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“The Three Big Issues and the 1930s Analogue” by Ray Dalio.

https://www.linkedin.com/pulse/three-big-issues-1930s-analogue-ray-dalio/

Bloomberg ranked Ray Dalio as the world’s 58th wealthiest person, and he runs one of the world’s largest hedge funds. So, he has some qualifications.

A FEW EXCERPTS
…The most important forces that now exist are:
1) The End of the Long-Term Debt Cycle (When Central Banks Are No Longer Effective)
2) The Large Wealth Gap and Political Polarity
3) A Rising World Power Challenging an Existing World Power…

…In other words now

1) central banks have limited ability to stimulate,
2) there is large wealth and political polarity and
3) there is a conflict between China as a rising power and the U.S. as an existing world power.

If/when there is an economic downturn, that will produce serious problems in ways that are analogous to the ways that the confluence of those three influences produced serious problems in the late 1930s…

…a) we are approaching the ends of both the short-term and long-term debt cycles in the world’s three major reserve currencies,
while
b) the debt and non-debt obligations (e.g., healthcare and pensions) that are coming at us are larger than the incomes that are required to fund them,
c) large wealth and political gaps are producing political conflicts within countries that are characterized by larger and more extreme levels of internal conflicts between the rich and the poor and between capitalists and socialists,
d) external politics is driven by the rising of an emerging power (China) to challenge the existing world power (the U.S.), which is leading to a more extreme external conflict and will eventually lead to a change in the world order,
and
e) the excess expected returns of bonds is compressing relative to the returns on the cash rates central banks are providing….

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This video, which was linked in the Ray Dalio article, is 30 minutes well spent.
It gives an interesting, simplifying perspective of the complexity of the world economy.

– Economic Principles –
How the Economic Machine Works

https://economicprinciples.org/

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Political polarity is overstated.  It was only 19 years ago that the dominant viewpoint was that both sides were equivalently evil and corrupt.  Give it another 10 years for disillusionment to sink in to revert back to where it was (and where it should be).  

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"we are approaching the ends of both the short-term and long-term debt cycles in the world’s three major reserve currencies"

The last number I've seen on 'negative yielding debt' is that it is in the range of $17 trillion, or more than one third of all global debt outstanding. There has never been an 'end to a debt cycle' with 'negative yielding debt', much less one third of it.

The 'three major reserve currencies' are presumably the USD, EUR, and UKP. The 'end' of a 'cycle' is presumably some sort of default where a bunch of loans go sour and creditors suffer severe setbacks or are wiped out. It's worth pointing out that the USD had a 'wipeout' in the late 1980s (S&L Crisis, mopped up by the Resolution Trust Corporation) and another one in 2008. The US has a habit of forcing banks to write off bad loans quickly. 

In the larger scheme of things this is unusual - countries like Japan have 'zombies' that banks keep alive so that they don't have to admit they made bad loans. Europe also tends to treat defaults as a 'stain on the family name', therefore Europeans tend to be risk averse. The exception within the US is student loans - and this is having effects in the US similar to the 'zombie' problems elsewhere.

These lessons are percolating through the rest of the world. Increasingly other countries are learning to be more failure tolerant. This keeps mountains of bad debts from stifling economic development.

"the debt and non-debt obligations (e.g., healthcare and pensions) that are coming at us are larger than the incomes that are required to fund them"

'Non-debt' obligations are probably better understood as 'debts to nature'. Deforesting a continent (as is occurring in Africa and South America) not only removes the global 'lungs' it also removes the ground cover responsible for water retention. This lowers flows in rivers such as the Amazon and Congo. Rising urban water demand combined with lower fresh water supplies creates exponentially increasing costs.

Most industrialized country consumers have noticed that air travel is 'dirt cheap' in at least some contexts. Some of the passengers are human, some of them are microbial, and some are stashed away in baggage or on the exterior surfaces of the aircraft. Thus we get iguanas and pythons in Florida, SARS infections scattered to every corner of the globe in weeks, 'exploding' trees, and 'poison carrots'. Countries with poor health care practices are breeding 'superbugs' that spread 'everywhere'. These 'costs' are rising faster than simply caring for old people. They have little to do with money - they are more related to the human capacity to respond with drugs, quarantines, or medical staff.

Yeast mixed with grape juice in a bottle creates a textbook case of eating up resources while being exterminated in the accumulating poison. A number of human populations on islands have had this experience, Easter Island being one example. The human gene pool shows evidence of a 'die-off' 70,000 years ago, most likely from a catastrophic volcanic eruption. Humans can poison their nests, but there are plenty of other events that humans have no control over that will have the same effect.

"large wealth and political gaps are producing political conflicts within countries that are characterized by larger and more extreme levels of internal conflicts between the rich and the poor and between capitalists and socialists"

France (as well as most of Europe) had vast 'wealth and political gaps' from the 14th century to 1789. 'Something' triggered a revolt that overturned the old order - crop failures most likely caused by a volcano in Iceland.

The archaeological evidence in Central America suggests that various civilizations there expanded over centuries then collapsed catastrophically. When the ruling class was no longer viewed as credible they were simply carried out with the trash. Digging among the ruins suggests excessive cultivation, water shortages, soil erosion, and drought.

The Arab Spring was basic 'fight or flight'. If someone can't earn a living and are at risk of starvation, they are going to die whether or not they confront the power structure, therefore the power structure is at risk. The US and the rest of the Western world is not at this point, at least not yet. Whether deprivation that triggers such a circumstance comes from natural catastrophe, human failure, or wholesale political neglect is a detail.

"external politics is driven by the rising of an emerging power (China) to challenge the existing world power (the U.S.), which is leading to a more extreme external conflict and will eventually lead to a change in the world order"

Spain, England, and France were all 'global powers' as humanity entered the scientific and industrialized era. The Ottoman and Austro-Hungarian empires might not have been 'global', but they were certainly expansive. Both of the latter 'disappeared' as a result of WW I.

The population of a country like Spain attempting to rule all of Central and South America (as well as the Philippines) would have been exhausting. This demands more than is physically possible. The British did it for as long as they did because they had steamships, telecommunications, and better guns, however their defense commitments bankrupted them in the end.

The US doesn't maintain a global empire of colonies. China's expansionary actions seem to be more focused on it's 'back yard': the Himalayas and the South China Sea. Neither the US nor China are attempting what Spain and Britain did globally, or the idea that the Soviet Union was going the 'rule the world' in a Communist 'one world government'.

The Romans were 'expansionary' until Hadrian built a wall across Britain. From that point forward Rome began giving up control, either due to lack of will or natural catastrophe. The 21st century is full of more wall building (China, the US, Israel, India, and 'effectively' Australia) more than it is about territorial acquisition. There is more interest in gaining control of markets than there is gaining 'political hegemony'. Markets tend to 'materialize out of nowhere', so there is often room to expand in domains that didn't exist in prior generations.

There is no doubt there will be a 'change in the world order', since it is changing all the time. For someone of retirement age right now, the fears were, at various times, Germany, the Soviet Union, Japan, and/or China. 

Interest rates and bond markets are pretty small potatoes in the larger context. People that look at human affairs in the context of financial markets have lost sight of the bigger picture.

  • Great Response! 2

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