Debt Cycles

Finance, Economy and Markets Series #001

What is a debt cycle? A debt cycle is continual borrowing that leads to increased debt, increasing costs, and eventual default. 1

Debt, the lending of money from a lender to a borrower, is a useful instrument. It enables the borrower to invest the money towards the future while it enables the lender to make a return on his/her savings, which woudl have been an otherwise idle investment. Some common examples of debt are mortgages, student loans and auto loans.

When times are good companies and their employees earn increasing incomes. The ability to pay back previous debt increases but so does the proclivity towards new debt. Haven’t you thought of buying a bigger car or a bigger house when you get a promotion? It’s only natural to want more when you can have more.

Underlying the cause of every debt cycle is this natural human tendancy of wanting more. A corporation’s desire for a new manufacturing plant, a country’s desire for better roads, or an socialite’s desire for a new Fendi bag. This desire is not inhernetly a bad thing, its what drives ambitions, in the words of Gordan Gecko ‘Greed is Good’. It’s only bad when the borrower is unable to pay back the debt. Three $5,000 Fendi bags may be one too many for a cashier at a Starbucks. So what comes next?

Default, or the failure to fullfill your loan obligation. It can happen to all of us and not just the Manhattan wannabe socialite or the over ambitious corporation. It can happen to Joe 6-pack who bought a new house two months before losing his job.

So what does debt cycles have to do with investing?

Enter Big Debt Cycles!

Default is manageable when its disparate and expected, but if it all happens at once, lik a flash-mob of group default ? trouble! Since there is a tendancy of people to lend more and borrow more when times are good, people, corporations and countries, can all be heavily indebted at the exact same time, a scenario with a plethora of borrowers going after a few lenders. If there’s a sudden change in the outlook, say a pandemic hits and the lenders want their money back ASAP that’s when when the dominos may start to fall.

At Millenial Gold we believe we are nearing the end of one such big dedt cycle which can end in mass defaults. We want our readers to be prepared for when this occurs. The exact timing of this occurrence is impossible to predict so please doubt anyone who confidently predicts the next crash! But with careful asset allocation you can prepare your portfolio to not just survice this cycle crash but thrive during it.

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