The latest BIS quarterly is excellent as always, but one section is particularly pertinent to the current environment. The authors provide an excellent overview of past financial crises and why they wreak such havoc on an economy. Their findings are similar to the events currently unfolding in the United States – a debt bubble ultimately results in extreme excess, asset collapse, economic collapse and ultimately a long period of private sector de-leveraging.
As I’ve been arguing for several years now the true key to quickly overcoming a debt crisis such as the current one is an austro-keynesian approach. Assets must be written down, the debt must be largely extinguished, the losers must lose, the market must be allowed to work and the government should provide aid in cases that does not impede the aforementioned steps. This is obviously not what we have done.
The best playbook, in my opinion (and the BIS confirms this), is something similar to what I advocated at the time of the bank bailouts – a Swedish approach. Unfortunately, we have opted for the Japanese “workout” approach. This likely means below trend economic growth, continued de-leveraging, a risk of deflation and a great deal of economic uncertainty. I highly recommend reading the report in its entirety. It provides an excellent overview of our current woes:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.