How money, credit, and the economy work together is key for long term investment success. The bottom line is that US economic policy has been accelerating in the wrong direction for the purposes of high long term growth over the last 70 years.
Another brilliant interview by Danielle Dimartino Booth, this time with Richard Werner, who goes deeply into the workings of credit and money creation. Richard Werner provides great empirical clarity and his universal perspective has produced a great track record for decades across the globe. Investors can derive great benefit from understanding long term monetary consequences experienced across all the major countries.
The bottom line is surprisingly simple. Small bank lending to small businesses is the most powerful engine of growth. The further you move away from this focus the worse it is for long term economic development. The more lending and spending moves to larger institutions the more it weakens long term growth and ultimately becomes increasingly inflationary. Moving to Central Bank Digital Currencies just moves policy further down the same path.
Stimulus measures, as currently constructed, may provide short term economic relief but only accelerate the long term problem.
The outperformance of US Equities has been remarkable given the growth record. Other factors have contributed. It seems that less than 40% of the S&P 500 gains since 2011 come from earnings and dividends.
Debt fueled by low interest rates can be an accelerator but how productive and sustainable is it?
“The essence of extend and pretend is to substitute income earned from increases in productivity, real prosperity, with debt, a simulation of prosperity,that doesn’t solve the real problems. It simply adds a new and fatal problem: since productivity hasn’t expanded across the spectrum, neither has income or prosperity.“
Debt cycles can be increasingly volatile as the scale rises. Tailwinds are shifting to headwinds as a huge reduction in US fiscal support in 2022 is hitting right now as shown in detail.
One form of debt is US Stockmarket Leverage. US Stockmarket Leverage/S&P500 Market Cap is back to record levels. Can this be sustained as the Fed tapers and raises interest rates?
What happened the last two times margin debt growth reached current levels?
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