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How Countries Go Broke: Introduction & Chapter One

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How Countries Go Broke: Introduction & Chapter One

The following is an excerpt from an early draft from my new book, How Countries Go Broke, which is available for pre-order here.

以下内容节选自我的新书《国家是如何破产的》初稿,该书可在此处预订。

Introduction

引言

Are there limits to a country’s’ debt and debt growth?

一个国家的债务及债务增长是否存在极限?

What will happen to interest rates and all that they affect if government debt growth isn’t slowed?

如果政府债务增长不减缓,利率及其所影响的一切会发生什么变化?

Can a big, important country that has a major reserve currency like the US go broke—and, if so, what would that look like?

像美国这样拥有主要储备货币的重要大国会破产吗?如果会,会是怎样的情形?

Is there such a thing as a “Big Debt Cycle” that we can track that will tell us when to worry about debt and what to do about it?

是否存在一种我们能够追踪的 “大债务周期”,它能告知我们何时该担忧债务问题以及如何应对?

These aren’t just academic questions for academic economists. They are questions that investors, policy makers, and most everyone must answer because the answers will have huge effects on all our well-beings and what we should do. But definitive answers don’t currently exist. 这些问题并非仅仅是学术经济学家们探讨的学术问题。投资者、政策制定者以及大多数人都必须回答这些问题,因为答案将对我们所有人的福祉以及我们应采取的行动产生重大影响。但目前尚无确切答案。

At this time, some people believe that there isn’t any limit to government debt and debt growth, especially if a country has a reserve currency. That’s because they believe that the central bank of a reserve currency country that has its money widely accepted around the world can always print the money to service its debts. Others believe that the high levels of debt and rapid debt growth are harbingers of a big debt crisis on the horizon, but they do not know exactly how and when the crisis will come—or what its impacts will be.

此时,一些人认为政府债务和债务增长不存在任何限制,特别是对于拥有储备货币的国家而言。这是因为他们相信,其货币在全球被广泛接受的储备货币国家的央行,总能印钞来偿还债务。另一些人则认为,高额债务和快速的债务增长预示着一场重大债务危机即将来临,但他们并不确切知道危机将如何以及何时到来,也不清楚其影响会是什么。

And what about the big, long-term debt cycle? While the “business cycle” is widely acknowledged and some people recognize that it is driven by a short-term debt cycle, that is not true for the big, long-term debt cycle. Nobody acknowledges it or talks about it. I couldn’t find any good studies or descriptions of it in textbooks, and even the world’s leading economists—including those who are now running, or in the past ran, central banks and government Treasuries—didn’t have much to say about this critically important subject when I explored it with them. That is why I did this study and am passing it along.

那么,大的长期债务周期又是怎样的呢?虽然 “商业周期” 已被广泛认可,且有些人认识到它是由短期债务周期驱动的,但对于大的长期债务周期而言并非如此。没有人承认它或谈论它。我在教科书中找不到任何关于它的优质研究或描述,甚至当我与世界顶尖经济学家(包括那些现任或曾任央行及政府财政部要职的人)探讨这个至关重要的主题时,他们对此也没什么可说的。这就是我开展这项研究并将其分享出来的原因。

Before I get into all that, I should begin by explaining where I’m coming from. I don’t come to this subject as an economist. I come as a global macro investor who for over 50 years has been through many debt cycles in many countries and has had to navigate and understand them well enough to bet on how they would go. I have carefully studied all the big debt cycles over the last 100 years, and superficially studied many more from the past 500 years, so I believe that I understand how to navigate them. Because I am now deeply concerned, I feel a responsibility to pass along this study for others to assess for themselves.

在深入探讨所有这些内容之前,我应该先说明一下我的出发点。我并非以经济学家的身份来研究这个主题。我是以一名全球宏观投资者的身份介入,50 多年来,我经历了许多国家的诸多债务周期,必须深入了解并驾驭它们,以便对其走向进行押注。我仔细研究了过去 100 年里所有重大债务周期,还粗略研究了过去 500 年里更多的债务周期,所以我相信自己明白如何应对它们。因为我现在深感担忧,所以觉得有责任将这项研究分享出来,让其他人自行评估。

To gain my understanding, I look at many cases like a doctor studies many cases, examining the mechanics behind them to understand the cause/effect relationships that drive their progressions. I also learn from being in these experiences, reflecting on what I learn, writing it up, and having smart people read and challenge it. Then I build systems to place my bets on what I learned and have new experiences. I do that over and over and will do it until I die because I love it. Because my game has been to bet on the markets and because the debt markets drive just about everything, I have been obsessed with studying debt dynamics for decades. I believe that if you understand these dynamics, you can do very well as an investor, businessperson, or policy maker, and if you don’t, you ultimately will be hurt by them.

为了形成自己的理解,我像医生研究众多病例一样,审视大量案例,剖析背后的机制,以理解推动其发展的因果关系。我还从自身经历中学习,反思所学内容,记录下来,然后让有见识的人阅读并提出质疑。接着,我构建体系,依据所学进行投资决策,从而获得新的经验。我反复这样做,并且会一直坚持到离世,因为我热爱这个过程。由于我的工作是对市场进行投资押注,而债务市场几乎驱动着一切,所以几十年来我一直痴迷于研究债务动态。我相信,如果你理解这些动态,作为投资者、商人或政策制定者,你就能表现出色;而如果你不理解,最终将会受到其伤害。

Through my research, I discovered that there are big, long-term debt cycles that have unfailingly led to big debt bubbles and busts. I saw that only about 20% of the roughly 750 currency/debt markets that have existed since 1700 remain and that all these remaining ones have been severely devalued through the mechanistic process I am going to describe in this study. I saw how this big, long-term debt cycle was described in the Old Testament, how it repeatedly played out in Chinese dynasties over thousands of years, and how time and again it has foreshadowed the fall of empires, countries, and provinces.

通过研究,我发现存在大的长期债务周期,它无一例外地会导致巨大的债务泡沫与破裂。我看到,自 1700 年以来大约 750 个货币 / 债务市场中,只有约 20% 留存至今,而所有这些留存下来的市场,都通过我将在本研究中描述的机制性过程经历了严重贬值。我看到《旧约》中是如何描述这种大的长期债务周期的,它在数千年间的中国朝代更迭中是如何反复上演的,以及它一次又一次地如何预示着帝国、国家和地区的衰落。

These Big Debt Cycles have always worked in timeless and universally consistent ways that are not well understood but should be. In this study, I hope to explain how they work with such clarity that my description will serve as a template that can be used to see what is going on with, and what is likely to happen to, money and debt. While I recognize that the Big Debt Cycle template I will describe has not previously been vetted, I am confident it exists because I have made a lot of money using it to bet on how things would go. I am passing it along because I am now at a stage of life in which I want to share what I have learned that I have found of value. You can do what you like with it.

这些大债务周期的运行方式始终具有永恒性和普遍一致性,尽管未被充分理解,但理应被人们知晓。在本研究中,我希望清晰地阐释它们的运行机制,使我的描述能成为一个模板,用于洞察货币与债务正在发生的状况以及可能发生的情况。虽然我意识到我将描述的大债务周期模板此前未经检验,但我确信它是存在的,因为我利用它对事物走向进行押注并赚了不少钱。我将其分享出来,是因为我现在处于人生的一个阶段,希望分享我所学到的有价值的东西。你可以随意处置它。

Why do I think I understand something that others don’t? I theorize that this is for a few reasons. First, this dynamic is not widely understood because big, long-term debt cycles typically last about one lifetime—roughly 80 years (give or take 25 years)—so we don’t get to learn about them through experience. Second, because we focus so much on what is happening to us at the time it is happening, people overlook the big picture. I also think there are biases against being concerned about too much debt because most people like the spending ability that credit gives them, and it is also true that there have been many warnings about pending debt crises that never happened. Memories of big debt crises like the 2008 global financial crisis and the European debt crisis of the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain) have faded, and since we have gotten past them, many people assume that policy makers learned how to manage them rather than view these cases as early warnings of bigger crises on the horizon. But whatever the reason, it doesn’t matter exactly why these dynamics are overlooked. I am going to paint a picture of what happens and why, and if there is enough interest in what I’m saying, my template will be assessed and will live or die on its merits.

为什么我认为自己理解了别人所不理解的东西呢?我推测有几个原因。首先,这种动态未被广泛理解,是因为大的长期债务周期通常持续约一生的时间,大致 80 年(上下浮动 25 年),所以我们无法通过自身经历来了解它们。其次,因为我们过于关注当下正在发生在自己身上的事情,从而忽略了全局。我还认为,人们对于担忧过多债务存在偏见,因为大多数人喜欢信贷赋予他们的消费能力,而且确实有许多关于即将到来的债务危机的警告最终并未成真。像 2008 年全球金融危机以及 “欧猪五国”(葡萄牙、意大利、爱尔兰、希腊和西班牙)的债务危机这样重大债务危机的记忆已经淡去,既然我们已经度过了这些危机,许多人就认为政策制定者已经学会了如何应对它们,而不是将这些案例视为更大危机即将来临的早期预警。但无论原因是什么,这些动态为何被忽视并不重要。我将描绘出发生了什么以及为什么会发生,如果人们对我所说的内容有足够兴趣,我的模板将接受评估,并根据其自身价值决定是否站得住脚。

That leads me to a principle:

这就引出了我的一个原则:

  • If we don’t agree on how things work, we won’t be able to agree on what’s happening or what is likely to happen. For that reason, I need to lay out my picture of how the machine works and try to triangulate with you and other knowledgeable people about it before moving on to look at what’s happening and what might happen.
  • 如果我们在事物的运行机制上无法达成共识,我们就无法就正在发生的事情或可能发生的事情达成一致。基于这个原因,在继续探讨正在发生什么以及可能发生什么之前,我需要阐述我对这个 “机制” 如何运作的看法,并尝试与你和其他有见识的人进行探讨。

At a time when government debt is large and increasing rapidly, it seems to me dangerously negligent to assume that this time will be different from other times without first studying how other cases transpired. It would be like assuming that we will never have a civil war or world war again because they haven’t happened before in our lifetimes without studying the mechanics that brought them about in the past. (By the way, I believe that both the civil war and world war dynamics are also going on today.) As in my other books,[1] I will create a description of the archetypical dynamic and then look at how and why different cases transpired differently so that one can track current cases relative to the template and put into context what’s happening and what’s likely to happen. In that way, you will both see many cases of this happening and get a peek into the future. Comparing what is happening with that template leads me to believe that we are heading into one of those cases in which central governments and central banks will “go broke” in the ways that have happened hundreds of times before and have had big political and geopolitical consequences.

在政府债务规模庞大且增长迅速的当下,在我看来,在未先研究其他案例的发展过程就假定这次会与以往不同,是极其危险且疏忽的。这就好比在未研究过去引发内战或世界大战的机制的情况下,就假定我们这一生中不会再发生内战或世界大战,仅仅因为此前尚未发生过。(顺便说一句,我认为内战和世界大战的动态如今也在发生。)就像我在其他书中所做的那样,我将描述典型的动态,然后研究不同案例为何以及如何以不同方式发展,这样人们就能对照模板追踪当前案例,并将正在发生的事情和可能发生的事情置于相应背景中。这样,你既能看到许多此类案例,又能对未来略窥一二。将正在发生的事情与该模板进行对比,让我相信我们正走向这样一种情况:中央政府和央行将以数百次之前出现过的方式 “破产”,并产生重大的政治和地缘政治后果。

This brings me to an important point.The Big Debt Cycle is just one of several interrelated forces that together make up what I call the overall Big Cycle. For example, 1) Big Debt Cycles influence and are affected by largely coinciding 2) big cycles of political and social harmony and conflict within countries that are both affected by and affect 3) big cycles of geopolitical harmony and conflict between countries. These cycles in turn are affected by both 4) big acts of nature, like droughts, floods, and pandemics and 5) developments of big new technologies. Combined, these five forces make up the overall Big Cycle of peace and prosperity and conflict and depression. Because these forces affect each other and practically everything, they must be thought of together. How these forces have worked and interacted and are working and interacting now is covered in much greater detail in my book and video titled Principles for Dealing with the Changing World Order and to a lesser extent in Chapter 17 of this study, which is the concluding chapter. In this study, I will be mostly focusing on the Big Debt Cycle, though we will see many references to the ways in which the Big Debt Cycle interacts with the other forces to create the path that we are on.

这就引出了一个重要观点。大债务周期只是构成我所称的整体大周期的几个相互关联的力量之一。例如,1)大债务周期影响且受大致同步的 2)国家内部政治与社会和谐及冲突的大周期影响,而这两者又都受到并影响 3)国家间地缘政治和谐与冲突的大周期。反过来,这些周期又受到 4)重大自然事件(如干旱、洪水和大流行病)以及 5)重大新技术发展的影响。这五种力量共同构成了和平与繁荣、冲突与萧条的整体大周期。因为这些力量相互影响,且几乎影响一切,所以必须综合考虑它们。这些力量过去是如何运作和相互作用的,现在又是如何运作和相互作用的,在我的书和视频《应对变化中的世界秩序的原则》中有更详细的阐述,在本研究的第 17 章(即结语章)中也有一定程度的涉及。在本研究中,我将主要聚焦于大债务周期,不过我们也会多次提及大债务周期与其他力量相互作用,从而塑造我们所处发展路径的方式。

This study consists of four parts and 17 chapters. Part 1 describes the Big Debt Cycle, at first very simply, then in a more complete and mechanical way, and then with some equations that show the mechanics and help with making projections of what is likely to happen. Part 2 shows what has actually happened across 35 Big Debt Cycle cases, laying out in a detailed template the typical sequence of events that signifies how a cycle is transpiring and shows symptoms that can help identify how far the cycle has progressed. Part 3 reviews the most recent Big Debt Cycle, which started when the new monetary and world orders began in 1944 at the end of World War II and brings it up to the present. In that part, in addition to looking at the Big Debt Cycle and the overall Big Cycle with a focus on the US (because it has been the world’s major reserve currency country and the world’s leading power, thus making it the world’s leading shaper of what one might call the American world order since 1944), I also very briefly describe the Big Cycles of both China and Japan, showing them from the 1860s until now. This will give you a more complete picture of what has happened in the world since 1944 and provide two other Big Debt Cycle cases to look at. Finally, in Part 4, I will peek into the future, looking at what my calculations say about what is required for the US to manage its debt burden, and how the five big forces might unfold in the years ahead.

本研究共分为四个部分,17 章。第一部分描述大债务周期,起初会以非常简洁的方式阐述,接着以更完整、更具机制性的方式展开,随后会借助一些方程式展示其运行机制,并辅助预测可能发生的情况。第二部分呈现 35 个大债务周期案例中的实际情况,通过详细的模板梳理出典型的事件序列,这些序列标志着一个周期的发展过程,同时展示出有助于判断周期进展程度的各种迹象。第三部分回顾最近的大债务周期,该周期始于 1944 年二战结束时新的货币和世界秩序的确立,一直延续到现在。在这部分内容中,除了聚焦美国来审视大债务周期和整体大周期(因为自 1944 年以来,美国一直是世界主要储备货币国家和全球主导力量,因而也是所谓美国世界秩序的主要塑造者),我还会简要描述中国和日本的大周期,呈现它们从 19 世纪 60 年代至今的发展历程。这将让你更全面地了解 1944 年以来世界所发生的事情,并提供另外两个大债务周期案例以供参考。最后,在第四部分,我将展望未来,依据我的计算,探讨美国为应对债务负担所需采取的措施,以及未来几年这五大主要力量可能的发展态势。

Because I recognize that there are different readers who have different levels of expertise and want to give different amounts of time to this and I want to help you get what you want out of this, I put the most important points in bold so you can read just the most essential stuff and optionally dive into the details that interest you. I put what I believe are timeless and universal principles in italics. If you are a professional or aspiring professional who is really into economics and markets, I recommend that you read the whole thing because I believe that it will give you a unique perspective that you will enjoy and will help you to be successful in your job. If you are not, I recommend that you just read what is in bold. Also, because I’d love to have a two-way conversation with you to try to get in sync about what’s true and what to do about it, I am working on a few new technologies for doing that, which I will tell you about later.

我深知读者们专业水平各异,愿意投入到本研究的时间也不尽相同。为了帮助大家各取所需, 我将最重要的要点加粗,这样你可以只阅读最关键的内容,若有兴趣,也可深入探究自己感兴趣的细节。我还将我认为具有永恒性和普遍性的原则用斜体标注。 如果你是专业人士,或者有志成为专业人士,且对经济学和市场极为热衷,我建议你通读全文,因为我相信这会为你带来独特的视角,你会从中获得乐趣,且这将有助于你在工作中取得成功。如果你并非如此,我建议你仅阅读加粗部分。另外,因为我很希望能与你展开双向交流,尝试就什么是真实情况以及如何应对达成共识,我正在研究一些新技术来实现这一目标,稍后会向你介绍。

In the next chapter, I will describe the Big Debt Cycle in just seven pages. If you want to stop there, that’s perfectly fine.

在下一章,我将仅用七页篇幅描述大债务周期。如果你只想读到这里,完全没问题。

I hope that you will find the study’s analysis helpful.

希望本研究的分析能对你有所帮助。

Part 1: Overview of the Big Debt Cycle

第一部分:大债务周期概述

Chapter 1: The Big Debt Cycle in a Tiny Nutshell

第 1 章:大债务周期简述

My goal for this chapter is to convey in seven pages a very brief but complete description of the mechanics of a typical Big Debt Cycle.

本章的目标是用七页篇幅,简洁而完整地描述典型大债务周期的运行机制。

How the Machine Works

机制运行方式 Credit is the primary vehicle for funding spending and it can easily be created.[2] Because one person’s spending is another’s earnings, when there is a lot of credit creation, people spend and earn more, most asset prices go up, and most everyone loves it. Paying back debt is much less enjoyable. As a result, central governments and central banks have a bias toward creating a lot of credit. Credit also creates debt that has to be paid back, which has the opposite effect—i.e., when debts have to be paid back, it creates less spending, lower incomes, and lower asset prices, which people don’t like. In other words, when someone (a borrower-debtor) borrows money (called principal) at a cost (an interest rate), the borrower-debtor can spend more money than they have in earnings and savings over the near term. But over the long term, this requires them to pay back (the principal + interest) and when they have to pay it back, it requires them to spend less money than they have. This dynamic is why the credit/spending/debt-paying-back dynamic is inherently cyclical.

信贷是为支出提供资金的主要手段,且易于创造。[2] 由于一个人的支出就是另一个人的收入,当大量创造信贷时,人们支出和收入增加,大多数资产价格上涨,大多数人都喜闻乐见。而偿还债务就没那么令人愉悦了。因此,中央政府和央行倾向于大量创造信贷。信贷也会产生必须偿还的债务,而偿还债务会产生相反的效果 —— 即当必须偿还债务时,支出减少,收入降低,资产价格下跌,人们并不喜欢这种情况。换句话说,当某人(借款债务人)以一定成本(利率)借入资金(称为本金)时,在短期内,借款债务人的支出可以超过其收入和储蓄。但从长期来看,这就要求他们偿还(本金 + 利息),而当他们必须偿还时,其支出就不得不低于其收入。这种动态变化就是信贷 / 支出 / 偿还债务的动态过程本质上具有周期性的原因。

The Short-Term Debt Cycle

短期债务周期

Everyone who has been around long enough to be affected by it several times should be well-acquainted with the short-term debt cycle. It starts with money and credit being provided readily when economic activity and inflation are lower than desired, and when interest rates are low relative to inflation rates and low in relation to the rates of return on other investments. Those conditions encourage borrowing to spend and invest, which causes asset prices, economic activity, and inflation to pick up until they are higher than desired, at which time money and credit are restrained, and interest rates become relatively high in relation to inflation rates and rates of return on other investments. This leads to less borrowing to spend and invest, which leads to lower asset prices, a slowing of economic activity, and lower inflation, which leads interest rates to come down, money and credit to become easier, and the cycle to begin again. These cycles have typically lasted about six years, give or take three years.

但凡经历过几次短期债务周期影响的人,都应对其相当熟悉。当经济活动和通货膨胀率低于预期,且利率相对于通货膨胀率较低、相对于其他投资回报率也较低时,货币和信贷供应就会变得宽松。这些条件会刺激借贷用于支出和投资,从而推动资产价格、经济活动和通货膨胀上升,直至高于预期水平。此时,货币和信贷就会受到限制,利率相对于通货膨胀率和其他投资回报率变得相对较高。这就导致借贷用于支出和投资的行为减少,进而资产价格下跌、经济活动放缓、通货膨胀率降低,利率随之下降,货币和信贷再次变得宽松,周期又重新开始。这些周期通常持续约六年,上下浮动三年。

Short-Term Debt Cycles Add up to Big, Long-Term Debt Cycles

短期债务周期累积形成大的长期债务周期

What isn’t paid enough attention is the way in which these short-term debt cycles add up to big, long-term debt cycles. Because credit is a stimulant that creates a high, people want more of it, so there is a bias toward creating it. This leads debt to rise over time, which typically leads to most of the short-term cyclical highs and lows in debt to be higher than the ones before. These add up to create the long-term debt cycle, which ends when it becomes unsustainable. The capacity to take on more debt is different early in the Big Debt Cycle when debt burdens are lower and there is more potential for credit/debt to be able to fund highly profitable endeavors than it is later in the cycle when debt burdens are higher, and lenders have fewer productive options.

未得到足够重视的是,这些短期债务周期是如何累积形成大的长期债务周期的。由于信贷是一种能带来繁荣的刺激因素,人们渴望更多信贷,所以存在创造信贷的倾向。这使得债务随时间推移而增加,通常导致大多数短期债务周期的高点和低点都高于之前的周期。这些短期周期累积起来,就形成了长期债务周期,当债务变得不可持续时,长期债务周期就会结束。在大债务周期早期,债务负担较低,信贷 / 债务为高利润项目提供资金的潜力更大,此时承担更多债务的能力,要比周期后期债务负担较高、贷方可选择的生产性项目较少时更强。

In that early part, it is easy to borrow—even to borrow a lot—and pay it back. These early short-term cycles are primarily driven by the previously described availability and economics of borrowing and spending, and also a lingering cautiousness brought about by memories of the pain of the most recent time when money was tight.[3] Early in the Big Debt Cycle, when debts and total debt service are relatively low in relation to incomes and other assets, increases and decreases in credit, spending, debt, and debt service are primarily determined by the previously described incentives with less risk. But late in the Big Debt Cycle, when debts and debt service costs get high relative to income and the value of other assets that can be used to meet one’s debt service obligations, the risks of default are higher. Also, late in the Big Debt Cycle, when there are a lot of debt assets and liabilities relative to income, the balancing act of trying to keep interest rates high enough to satisfy lender-creditors without having them too high for borrower-debtors becomes more challenging. That’s because one person’s debts are another’s assets and both must be satisfied. So, while short-term debt cycles end because of the previously described economic considerations, long-term debt cycles end because the debt burdens are too great to be sustained. Said differently, because it is more enjoyable to borrow and spend, if one isn’t careful, debt and debt service can grow like a cancer, eating up one’s buying power and squeezing out other consumption. This is what makes the long-term Big Debt Cycle.

在早期阶段,借贷很容易 —— 甚至大量借贷并偿还也不难。这些早期的短期周期主要受前文所述的借贷和支出的可得性及经济因素驱动,同时也受到对近期资金紧张时痛苦记忆所带来的挥之不去的谨慎态度的影响。[3] 在大债务周期早期,相对于收入和其他资产,债务和总偿债额相对较低,信贷、支出、债务和偿债额的增减主要由前文所述的激励因素决定,风险较低。但在大债务周期后期,相对于收入和可用于履行偿债义务的其他资产价值,债务和偿债成本变得很高,违约风险也随之增加。同样在大债务周期后期,相对于收入,存在大量债务资产和负债时,要在维持足够高的利率以满足贷方 - 债权人,同时又不至于让利率过高而影响借方 - 债务人之间取得平衡,变得更具挑战性。这是因为一个人的债务就是另一个人的资产,两者都必须得到满足。所以,虽然短期债务周期因前文所述的经济因素而结束,但长期债务周期的终结是因为债务负担过重而难以为继。换句话说,由于借贷和支出更令人愉悦,如果不小心,债务和偿债额就可能像癌症一样增长,侵蚀购买力,挤压其他消费。这就是长期大债务周期形成的原因。

Throughout the millennia and across countries, what has driven the Big Debt Cycle and has created the big market and economic problems that go along with it is the creation of unsustainably large amounts of debt assets and debt liabilities relative to the amounts of money, goods, services, and investment assets in existence.

在过去的数千年里,各个国家中,推动大债务周期并引发与之相关的重大市场和经济问题的,是相对于现有货币、商品、服务和投资资产数量,创造出了过多且难以为继的债务资产和债务负债。

Said more simply, a debt is a promise to deliver money. A debt crisis occurs when there have been more promises made than there is money to deliver on them. When that happens, the central bank is forced to choose between a) printing a lot of money and devaluing it or b) not printing a lot of money and having a big debt default crisis. In the end, they always print and devalue. Either way—via default or devaluation—the creation of too much debt eventually causes debt assets (e.g., bonds) to be worth less.

更简单地说,债务是一种交付货币的承诺。当承诺交付货币的数量超过实际可交付的货币数量时,就会发生债务危机。当这种情况发生时,央行被迫在以下两者中做出选择:a)大量印钞并导致货币贬值;b)不大量印钞,从而引发严重的债务违约危机。最终,他们总是选择印钞和贬值。无论哪种方式 —— 通过违约或贬值 —— 过多债务的产生最终都会导致债务资产(如债券)价值降低。 While there are variations in how each of these cases plays out, the most important factor is whether the debt is denominated in a currency that the central bank can “print”. But no matter the variation we almost always see that it becomes relatively undesirable to hold the debt assets (i.e., bonds) relative to holding the productive capacity of the economy (i.e., equities) and/or owning other, more stable forms of money (e.g., gold).

虽然每个案例的发展过程存在差异,但最重要的因素是债务是否以央行能够 “印刷” 的货币计价。但无论有何差异,我们几乎总能看到,相对于持有经济的生产能力(如股票)和 / 或持有其他更稳定的货币形式(如黄金),持有债务资产(即债券)变得相对不那么可取。

To me it is interesting and inappropriate that, when credit rating agencies rate the credit of a central government, they don’t rate the riskiness of its debt losing value. They only rate the risk of default on the debt, which gives the misimpression that all higher-rated debt is a safe storehold of value. Said differently, because central banks can bail out central governments, the riskiness of central governments’ debts are hidden. Creditors would be better served if the rating agencies rated the riskiness of the debt losing value through both default and devaluation. After all, these bonds are supposed to be storeholds of wealth and should be rated as such. As you will see in this study, that is how I look at bonds. For countries with debts denominated in their own currencies (i.e., in a currency they can print), I rate central governments’ debts separately from their central banks to show how risky they are, and I rate the risks of central banks’ debts by considering the risk of the devaluation of money to be as, if not more, probable than a default on government debt.

Default or devaluation, I don’t care. What I care about is losing my storehold of wealth, which inevitably will happen one way or another.

Following the Debt Cycle’s Progression

The main difference between a short-term debt cycle and a long-term (big) debt cycle has to do with the central bank’s ability to turn them around. For the short-term debt cycle, its contraction phase can be reversed with a heavy dose of money and credit that brings the economy up from a depressed disinflationary state because the economy has the capacity to produce another phase of noninflationary growth. But the long-term debt cycle’s contraction phase cannot be reversed by producing more money and credit because existing levels of debt growth and debt assets are unsustainable and holders of debt assets want to get out of them because they believe that, one way or another, they will be poor storeholds of wealth.

Think of the Big Debt Cycle’s progression like the progression of a disease or a life cycle through stages that exhibit different symptoms. By identifying these symptoms one can identify approximately where the cycle is in its progression with some expectations of how it is likely to progress from there. Described most simply, the Big Debt Cycle moves from sound/hard money and credit to increasingly loose money and credit to a debt bust that leads to a return to sound/hard money and credit brought about by necessity. More specifically, at first there is heathy borrowing by the private sector that can be paid back; then the private sector overborrows, has losses, and has problems paying it back; then the government sector tries to help, overborrows, has losses, and has problems paying it back; then the central bank tries to help by “printing money” and buying the government debt, and has problems paying it back, which leads it to monetize a lot more debt if it can (i.e., if the debt is denominated in the currency that it can print). Though not all cases progress in exactly the same way, most cases progress through the following five stages:

1) The Sound Money Stage: When net debt levels are low, money is sound, the country is competitive, and debt growth fuels productivity growth, which creates incomes that are more than enough to pay back the debts. This leads to increases in financial wealth and confidence.

  • Credit is the promise to deliver money. Unlike credit which requires a payment of money at a later date, money settles transactions—i.e., if money is given the transaction is complete, whereas if credit is given money is owed. It’s easy to create credit. Anyone can create credit but not anyone can create money. For example, I can create credit by accepting your promise to pay me money even if you don’t have the money. As a result, credit easily grows so there is much more credit than there is money. The most effective money is both a medium of exchange and a storehold of wealth that is widely accepted around the world. At the early stage of the Big Debt Cycle money is “hard,” which means that it is a medium of exchange that is also a storehold of wealth that can’t easily be increased in supply, such as gold, sterling silver, and Bitcoin. Cryptocurrency like Bitcoin is now emerging as an accepted hard currency because it is a currency that is widely accepted around the world and is limited in supply. The biggest, most common risk to money becoming an ineffective storehold of wealth is the risk that a lot of it will be created. Imagine having the ability to create money; who wouldn’t be tempted to do a lot of that? Those who can always are. That creates the Big Debt Cycle. In the early part of the Big Debt Cycle, a) money is typically hard—e.g., gold—and the paper money that circulates like money is convertible into the “hard money” at a fixed price and b) there isn’t a lot of paper money and debt (which is the promise to pay money) outstanding. The Big Debt Cycle consists of the building up of a) “paper money” and debt assets/liabilities relative to b) “hard money” and real assets (e.g., goods and services) and relative to the income that is required to service the debt. Basically, the Big Debt Cycle works like a Ponzi scheme or musical chairs with investors holding an increasing amount of debt assets in the belief that they can convert them into money that will have buying power to get real things, yet as the amount of the debt assets that are held up by that faith increases relative to the real things, that conversion becomes more obviously impossible until that is realized and the process of selling the debt to get the hard money and real assets begins.
  • At the early stage of the debt cycle, private and government debt and debt service ratios are 1) low relative to incomes and/or 2) low relative to liquid assets. For example, government debt and debt service are low relative to government tax revenue and/or low relative to government liquid assets (e.g., reserves and other savings such as sovereign wealth assets) that can easily be converted into money. For example, when the Big Debt Cycle that we are in began in 1944, the ratios of a) US government debt and b) US money supply divided by the amount of gold the US government had were equal to a) 7x and b) 1.3x respectively, whereas now these ratios are a) 37x and b) 6x respectively.
  • During this early stage in the cycle, debt levels, debt growth, economic growth, and inflation are neither too hot nor too cold and finances are both sound.
  • At this stage in the cycle, “risky assets” are relatively inexpensive relative to “safe” assets. That is because the memories of the prior period in which there was great damage done affects psychology and pricing. For example, in the late 1940s and early 1950s stock earning’s yields were roughly 4x that of bond yields.
  • During this stage, there is a healthy economy and good investment returns that lead to the next stage. 2) The Debt Bubble Stage: When debt and investment growth are greater than can be serviced from the incomes being produced.
  • In this stage, money is readily available and cheap, there is a debt-financed economic expansion and an economic boom. Demands for and prices of goods, services, and investment assets are driven up by a lot of debt-financed buying, sentiment is very bullish, and, by most conventional measures, the market is overpriced.
  • In this stage, there are typically amazing new inventions that are truly transformative that investors invest in without an ability or care to assess whether the present value of their future cash flows will be greater or less than their costs.
  • This dynamic eventually produces a bubble that is reflected in the rates of debt and debt service growth to finance speculation being greater than the income growth rates that are needed to service the debts. In this stage, markets and economies seem great, most everyone believes that they will get better, they are financed by a lot of borrowing, and “wealth” is created out of nothing. By wealth being created out of nothing, I mean that there is greater imagined wealth rather than actual existing wealth. For example, bubble periods are identifiable by extensive periods (e.g., three years) of debt growth that is significantly faster than income growth, high asset prices relative to traditional measures of the present values of likely future cash flows, and many other factors that I measure in my bubble indicator. (You can find the indicator here.) A contemporary example is the unicorn that is valued at over $1 billion that has made the owner a “billionaire” on paper but has only raised $50 million in capital because speculative venture capitalists put in the money to get option-like chips in case it does well. Bubbles can go on a while before the top is made. However, they inevitably lead to the next stage. 3) The Top Stage: When the bubble pops and there is a credit/debt/market/economic contraction.
  • The popping of the bubble occurs due to a combination of a tightening of money and the prior rate of debt growth being unsustainable. It is just that simple.
  • When the bubble is popped, a self-reinforcing contraction begins so the debt problems spread very quickly, like an aggressive cancer, so it is very important for policy makers to deal with it quickly, either to reverse it or to guide the deleveraging to its conclusion. In most cases, the debt contraction can be temporarily reversed by giving the system a heavy dose of what caused the debt problem—i.e., by creating more credit and debt. That continues until it can’t continue anymore, at which time a big deleveraging occurs. 4) The Deleveraging Stage: When there is a painful bringing down of debt and debt service levels to be in line with income levels so that the debt levels are sustainable.
  • At the beginning of this stage in the Big Debt Cycle, the first cracks typically spread from the private sector to the central government and then to the central bank. Net selling of debt assets, especially net selling of government debt assets, is a big red flag. When that happens conditions will deteriorate quickly unless managed very well and very quickly by central governments and central banks. That selling takes the form of runs on banks. By “runs on banks” I mean the turning in of debt assets to get real money, which lenders like banks don’t have enough of. When debt problems become apparent, the holders of the debt assets sell their debt assets, which drives interest rates on the debt up. This makes the debt more difficult to service, hence more risky, which drives interest rates higher.
  • The selling of the government’s debt leads to a) a free-market-driven tightening of money and credit, which leads to b) a weakening of the economy, c) downward pressure on the currency, and d) declining reserves as the central bank attempts to defend the currency. Classically, these runs accelerate and feed on themselves as holders of debt assets see that, one way or another (through default or through the devaluation of their money), they will lose the buying power that they had believed was stored in these debt assets, causing great shifts in market values and wealth until debts are defaulted on, restructured, and/or monetized. Because this tightening proves too harmful for the economy, the central bank eventually simultaneously eases credit and allows a devaluation of the currency. The devaluation of money can itself be the reason to sell the debt asset because it becomes a poor storehold of wealth. So, whether there is a tightening of money that leads to debt defaults and a bad economy or an easing of money that produces a devaluation of money and debt assets, it is not good for the debt asset. This dynamic creates what is called a death spiral because it is a self-reinforcing, debt-contraction dynamic in which the rising interest rates cause problems that creditors see, leading them to sell the debt assets, which leads to even higher interest rates or the need to print more money, which devalues the money and leads to even more selling of the debt assets and the currency and so on until the spiral runs its course. When this happens to government debt, the realization that too much debt is the problem naturally leads to the inclination to cut spending and borrowing. However, because one person’s spending is another’s income, cutting spending at such times typically only contributes to increases in debt-to-income ratios. That is typically when policies are shifted to a mix of debt restructurings and debt monetizations with the mix chosen primarily dependent on how much of the debt is denominated in the country’s currency. This defaulting on, restructuring of, and/or monetizing debt reduces the debt burdens relative to incomes until a new equilibrium is reached. The movement to a stable equilibrium typically takes place via a few painful adjustment spasms because borderline financial soundness is achieved before secure financial soundness.
  • Classically, the deleveraging process progresses as follows. Early in this recession/depression phase, central banks bring interest rates down and make credit more available. However, when a) debts are large and a debt contraction is underway, b) interest rates can’t be lowered any more (i.e., when they fall around 0%), c) there is not enough demand for government debt, and d) the monetary easing is not enough to offset the self-reinforcing depressionary pressures, the central bank is forced to switch to new “tools” to stimulate the economy. Classically, to stimulate the economy the central bank must lower interest rates to below nominal economic growth rates, inflation rates, and bond rates, but that is difficult to do when they approach 0%. At the same time, the central government is typically getting itself into a lot more debt because tax revenues are down and spending is up to support the private sector, yet there is not enough private sector demand to buy that debt. The central government experiences a debt squeeze in which the free-market demand for its debt falls short of the supply of it. If there is net selling of the debt, that creates a much worse problem.
  • Often in this deleveraging stage of the cycle there is a “pushing on a string,” a phrase coined by policy makers in the 1930s. It occurs late in the long-term debt cycle when central bankers struggle to convert their stimulative policies into increased spending because savers, investors, and businesses fear borrowing and spending and/or there is deflation, so the risk-free interest that they are getting is relatively attractive to them. At such times, it is difficult to get people to stop saving in “cash” even when interest rates go to 0% (or even below 0%). This phase is characterized by the economy entering a deflationary, weak, or negative growth period as people and investors hoard low-risk, typically government-guaranteed cash.
  • At this stage, central banks must choose between keeping money “hard,” which will lead debtors to default on their debts, which will lead to deflationary depressions, or making money “soft” by printing a lot of it, which will devalue both it and the debt. Because paying off debt with hard money causes such severe market and economic downturns, when faced with this choice central banks always eventually choose to print and devalue money. Of course, each country’s central bank can only print that country’s money, which brings me to my next big point.
  • At this stage, if it has the ability to “print money,” the central bank creates a substantial amount of money and credit and throws it aggressively at the markets. It typically buys government debt and private sector debt of systemically important entities that are at risk of defaulting (in order to make up for the private sector’s inadequate demand for debt and to keep interest rates artificially low), and it sometimes buys equities and creates incentives for people to buy goods, services, and financial assets. At this stage, it is also typically desirable to devalue the currency because that is stimulative to the economy and raises inflation rates thus negating the deflationary pressures. If the currency is linked to gold, silver, or something else, that link is typically broken and there is a move to a fiat monetary system. If the currency isn’t linked—i.e., if the currency is already a fiat currency—devaluing it relative to other storeholds of wealth and other currencies is helpful. In some cases, the central bank’s moves can drive nominal interest rates higher, either because the central bank tightens monetary policy to fight inflation or because it doesn’t tighten money to fight inflation and holders of the debt don’t want to buy the newly issued government debt and/or they want to sell it because it doesn’t provide an adequate return. It is important to watch real and nominal interest rates and the supply and demand for debt to understand what is happening. At such times, extraordinary policies to get money like imposing extraordinary taxes and capital controls become common.
  • This deleveraging stage is typically a painful time when debt burdens are reduced by defaults, restructurings, and/or devaluations. This is when an aggressive mix of debt restructurings and debt monetizations inevitably takes place to reduce the debt and debt service burdens relative to incomes. In a typical deleveraging the debt-to-income ratio has the be lowered by roughly 50%, give or take about 20%. It can be done well or poorly. When it is done well, which I call a “beautiful deleveraging,” central governments and central banks simultaneously do both debt restructurings and monetary stimulations in a balanced way. The restructurings reduce debt burdens and are deflationary while the monetary stimulations also reduce debt burdens (by providing money and credit to make it easier to buy debt) but are inflationary and stimulative to the economy so, if they get the balance right, positive growth occurs with falling debt burdens and acceptable inflation. Whether done well or poorly, this is the stage of the Big Debt Cycle that reduces a lot of the debt burden and establishes the bottom that can be built on to begin the next Big Debt Cycle. 5) The Big Debt Crisis Recedes: When a new equilibrium is reached, and a new cycle begins.
  • In order to have a viable money/credit/debt system, it is imperative that a) money/debt is sound enough to be a viable storehold of wealth, b) debt and debt service burdens are in line with the incomes to service them so that debt growth is sustainable, c) creditors and debtors both believe that those things will exist, and d) the availability of money and credit and real interest rates begin to fall in line with that which is needed by both lender-creditors and borrower-debtors. This late phase of the Big Cycle is when there is a movement to those things happening. It requires both psychological and fundamental adjustments. After a big deleveraging, it is typically difficult to convince lender-creditors to lend because the devaluations/restructurings they experienced in the deleveraging make them risk-averse, so it is imperative that the central government and the central bank take credibility-restoring actions. These generally involve bringing their finances in order by a) the central government earning more money than it spends and/or b) the central bank making money hard again by offering high real yields, raising reserves, and/or linking the currency to something hard like gold or a strong currency. Typically, in this stage, interest rates need to be relatively high in relation to inflation rates and more than high enough to compensate for currency weakness, so it pays to be a lender and is costly to be a borrower. This stage of the cycle can be very attractive for lender-creditors.

The stage that the Big Debt Cycle is in is also reflected in the types of monetary policies being used. As the Big Debt Cycle progresses, central banks have to change how they run monetary policy in order to keep the credit/debt/economic expansion going, so by observing what type of monetary policy they are using, one can surmise about what stage the Big Debt Cycle is in. The phases in monetary policy and the conditions that lead to them are as follows:[4]

Phase 1: A Linked (i.e., Hard) Monetary System (MP1). This is the type of monetary policy that existed from 1944 until 1971. This type of monetary policy ends when the debt bubble bursts, and there is the previously described “run on the bank” dynamic, which is a run from credit assets to the hard money, and the limited amount of hard money causes massive defaults. This creates a compelling desire to print money rather than leave the supply of it limited by the supply of the gold or hard money that exists to be exchanged at the promised price.

Phase 2: A Fiat Money, Interest-Rate-Driven Monetary Policy (MP2). During this phase, interest rates, bank reserves, and capital requirements are also controllers of the amounts of credit/debt growth. This fiat monetary policy phase both allows more flexibility and provides less assurance that money printing won’t be so large that it will devalue money and debt assets. The US was in this phase from 1971 until 2008. It ends when interest rate changes no longer work (e.g., interest rates hit 0% and there is a need to ease monetary policy) and/or the private market demand for the debt being created falls short of the supply being sold so that, if the central bank did not print the money and buy the debt, money and credit would be tighter and interest rates would be higher than desired.

Phase 3: A Fiat Monetary System with Debt Monetization (MP3). This type of monetary policy is implemented by the central bank using its ability to create money and credit to buy investment assets. It is the go-to alternative when interest rates can no longer be lowered and when private market demand for debt assets (mostly bonds and mortgages though it can also include other financial assets like equities) is not large enough to buy the supply at an acceptable interest rate. It is good for financial asset prices, so it tends to benefit disproportionally those who have financial assets. It won’t effectively deliver money into the hands of those who are financially most stressed, and it won’t be very targeted. The US was in this phase from 2008 until 2020.

Phase 4: A Fiat Money System with Coordinated Big Fiscal Deficit and Big Debt Monetization Policy (MP4). This type of monetary policy is used when, in order to make the system work well, central government fiscal policy and central bank monetary policy have to be coordinated in order to get money and credit into the hands of people and entities that need it most. While creating money and credit typically temporarily alleviates the debt problem, it does not rectify the problem.

Phase 5: A Big Deleveraging (MP5). This is when there must be a big reduction in debt and debt service payments through a debt restructuring and/or a debt monetization. When managed in the best possible way—what I call a beautiful deleveraging—the deflationary ways of reducing debt burdens (e.g., through debt restructurings) are balanced with the inflationary ways of reducing debt burdens (e.g., by monetizing them), so that the deleveraging occurs without having unacceptable amounts of either deflation or inflation. The Big Debt Cycle sequence to keep in mind is: first the private sector overborrows, has losses, and has problems paying it back (i.e., a debt crisis); then, to help, the government overborrows, has losses, and has problems paying it back; then, to help out, the central bank buys the government debt and takes losses. To fund those purchases and to fund other debtors in trouble (because it is the “lender of last resort”), the central bank prints a lot of money and buys a lot of debt. Then, at its worst, the central bank loses a lot of money on the debt it bought.

  • While it is said that modern central bank “prints” money to buy the debt, the central bank doesn’t literally “print money.” Instead, it borrows money (reserves) from commercial banks that it pays a very short-term interest rate on. At its most extreme, the central bank can lose money because the interest earnings it gets on the debt it bought are less than the interest that it has to pay out on the money it borrowed, so when these amounts become large it can find itself in a self-reinforcing spiral of having to buy debt, which leads it to have losses and negative cash flows which leads it to need to print more money to service its debt and to need to buy more debt which ends up having more losses which requires it to do more of the same. This is the “death spiral” I mentioned earlier. When done in large amounts, the “printing” devalues the money and creates inflationary recessions or depressions. If interest rates rise, the central bank loses money on its bond holdings because the interest rate that it has to pay on its liabilities is greater than the interest rate it receives on the debt assets it bought. This is notable but not a big red flag until the central bank has a very large negative net worth and is forced to “print” more money to cover the negative cash flow that it experiences due to less money coming in on its assets than has to go out to service its liabilities. That is what I mean when I say the central bank goes broke: while the central bank doesn’t default on its debts, it can’t make its debt service payments without printing money.
  • Eventually the debt restructurings and debt monetizations reduce the size of the debts relative to incomes and the debt cycle runs its course.

Phase 6: The Return to Hard Money (MP6). In this phase the central government takes actions to restore the soundness of its money and credit/debt. This type of monetary policy occurs after the debt has been written down through debt defaults/restructurings and debt monetizations so the debt levels relative to the incomes and amounts of money that are available to service the debts can be brought back into alignment. As previously described, it comes after those who held the debt assets were burned by the defaults and/or inflationary periods, so confidence in holding debt assets has to be rebuilt. At this stage, countries typically go back to MP1 (i.e., a hard-asset-backing monetary policy) or MP2 (an interest rate/money supply-targeted monetary policy) that is beneficial to lender-creditors via high real interest rates.

For great countries with great empires, the end of the Big Debt Cycle has meant the end of their prominence.

A Few Concluding Observations

  • It pays to build up savings in the good times so there are savings to draw on in the bad times. There are costs to having too much savings as well as too little savings, and no one gets the balance exactly right.
  • Big debt crises are inevitable. Throughout history only a very few well-disciplined countries have avoided them. That is because lending is never done perfectly relative to the incomes that are needed to service it. And it is often done badly because people always want more credit and that turns into debt. Debt levels get beyond that which is sustainable which leads to the need to bring the debt burdens down which typically leads to a mixture of debt defaults/restructurings and the creating of money and credit, leading a debt crisis to occur. And people’s psychology reinforces the cycle: the bubble period makes people more optimistic causing them to borrow more, and the bust causes people to be more pessimistic causing them to cut spending. Even though this progression has happened many times in history, most policy makers and investors think their current circumstances and monetary system won’t change. The change is unthinkable—and then it happens suddenly.
  • The best way to anticipate a debt crisis happening is not by focusing on a single influence or number like debt as a percent of GDP; it is by understanding and focusing on a number of interrelated dynamics that we will get into, especially in the next two chapters.
  • If debts are denominated in a country’s own currency, its central bank can and will “print” the money to alleviate the debt crisis. This allows them to manage it better than if they couldn’t print the money, but of course it also reduces the value of the money. If the debt is not denominated in currencies that their central banks can print, then they will have debt defaults and deflationary depressions measured in the currency that they owe and can’t print.
  • All debt crises, even big ones, can be managed well by economic policy makers restructuring and monetizing them so that the deflationary ways of reducing the debt burdens (i.e., writing off and restructuring debt) and the inflationary ways of reducing debt burdens (creating money and credit and giving it to the debtors to make it easier for them to service their debts) balance each other. The key is to spread the paying back over time. For example, if the debt-to-income ratio needs to fall by about 50% to make it sustainable, a debt restructuring that spreads it out to be at a rate of 3% or 4% per year would be much less traumatic than one that is about 50% in one year.
  • Debt crises provide great risks and opportunities that have been shown to both destroy empires and provide great investment opportunities for investors if they understand how they work and have good principles for navigating them well.
  • If you try to focus on debt cycles precisely or focus your attention on the short term you won’t see them. It’s like comparing two snowflakes and missing that they are pretty much the same because they’re not exactly the same.

That’s it in a nutshell.

In the rest of this study I will get into the mechanics in greater depth, show the actual archetypical sequences that have played out over 35 cases, look at how the Big Debt Cycle and Big Cycle that includes the other big cycles (for instance, cycles of internal and external order) that started in 1944 and that we are currently in the late stages of have transpired relative to this template, and briefly look at the Chinese and Japanese Big Cycles and a number of other cases. The Japanese case is interesting because Japan is further along in its Big Debt Cycle. Notably its large debt and debt monetizations have led to the depreciation of its currency and debt, which led holders of its bonds to have losses of 45% relative to holding US dollar debt since 2013 and losses of 60% relative to holding gold since 2013. In the final chapters, I will share how I am processing the US today relative to this template, how the US could reduce the risk of an acute debt crisis, and how I read the Five Big Forces today.

View the next installation of this study here.

The views expressed in this article are mine and not necessarily Bridgewater’s.

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[1] While debt and currency cycles are comprehensively covered in my book Principles for Navigating Big Debt Crises (which looked at all of the 48 biggest debt crises in the 100 years between 1918 and 2018, the year I published the book) and in Chapters 3 and 4 of my book Principles for Dealing with the Changing World Order (which looked at the rises and declines of the world’s reserve currency markets over the last 500 years and 750 currencies since 1700), in this study, I am going to get much more granular in explaining the last and most dramatic breakdown part of the cycle that leads to changes in currency orders.

[2] The “fractional reserve banking system” can lend more money than is deposited because the same money can be lent several times.

[3] This cautiousness is reflected in market pricing. For example, during the early stages of the cycle the yields and expected returns of “risky assets” are very high relative to those of “low-risk assets.”

[4] This explanation of the phases differs slightly from how I have described them in my earlier writings and books, with the main difference being that I have separated linked monetary systems from fiat ones, which were previously both described as being part of MP1. I’ve made this change because I think it is important to draw a distinction between linked and fiat systems. The definitions of the other monetary policies (debt monetization, fiscal-monetary coordination) have remained the same, but the numbering is now different (i.e., MP2 has become MP3 and MP3 has become MP4).

This post is licensed under CC BY 4.0 by the author.