Coming Soon: More Pain than the 2009 Financial Crisis - Dylan Jovine

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Coming Soon: More Pain than the 2009 Financial Crisis

“But this time is different”“Things have changed”“That wouldn’t happen now” 

First time I heard Wall Street sing that chorus was in the 90’s. Clinton was president, Greenspan was running the Fed and we first learned what the world wide web was.

The internet, the argument went, was increasing productivity so much that the economy was going to grow faster than ever thought possible. It was a new way to look at the economic growth.

And who could argue? The economy was booming and we were running budget surpluses as far as the eye could see.

Well it wasn’t long before people realized that eyeballs are not cash flow and the buying stopped. Then the market crashed. It got ugly. You were there. You remember.

The next time I heard Wall Street sing that tune was in the 2000’s. This time “W” was president, Bernanke was running the Fed and we first learned how easy it was to make money flipping houses.

Real estate, the argument went, was a real asset, not like those pesky pieces of paper we call stocks. It was a new way of looking at real estate.

And who could argue? The economy was booming and even our village idiot had become a mini real estate mogul.

Well it wasn’t long before people realized that average local home prices are based on average local incomes. And since average local people couldn’t afford them anymore, the buying stopped. Then the market crashed. Then the bankruptcies. It got ugly. You were there. You remember.

Recently, I’ve heard Wall Street sing that tune once again. But this time they aren’t playing with a single asset class like stocks or real estate. This time they’re playing with our very country. Let me explain.

There is a vocal and growing group of economists who are saying there is no need to really worry about our nations debt anymore. Interest rates, the argument goes, stay low regardless of how much debt we keep adding. So if people willing to keep buying our debt we may as well keep selling it to them.

As long as the interest rate on government borrowing is lower than the growth rate of the economy, financing the debt should be sustainable.

And who could argue? Low borrowing costs support their argument. Debt as a share of GDP rose from 34% before the recession, to 78% at the end of 2018. Yet treasury yields have fallen from over 4% before the recession to 2.7% That does in fact suggest that investors aren’t too worried about the debt.

I’m a red-blooded American capitalist. So normally I’d sit back and watch the coming carnage unfold. And I’d profit handsomely from it, just like I did in 2009.

But we’re not talking sock puppets during the dot-com boom or the village idiot during the real estate crash. We’re talking about the very future of our country. Our security as a nation. The country our children will inherit….

So I intend to argue.

Believe me when I tell you folks this time is not different. That’s just a simple failure of imagination.

Why? Because anyone who says debt doesn’t matter anymore is really only talking about the recent past. What they are really saying is that debt hasn’t mattered in the past decade. And that’s true. But one decade does not a financial history make.

In other words, they are imagining that the next 10, 20 or 30 years looks much like the past 10, 20 or 30 years. They imagine a nice, predictable, world….

They imagine a world where American remains the undisputed dominant world power…where China’s  massive military spending in the South China seas is never used to challenge us…where client-states South Korea and Japan never move closer to China, despite China recently becoming their largest trading partners…

They imagine a world where the unemployment stays below the 10% rate its been since 1984…where inflation never rises above the 2% average of the past 30 years…where investors don’t wake up one day after the next market crash and decide they have better things to do with their money than invest in treasuries…

They imagine a world where global economic growth still advances at a healthy clip…where India and China don’t get caught in the middle income trap…where there is still money sloshing around the system…where Europe and Russia don’t have a conflict…where Iran and Saudi Arabia don’t go to war…

Internet investors imagined a world where website hits were more important than cash flow. Real estate investors imagined a world where home prices had nothing to do with income. And you saw what happened there.

The difference is this crisis will be on a national level. What does that mean? It means that the government we normally rely upon to bail us out would need a bailout themselves.

The first to go would be military spending. Safety net programs for the poor would follow. Then college loans. Then housing loans. And finally social security.

Need help imagining what that looks like? Imagine America circa 1919.

“The Buck Stops Here”

Dylan Jovine

Behind the Markets

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