The Debt-Liquidity Spiral

Looking ahead, the wealth divide will likely accelerate and today’s social tensions must inevitably rise. But, much like in 1920s Germany when hyper-inflation savaged the post-WW1 economy, there was also a widening split between young (stock speculators) and old (bond investors). In today’s monetary inflation World, many young (crypto investors) ar... See more

Both Boomers and GenX’ ers bought their homes for around 4.5 times their annual incomes. When Millennials entered the US workforce, they could buy houses for circa 5.5 times annual income. In the COVID emergency, the US Federal Reserve generously printed $6 trillion through QE policies, and since then house prices have jumped to some 7.5 times annu... See more

For example, if public debt is compounding higher at a 7-8% annual clip, then liquidity needs to keep pace to avoid financial crises. Think of it as the ‘cost’ of stability. This rate of monetary inflation represents a return hurdle for other assets because it measures the rate of debasement of paper money. Hence, investors need to figure which ass... See more

The hidden cost of this ‘monetary inflation’ turns on the relative rather than the absolute impoverishment of wage earners. Monetary inflation may not necessarily spill-over into faster high street inflation , but it almost certainly will mean faster asset price inflation . Portfolio investment choice is less about choosing ‘cheap’ stocks versus ea... See more

While more debt is not always bad, the lesson of history is that excessive private sector debt is often deflationary, whereas too much public sector debt is inflationary .

As noted, financial markets today serve as giant debt refinancing mechanisms and not as the new capital raising vehicles popular in finance textbooks. Here balance sheet capacity, i.e. liquidity, is what matters, not interest rates. In a World dominated by new investment spending, interest rates serve as the cost of capital, but in a debt re-financ... See more