QUESTION: Commercial move seems to have it 2 quadrillion dollars of global debt that outweighs everything. Thus, paper assets will explode! They seem to say that everything grew because of this debt bubble, and it was all created with zero interest rates. Now that they are rising, the debt bubble will burst and everything will go downhill. History seems to be The boom-and-bust cycle that lasted several decades was created over and over again by the Federal Reserve.
It’s like, like you said, they’re trying to reduce everything to one cause and effect.
What is really going on?
REPLY: These people seem to keep preaching the same story but have no historical understanding of how the monetary system ever worked. Their focus on the Federal Reserve shows they don’t look at the global economy or even realize how bad things really are outside the United States. They don’t understand what an interest rate is. This is compensation to the creditor for his expectation of inflation, plus a profit. If I think the dollar is going to drop 50% why would I lend you dollars for a year if when you pay me back they buy half of what I loaned you?
Debt can be a performing asset. In the 1980s, I consulted for many of the Takeover Boys. We borrowed in one currency to buy an asset in another, using a computer to distinguish between long-term trends. I would not recommend this to someone who is just operating on intuition.
We also consulted on the real values that Hollywood has distorted and based on the movie “Wall Street” with Michael Douglas and his famous speech about greed. What they didn’t really understand was that after the Public Wave, which peaked in 1981, stocks were crushed and total faith in government created a widely supported bond market. Hence, bonds were conservative and stocks were risky. There were two aspects behind the acquisition boom.
First, I showed these charts and how, in terms of book value, the Dow Jones hit bottom in 1977. It was obvious that if you can buy a company, sell its assets, and double or triple your money, then the market is clearly not overpriced. We predicted that the Dow was undervalued and that it would rise from the 1982 low of 769.98 and test the 2500 level two years later in 1985. Indeed, by September 1987 it had reached 2695.47. We also predicted that by the next decade the Dow Jones would test 6000 on its next rally.
Even the press in Japan was shocked. We also predicted that oil would fall below $10 in 1998. Indeed, this forecast was published by Mark Pitman in Bloomberg News. In 1998, the price bottomed out at $10.65. In gold, the price is predicted to drop to $250 by 1999, ending a 19-year low cycle. Then gold will rise to test 1000. By 2008, gold had hit the $1000 mark. The Japanese press considered these predictions, to put it mildly, wild.
The SECOND aspect of our advice to the ’80s takeover guys was about the press. NEVER Understood. We would advise taking out a loan in one currency for an asset in another. We were able to turn debt into a working asset. We would get 20-40% profit only on the currency. Often the press just looked at the debt and didn’t understand what we were doing at all.
Much of this reasoning stems from the observations of Sir Thomas Gresham when he represented England on the Amsterdam Stock Exchange during the reign and humiliation of Henry VI. Since Henry devalued silver coinage, as they did in Spain, the more they depreciated coinage, the higher inflation was. His remark that bad money drives out good money was misunderstood. When I was growing up, silver was withdrawn from minting in 1965. People were rejecting silver, showing that the defaced new coinage of 1965 had forced the old silver coins out of circulation. The same thing happened with copper coins.
As people hoard old coins, the money supply shrinks. This then forces the government to issue many more defaced coins to make up for the minting taken from stock. Consequently, inflation unfolds when all tangible assets rise in value, which translates into new devalued coins.
What these people are always trying to sell is the same old scenario that they can’t point to any time in history where everything crumbles to dust but only gold survives. Such periods usually lead to revolution. When Caesar crossed the Rubicon, this too was linked to the debt crisis.
You must also understand that interest rates will be the LOWEST internationally in the mainstream economy of the financial capital of the world, which is the US right now. The farther you are from the center, the higher the interest rate will be. Therefore, I warned that the United States would be the LAST to fall, not the first. This is not based on my opinion, it’s just historical fact.
We have interest rates going back to 3000 BC, and we have studied the impact of such convulsions on economic history. As for the debt crisis that forced Caesar to cross the Rubicon, I suggest you read Only Julius Caesar understood the anatomy of the debt crisis.
The essence is very simple. There is simply no such period, as people describe, when everything turns to dust and only gold survives. Even if it were true, what good is gold if everything else is worth ZERO? Gold would also have ZERO value as nothing would have value.
The real problem is that as government defaults develop, tangible assets will rise in value by the amount of money in debt, which always dwarfs that amount, even in the stock market. We are in a sovereign debt crisis, and it is very different from a private debt crisis.