Another great presentation from the Library of Mistakes. This one from Martin Barnes on the debt super cycle.
While the topic sounds dramatic, Barnes isn’t predicting an imminent crisis. Instead, he cites Herb Stein’s quote: 'If something cannot go on forever, it will stop.' He tracks the rise of debt since WWII, explaining how deregulation, low rates, and policy choices fueled debt-driven growth, now largely held at the sovereign level. Eventually, the bond market will demand accountability, though no one knows exactly when.
He also offers a reality check: we, the public, are complicit. We demand more services and lower taxes, and the pollies eagerly oblige. By avoiding recessions and not clearing out economic excess, we misallocate capital and widen wealth disparity. The opportunity costs are massive.
He lists six potential 'fixes,' none of which are easy or palatable:
- Raise taxes (political suicide)
- Reform entitlements (political suicide)
- Cut discretionary spending (already minimal)
- Sell assets (best ones are gone)
- Tolerate higher inflation (a stealth tax)
- Financial repression (forcing investors to hold gov debt)
Economic growth significasntly above trend would also help, but that’s a long shot. Thus, 5 & 6 seem inevitable, signaling more QE and persistent inflation.
Still, as he says LIFE WILL GO ON, and those who position themselves well could thrive.
He notes that those who spotted the inflation wave in the 1970s, like his former employer BCA Research, profited through hard assets (gold) and resilient businesses. It’s a reminder that catching big trends often beats focusing on short-term noise.
Anyway, I enjoyed it a lot. The practical bottom line for me is:
- Avoid cash and fixed interest. Any nominal returns will be outpaced by inflation. You're holding a melting ice cube.
- Favour businesses with solid balance sheets, and reasonably resilient earnings
- Growth-oriented small caps are perfectly fine, SO LONG AS they are reasonably well funded and/or have a decent shot at significant growth.
- Don't get silly with leverage.
This is hands down one of the best finance presentations I've seen in a long while.
Pure gold, from start to finish.
So many quotable lines, but "never trust a forecast with a decimal point" is worth a mention.
Also, towards the end of this talk (recorded in March this year) he pretty much called the capital flight to Japan which is what triggered the dump this week as the carry trade unwound.
Russel Napier (who kind of reminds me of a Scottish Ross Gittens) delivers a cracking talk here:
I watched "Princes of the yen" recently. A documentary on the Japanese experience post WW2 and how their central bank played a role in shaping the economy and ultimately inflating their property bubble.
It's based on the book of the same name by Richard Werner (an economist who's ideas I'm quite fond of, even if they are somewhat outside of the mainstream).
His whole schtick is that credit creation is the major driver of economic activity, and when that's directed away from productive investment and into assets or consumer spending you get all kinds of nasty consequences (asset bubbles and inflation, mainly)
For anyone that follows Russel Napier, a Scottish economist who I also really like, this might be up your alley.
Anyway, if you need a movie to watch this weekend, I'm sure this will make you think.
Link here
If you want to nerd out on some of his work, there are some good essays here