Forgive me this self-indulgent video. A little too much of my personal story. But when Mervyn King of the Bank of England publicly says “This is the most serious financial crisis we have seen at least since the 1930s, if not ever” – then maybe a little introspection on a long weekend is OK.
The history of debt-driven bubbles
History is so badly taught at school. It’s dull and dry, all about dates and battles – instead of about the introduction of new ideas, waves and movements. The present can only be understood when put in the context of the past.
Mark Twain was too much of a dandy with his poetic “History doesn’t repeat itself, but it does rhyme”. George Santayana was more on the money with his “Those who cannot remember the past are condemned to repeat it”.
I might put it more bluntly: “We f***ed it up last time and we’re about to f*** it up all over again”.
Edward Chancellor’s book “Devil Take the Hindmost – A History of Financial Speculation” describes 400 years of manias, panics and depressions – from Tulip Mania in 1637 to LTCM in 1998. A common theme of all these manias was the use of excessive leverage and the build up of debt. The resulting depressions were the periods necessary to cleanse the financial system of the debt and restore balance sheets.
Edward Chancellor wrote the book in 1999 and now works on asset allocation for GMO, Jeremy Grantham’s investment management firm. Probably a receptive environment for him.
Steve Keen talks about debt bubbles and deleveraging
Steve Keen, an Australian economist, is the world thought leader on incorporating debt into economic theory, modelling how debt bubbles burst and the resulting deleveraging process. In this recent interview he talks about how the politicians have not grasped the problem and are just trying to get back to the status quo.
What we saw in 2008 was only Act 1 and we have much more pain to go through. In Why the GFC Is Not Behind Us, Steve Keen thinks:
“The need for deleveraging has not been removed … the scale of that potential deleveraging appears certain to exceed that experienced in the Great Depression.” Steve Keen
What the bursting debt bubble means for me
Debt is the problem – and until that is fixed, sustained economic growth is not possible. We will lurch from one economic crisis to another – GFC here, Euro-zone collapse there, G20 meeting here, Merkel/Sarkozy meeting there. And as sure a night follows day, the politicians will raise taxes and cut services – they have to, they’ve run out of money.
And so if that is the background for the next 10 years, I need to adjust:
- Pay down debt and own assets outright
- Be self-employed and not rely on the benevolence of an employer
- Have valuable skills that continue to be valued in the future
- Look after my own pension and health
- Have a shorter term outlook for investments, and
- Keep my liquid funds in the strongest currencies and strongest banks possible
Who’d have thought we’d be discussing sovereign debt default by first world countries on prime time television. Hmm. Would the guys currently in charge please step aside – we don’t need your “help” any more.
Reader comments on ‘The Book That Changed My Life’
“‘The Book that changed my Life’ … What about ‘The website that changed MY life?’ I’m a NYC FireFighter and emini trader. Firefighting is my passion but emini trading, with the help of your site, has changed my families life for the better. My family can now afford the best medical care, best education and the satisfaction of changing other peoples lives for the better. You even got me to attend the Quicksilver Pro contest that was held at a local beach recently … I may take up surfing next!” Justin G.
“Well said Barry. You, sir, have a good head on your shoulders. And on a separate note, your grandmother and my dad were born in the same year.” James N.
“I’m reading ‘Devil take the Hindmost’ and finding it fascinating how history just keeps repeating itself. It’s almost a blueprint of what is going on today. Thanks for the recommendation.” Nancy
“Great presentation, I really appreciate the summary of this book and what it means to our generation. Most of all I was inspired by the opportunities that you pointed out. I happen to agree with all of those mentioned, l would also include health as an opportunity as more people become conscious of alternative medicines, natural crop shortages and the constant increase in food costs. Anyway great job and keep up the good work.” Ace
“Thanks very much for that excellent video. I feel the very same thing about the ideas you express, especially your last comment about the decentralization of workers. I have a similar background – consulting (IT, not financial or economic) for 16 years, and now switching to trading full time, and my personal impetus for my career change is essentially because the social contract that my grandfather and to some extent my father held between themselves and the companies that provided their employment barely seems to exist anymore … I cannot see a more pure way to make a living than trading, where you and you alone bear complete responsibility for your own income. I have four kids, and what I have been teaching them lately, when they ask, is that they will need to forego the traditional job search concept when they leave school in favor of making their own way in the world. When my oldest son turns 13 I am planning to open a $5K account with TradeStation and teaching him to trade a single ES contract for his spending money, instead of delivering newspapers, or working part-time at the video game store, like his cousin does.” Owen S.