1) THE LONG-TERM MONEY AND DEBT CYCLE
At no point in our lifetimes have interest rates been so low or negative on so much debt as they are today. At the
start of 2020, more than $10 trillion of debt was at negative interest rates and an unusually large amount of
additional new debt will soon need to be sold to finance deficits. This is happening at the same time as huge
pension and healthcare obligations are coming due. These circumstances raised some interesting questions for me.
Naturally I wondered why anyone would want to hold debt yielding a negative interest rate and how much lower
interest rates can be pushed. I also wondered what will happen to economies and markets when they can’t be
pushed lower and how central banks could be stimulative when the next downturn inevitably came. Would central
banks print a lot more currency, causing its value to go down? What would happen if the currency that the debt is
denominated in goes down while interest rates are so low? These questions led me to ask what central banks will
do if investors flee debt denominated in the world’s reserve currencies (i.e., the dollar, the euro, and the yen),
which would be expected if the money that they are being paid back in is both depreciating in value and paying
interest rates that are so low.
In case you don’t know, a reserve currency is a currency that is accepted around the world for transactions and
savings. The country that gets to print the world’s primary currency (now the US) is in a very privileged and
powerful position, and debt that is denominated in the world’s reserve currency (i.e., US dollar-denominated debt)
is the most fundamental building block for the world’s capital markets and the world’s economies. It is also the
case that all reserve currencies in the past have ceased to be reserve currencies, often coming to traumatic ends for
the countries that enjoyed this special privilege. So I also began to wonder whether, when, and why the dollar will
decline as the world’s leading reserve currency—and how that would change the world as we know it.
2) THE DOMESTIC WEALTH AND POWER CYCLE
Wealth, values, and political gaps are now larger than at any other time during my lifetime. By studying the 1930s
and other prior eras when polarity was also high, I’ve learned that which side wins out (i.e., left or right) will have
very big impacts on economies and markets. So naturally I wondered what these gaps will lead to in our time. My
examinations of history have taught me that, as a principle, when wealth and values gaps are large and there is an
economic downturn, it is likely that there will be lot of conflict about how to divide the pie. How will people and
policy makers be with each other when the next economic downturn arrives? I am especially concerned because of
the previously mentioned limitations on central banks’ abilities to cut interest adequately to stimulate the economy.
In addition to these traditional tools being ineffective, printing money and buying financial assets (now called
“quantitative easing”) also widen the wealth gap because buying financial assets pushes up their prices, which
benefits the wealthy who hold more financial assets than the poor.
3) THE INTERNATIONAL WEALTH AND POWER CYCLE
For the first time in my lifetime, the United States is encountering a rival power. China has become a competitive
power to the United States in a number of ways and is growing at a faster rate than the US. If trends continue, it
will be stronger than the United States in most of the most important ways that an empire becomes dominant. (Or
at the very least, it will become a worthy competitor.) I have seen both countries up close for most of my life, and I
now see how conflict is increasing fast, especially in the areas of trade, technology, geopolitics, capital, and
economic/political/social ideologies. I can’t help but wonder how these conflicts, and the changes in the world
order that will result from them, will transpire in the years ahead and what effects that will have on us all.
The confluence of these three factors piques my curiosity and most draws my attention to similar periods such as
the 1930-45 period and numerous others before that. More specifically, in 2008-09 like in 1929-32, there were
serious debt and economic crises. In both cases, interest rates hit 0% which limited central banks’ ability to use
interest rate cuts to stimulate the economy, so, in both cases, central banks printed a lot of money to buy financial
assets which, in both cases, caused financial asset prices to rise and widened the wealth gap. In both periods, wide
wealth and income gaps led to a high level of political polarization that took the form of greater populism and
battles between ardent socialist-led populists of the left and ardent capitalist-led populists of the right. These
domestic conflicts stewed while emerging powers (Germany and Japan in the 1930s) increasingly challenged the
existing world power. And finally, just like today, the confluence of these factors meant that it was impossible to
understand any one of them without also understanding the overlapping influences among them.