern economies of the world. In the world today, including Australia, wage growth has been virtually stagnant, barely keeping pace with inflation, so how have property values ​​doubled many times over these past decades?

Well, we were allowed to take on more mortgage loans before 2008 was seen as a great way for both banks and individuals to invest and then after 2008 we entered a period where interest rates remained at historic lows. year after year, meaning more people could borrow more money and artificially put up more firepower, two options that were still happening with limited supply. of houses and therefore higher prices, the reason this became particularly evident in Australia, precisely, is because it never fully felt the consequences of 2008 because it never actually entered a recession, which sounds great, but it may actually have given the It takes longer for the economy to inflate further, with a greater chance of falling.

I choose Australia because I live here and it is one of the most glaring examples, but the problem of debt-driven growth rather than fundamentals-driven growth is becoming a problem. Around the world, something that may be especially difficult to face in this case, it has become clear that this will be the most aggressive economic crisis in recent history. We are facing an external shock that is very severe and has very immediate impacts on employment and businesses in both advanced and developing economies, but that cannot distract from the most important issue: we are now more leveraged than ever.

The economic crisis of 2008 was a debt crisis caused by people borrowing more money than they could afford and which was compensated by banks that managed In matters of liquidity, the economic crisis of 2020 will be a debt crisis caused by companies and individuals They borrowed more money than they could afford and will be unleashed by an invisible enemy that must not be named If businesses and individuals were not just days away from defaulting on their debt payments at any given time, a locked-down economy would not would be such a bad thing, in theory things could stop relatively peacefully and safely, it's not ideal, but it's not as bad as it will actually be.

It happens that people can't afford to stop working today because they won't be able to pay

next

week's rent, landlords can't afford not to collect

next

week's rent because they won't be able to pay their home loan payments. next month and banks cannot afford to suspend mortgage loans because they will have the same liquidity problems they had 12 years ago. The same goes for companies that cannot afford to close because they will not be able to pay their expenses. There is really no flexibility in this chain. The level of debt that is currently in the system, everyone owes someone money and no one can stop getting paid for it.

Now governments around the world have attempted to alleviate this problem by enacting huge fiscal stimulus policies. The United States is preparing to approve the largest government stimulus. In history, the United Kingdom has enacted a huge income security program and most other developed countries have followed suit. This huge influx of cash is expected to mean that people will maintain the cash flow needed to remain a functional link in the debt chain, which is great and hopefully useful. The side effect of thisis that people are less likely to need to work jobs than at-risk people, but at a macroeconomic level it may not be the silver bullet we need due to a phenomenon known as displacement. things that governments have to address when they find themselves in a debt crisis, the logical response to this type of crisis is to help those who are affected with a stimulus to ensure that their needs are met, but perhaps more importantly That they can can continue to be good small consumers and keep the economy going, this of course costs the government a lot of money that it would normally raise through taxes, but the last thing a government wants to do at a time like this is tax more people because so First of all, this defeats the purpose of a stimulus, so they simply borrow the money by issuing government bonds.

These government bonds are primarily purchased by institutions seeking a good risk-free return during these uncertain times and this allows the government to spend lavishly while also avoiding placing the burden on the poor old taxpayer to fund that largesse. However, the problem with this is that it sucks up a lot of liquidity in the market. Often governments will present a huge demand for cash in a very, very short space of time, raising hundreds. billions of dollars and leaves absolutely no money left over for businesses or households, if JP Morgan just spent ten billion dollars buying government bonds, it won't have much left to fund slightly riskier loans, such as mortgage loans or the commercial lines of this This is what we mean by really safe and attractive government loans displace the market for all types of loans and when markets such as real estate and corporate, which have been underpinned by debt For decades, they are suddenly cut out of this generous flow of new money.

They crash hard, so this would still be a really bad outcome, it would be like giving a blood transfusion to an economy that you are also using as a blood donor; In reality, it's just moving the problem around, so what nations will do instead is conduct these measures in parallel with printing more money. Quantitative easing is just a fancy way of saying introducing a ton of money into the economy by printing. more and more money in the central bank, this means that financial institutions can quickly accumulate more liquidity. and with their new wealth they can make loans to the government as well as regular borrowers, which keeps the whole system running and avoids the crowding out problem we saw before, so that's great, then the government can fund their stimulus without affecting to the taxpayers and without limiting people's ability to get a loan properly, well no, there is always someone who will pay, so who foots the bill for this one?

In this case, it's savings. You know the people who were responsible and had a decent amount of cash on hand so they would be safe in a situation like this as more and more cash is introduced into the economy. Savers are affected by higher inflation rates that corrode the effective capital of their savings, so while there is no direct exit from their wallets, there are those who are indirectly financing this exercise now the response of the financial community these good savers should have been spending and racking up massive debt to be good little consumers our economy depends on spending and the savers are not doing their part to help and in many ways they are right but it is still quite unfair that the most responsible members of our society bear the burden of other people's poor decision-making process, to add insult to injury, controlled inflation like this is actually very good for debt.

The owners say someone borrows $1 million to buy a $1.1 million property. Well, they have $100,000 in capital, but then the government comes in and Chuck is either on the money printer or not. I don't know, let's say he doubles the money supply in a decade. Let's say that, all things being equal, this turns a $1.1 million property into a $2.2 million property because there is now double the money supply, so it's worth half as much. It doesn't work exactly like that, but it's close enough and just follow this for simplicity, either way, the property owner increased his equity position 11 times, from $100,000 to $1.1 million, and this is not because they added value to the economy at all or even because they made a particularly smart investment in this property.

It hasn't actually increased in genuine value at all, it's simply because its debt positions are eroded by inflation. The real big winners in a crisis like this will be the people with a lot of debt who can remain solvent and, when the system is implemented to deal with a crisis, it effectively encourages people to engage in the type of behavior that causes the crisis. . Well, I mean, it's easy to see why we're in the same situation every 10 years or so. Unfortunately, a lot of what the future holds is speculation at this point and people predicting. That this will be the next great

depression

may seem as silly as the people who said this would all go away more than two months ago, but what can be said with certainty is that this will be an economic recession of our own making.

We don't wipe our hands of this mess and say it's the fault of things that are out of our control because the underlying truth of the fact is that people got greedy and put themselves in precarious situations that would blow up in their faces in situations like this and again what's going to make all of this worse is that, unlike every other economic recession in modern history, governments are not acting exclusively to rectify the economic problem because they need to balance their response to the economy with their response to public safety and, in many cases, two are at odds with each other: this lack of economic focus coupled with the underlying problems that were caused by the last economic crisis threatened to make the GFC 2.0 already more serious and more widespread than any other economic crisis that working people have seen today.

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