Financial analyst and writer John Mauldin has christened the beginning of 2020 as the decade in which we will live dangerously. In this article we will translate and comment on the arguments and analyses published by this author under the same title. Readers will be able to see the coincidence in some aspects with respect to what we have been saying in the past. publishing on this blog for more than 4 years.
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Hyman Minsky taught us that stability, perhaps because of the abuse we tend to make of it, sooner or later leads to instability. But that abuse is as unconscious as it is harmful, and we humans like to dabble in concepts like «reasonable», «manageable», «conservative» or «prudent». That's why we feel safe seeking more and more performance until we go too far to avoid disaster.
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To think that somehow central banks are capable of eliminating recessions and risk is crazy, despite the fact that most investors fall into this trap time and again. Yes, it is true that, as we have said many times before, with infinite liquidity no one is insolvent and therefore their debt is virtually devoid of default risk. But at some point gravity will do its work again and the insolvent will collapse as God -or the elementary fundamentals of economics- commands.
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Debt seems harmless at first. And with sufficient cash flow, capital repayments are not a problem, let alone ridiculous interest rates. Besides, debt will be used wisely and profitably to increase growth, won't it? Well, it won't, because human nature always leads us to denaturalise goodness, and lenders will insist ad nauseam that we get into debt far beyond what is necessary for economic growth, and we start getting into debt simply to consume today what we should be consuming tomorrow. So the goodness of indebtedness is corrupted along the way.
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Personal debt, though often excessive, is not the most serious problem. Corporate and public debt are the main challenge for which Mauldin predicts a dangerous decade ahead. And let us not forget that all this public and corporate debt ends up as personal debt, since most of us are after all taxpayers, shareholders or both.
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The calm on the markets, however, may last a few more years (2020, 2021, 2022, 2023...). But beneath the surface of the central banks' cheerful free bar, the pressure is increasing every year. Slowly, almost imperceptibly, but at some point it will explode.
Ben Hunt, a personal friend of Mauldin's, has developed the concept of the «The Long Now«. Something like an endless today that swallows up the income of the future. Or as Hunt defines it: «Everything we bring to the present of our future and that of our children».». The Long Now is the realisation of the stark reality of Fiat money or fiat money, without anchorage to any tangible and finite value. In other words, trust in an abused and uncontrolled system is what makes us choose bread for today. And that system is the one that tells us that inflation is virtually zero, that wealth inequality, low productivity and negative savings rates are just a circumstantial fact of life. We are also told that we must vote for ridiculous candidates to be a good and politically moderate citizen, that we must buy ridiculous funds and stocks to be a good investor, or that we must take ridiculously unpayable loans to be a good parent or child.
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Debt is future consumption brought into the present. But to pay that money back we or our heirs will have to consume less in the future, unless our economy grows sufficiently. And that is the problem, that today's debt is not being used to gain growth but we live in a world where the economy is driven by consumption. Furthermore, Ben Hunt observes that society tends to procrastinate in solving problems. We tend, with surprising skill, to postpone the inevitable (rather than avoid it indefinitely). And when it comes to over-indebtedness, it is also a three-way game, as neither debtors, creditors nor regulators are in the mood to end the game. It is in the interest of none of them to recognise that the debt is a dead letter and unpayable and to write off the losses on their balance sheets. The traumatic consequences of recognising insolvency and the resulting bankruptcies.
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A game of Monopoly would never end if the bank refinances the debts of the players infinitely.. The million-dollar question is, as a spectator of this distorted game of Monopoly, to which player should we lend our money in exchange for reasonable returns? To the players who owe astronomical amounts to the banks, but who nevertheless continue to play and play? Or to the few players who owe nothing and are meritoriously sustaining themselves in the game by their own means? An infinite game would make no sense at all and would call into question the very market system we have known since the beginning of civilisations. Therefore, at some point not necessarily far away, the game will end and there will have to be losers. Many of them.
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That said, Mauldin predicts that we will be comfortable and relatively safe along the way. That at any given moment, analysts will look at the data and think we have avoided the worst. We will have some passing recessions and some financial crises, but they will seem «manageable» when we get into them. And we will indeed come out of them. But what we will not see is the magnitude of the expansion that the system will need to continue to finance our debt, which will continue to grow and grow throughout this Long Now. So the debt burden will become heavier, and there will come a time when it will be unsustainable even for this trust-based system of infinite money.. Then the fan will blow more than just air in everyone's face.
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Mauldin defined the inevitable process in 3 phases: An initial seemingly manageable instability, perhaps initially caused by high yield debt, but easily contagious to other parts of the system that are also unstable. Secondly, a drying up of liquidity that will force banks to reduce lending, thereby reducing the capital available to productive businesses and thus reducing economic growth, leading to recession. This second episode may be recurrent, with drying up of funding and intermittent renewed flows based on emergency measures by central banks, but increasingly unmanageable. And finally, a third phase of global political instability, where artificial intelligence - among other factors - will make a lot of intermediate jobs redundant. The shrinking voter will vote for governments that promise to maintain a welfare state that provides for his or her needs and comfort as in past decades, and those governments will of course raise taxes (remember that infinite liquidity dried up in phase two) to the point of economic suffocation, deepening the recession. Mauldin does not expect to see the start of this process until the second half of the new 20s.
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Perhaps the whim of fate is leading us into another decade of the Roaring Twenties like 100 years ago. But a new Great Depression will hardly be mitigated by central banks with depleted ammunition.