Lesson 3
Historical Parallels
Study the historical parallels closely. Japan shows the stagnation risk. 1930s shows the deflation risk. Both were resolved via massive policy response. The current setup resembles a mix, with resolution likely via inflation and fiscal spending.
History doesn't repeat but it rhymes. Understanding past deleveragings helps interpret the current situation.
The Great Depression (1929-1940s):
- Debt bubble from 1920s speculation
- Fed initially TIGHTENED (huge error)
- Deflationary collapse
- Eventually resolved via WWII spending + inflation
- Key lesson: Don't let deflation take hold
Japan (1990-Present):
- Property and stock bubble burst 1989
- Banks refused to recognize losses
- Zombie companies, zombie banks
- 30+ years of deleveraging
- Key lesson: Don't delay the restructuring
US 2008-2020:
- Housing/credit bubble burst
- Banks recapitalized quickly (vs Japan)
- Fed printed aggressively (vs 1930s)
- Recovery but inequality increased
- Key lesson: Fast action prevents depression
Current Situation:
US debt/GDP is 120%+ (peacetime record). Real rates negative to zero. Fed has used most tools. What's different:
- Dollar is reserve currency (can print more)
- Global debt makes everyone in same boat
- Technology deflationary (offsets some printing)
- Geopolitical tension rising (wartime spending coming?)
Check your understanding
Lesson Quiz
Quiz Check
What was the Volcker shock and why does it mark a debt cycle turning point?
Quiz Check
From 1980-2020, every crisis was solved by cutting rates and adding debt. Can this continue indefinitely?