Economic Storms Brewing: Are We on Course for a Financial Catastrophe? - FL #3
Economic Storms Brewing: Are We on Course for a Financial Catastrophe? - FL #3
Is a potentially disastrous global economic crisis coming, and what can we do to ensure we stay safe?
Hi Fellow Explorers!
I hope you had a wonderful weekend and are excited for the week! Today I’m writing regarding a question I’ve contemplated deeply over the past year: Is a potentially disastrous global economic crisis coming, and what can we do to ensure we stay safe?
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Introduction:
In 2008, The United States experienced a catastrophic economic collapse as a result of banks defaulting on their debt due to a housing crisis. The next crisis is approaching in a seemingly obvious yet, unpredictable way. This time, I think we will see an even bigger collapse as a result of the central bank and government defaults due to a fiat money crisis.
Over the past year, I have read, listened to, and watched some concerning analyses of the United States Economy. It has pushed me to think deeply about an old hypothesis I formed in October of 2022 and resurfaced the question I am exploring in this piece today: Is a potentially disastrous global economic crisis coming, and what can we do to ensure we stay safe?
To get at the answer to this question, I am going to explain Ray Dalio's Big Cycle hypothesis, summarize Balaji Srinivasan's Fiat Crisis, and discuss the Strauss–Howe generational theory to help synthesize my new and updated hypothesis to understand and prepare for what might be coming.
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Preface - Not Here to Incite Fear
In the past, I was a cynic—it made avoiding disappointment and pain easy. But it also shades you from the infinite potential when making yourself vulnerable and trusting in the greatness of humanity, which is why I always aim to keep the two in balance.
When predicting and projecting potential doom and chaos, there is always a fine line to walk, so we can objectively raise concern while envisioning a way that the future can be filled with hope and optimism beyond a gloomy horizon.
The aim here is not to spread fear - it is to analyze our situation and find strategies to move forward so that we can bring a great and hopeful vision of the future to life. I refuse to become the naïve optimist who turns a blind eye to unfortunate circumstances, but I will not be a toxic cynic consumed with doomsday predictions and everything wrong about society.
So today, we will walk that balance, and we'll start by investigating the man who spent $1 million of his own money to raise alarm bells about this potential chaos.
Echoes of October: Reviving a Past Prediction
Balaji’s Bet
I first came across Balaji Srinivasan and his ideas listening to his 8-hour interview with Lex Fridman. I was gripped by his thinking and stayed for all 8 hours. Balaji is an extremely successful angel investor who was a previous general partner at the popular venture capital firm Andreessen Horowitz and former Coinbase CTO. He has a plethora of knowledge that informs his opinions and has developed the fascinating idea of network states. By my estimate, he is an extremely credible source to make a bold prediction. For even more proof, take a look at his remarkable public prediction in January 2020:
You DID NOT read that wrong - He made that prediction on 1/30/2020, about two months before Covid was declared a pandemic. He has publicly made another prediction starting with his $1 Million bet, but this one involves the collapse of the United States financial system. Balaji presented this new prediction quite eloquently in “The Fiat Crisis” article, this Twitter video about the same thesis, at ETHGlobal, on this podcast, and spread through his in-depth and data-filled tweets over the past four months.
Balaji's thesis goes something like this:
The Federal Reserve raised interest rates suddenly and drastically, which caused a massive decrease in the value of bonds purchased pre-2022. Because of this, nearly all banks are insolvent. Too many markets are failing in the United States, and above all, the United States government needs more money to pay down its debt. As Balaji puts it,
"Specifically, we have an economic polycrisis — a combination of banking crisis, debt ceiling crisis, municipal budget crisis, bond crisis, commercial real estate crisis, Ukraine crisis, de-dollarization crisis, auto loan crisis, credit card crisis, medical debt crisis, student loan crisis, insurance crisis, trade war crisis, energy crisis, and sundry other cascading crises all happening at the same time, each with a ~$100B-$1T+ price tag."
Because of this, there will be a US default, and it will look like:
1. Hard default - Telling people, "we won't pay you."
2. Soft default - Printing money to pay the debt (inflationary)
3. Mix of both
And occur on the following timeline:
For the data and sources on his idea, the links above provide a solid basis for the grounds of his claims. Putting this into perspective, he claims there will be an economic collapse, at least as big as the 2008 financial crisis. While his thesis may sound far-fetched, he is not the first to make claims of a period of great disorder in the United States. The first individual that made a prediction like this and initially inspired my thinking here is the founder of the largest hedge fund in the world.
Enter: Ray Dalio
Dalio’s Big Cycle Analysis
Ray Dalio is a behemoth in the macroeconomic prediction game; he created the largest hedge fund in the entire world, which had positive returns 28 times in the last 32 years! That is to say; he knows how to identify cycles and make predictions based on those cycles. Evidence of this can be found in his outstanding analysis of the U.S. Economy, which will give you a bachelor's degree in economics within 30 minutes as I accredited (sorry, it may not be worth much on your resume).
Of the excellent content Dalio has made available on his YouTube Channel, the relevant content for this essay is his Principles for Dealing with The Changing World Order video and book.
The brief summary is that Dalio put a lot of time into studying the past 500 years of history, looking at global superpowers, and drawing out key points in the cycle of the rise and fall of the world's leading superpower by evaluating across the most relevant metrics of a nation. He called this analysis The Big Cycle.
You can see the chart below with all the key points abstracted:
And the chart of the real-world analysis of the past 500 years of world powers quantified based on the metrics (Education, Innovation and Tech, Competitiveness, Output, Trade, Military, Financial Center, Reserve Status) analyzed:
Ray Dalio also puts this into the context of his Economic cycle analysis. The cycle is broken down by productivity growth (linear), the short-term debt cycle (the 8-12 year periods of economic growth and then recession), and the long-term debt cycle (the 75-100 year period where there is a significant collapse because of overborrowing and spending). I have labeled them on the graph below.
His most up-to-date analysis of where we currently are in this cycle can be found in his recent post, podcast appearance with Tom Bilyeu, and very simply in this chart:
Dalio's analysis identifies five forces driving global changes:
The credit/debt/market/economic cycle
The internal peace/conflict cycle shaping domestic orders
external peace/conflict cycle shaping international orders
Acts of nature, and
Human inventiveness and technology.
He argues that these forces are at their highest magnitude since the 1930s, potentially leading to significant shifts in the financial, domestic, and global orders. This could lead to conflicts between great powers, particularly the United States and China. Dalio also highlights the potential effects of climate change, technology, and internal political conflicts within countries, advocating for collaboration and focusing on the greater good.
In discussing these five forces, Dalio believes we are currently in the late Stage 5:
"By most measures, the US is clearly in the late Stage 5 ("When There Are Bad Financial Conditions and Intense Conflict") part of the internal order cycle explained in pages 167-83 of Principles for Dealing with the Changing World Order, which comes just before some sort of uncontrolled fighting or some form of civil war."
Remember, Dalio, may be wrong, Balaji may be wrong, and I may be wrong too.
But I've looked like a fool too many times in my life to stop risking looking like one again 🙂
Before I weigh in, I want to draw on one last source that adds to the argument about upcoming disasters, which I would say is lesser known in the mainstream.
The Generational Turning Theory
Strauss-Howe Generational Theory predicts recurring generational cycles in American history. It was created by William Strauss and Neil Howe in their books "Generations" (1991) and "The Fourth Turning" (1997). The theory divides history into cycles of around 80 to 100 years. Each cycle is subsequently divided into four "turnings" or stages, each lasting roughly 20-25 years.
Here's a brief overview of the four turnings:
1. High: A period of relative stability and consensus.
2. Awakening: A period of social change and renewed individualism, often with youth movements playing a significant role.
3. Unraveling: As the institutions weakened during the Awakening are further challenged, society enters an "Unraveling" phase characterized by deterioration in societal structures and increasing self-interest and individualism.
4. Crisis: The cycle culminates in a "Crisis" phase. This is a period of upheaval and major events (wars, economic collapses, revolutions), out of which new societal orders emerge, and institutions are rebuilt, beginning a new "High".
Each turning corresponds with a new generation with their own collective identities (archetypes), defined by the times they grow up. Strauss and Howe identified four generational archetypes that reappear in the same order each cycle: Prophet, Nomad, Hero, and Artist.
Of the three theories, this is the one I know the least about. However, it is captivating, especially given my understanding and reading of Carl Jung and Jordan Peterson, which point to the fact that we are embedded in some narrative that unconsciously drives us to continue operating in a predictable behavior pattern.
What’s important to think about before trying to understand what may be coming is what the people opposing these three analyses would say.
The Counter Arguments
Understanding these ideas was quite eye-opening, and I immediately bought into it. Whenever that happens, a safeguard goes up in my brain, and questions start to fire off: “What am I missing? Why is such a bold claim so believable?” I will keep this brief, but I do not want to build a straw man. I am going to rattle off some counters to the above arguments that I laid out
Dalio Counters:
Breaking down the span of an empire into simple metrics and analysis is an over-simplified model for a complex system
The use of historical data for predicting future events isn’t always right
It does not account for a break in the cycle or potential bigger cycles that aren’t being accounted for
Balaji Counters:
Fiscal policy can help manage the debt
If an increase in productivity is commensurate with the amount printed, inflation may not run away out of control
Confidence in the dollar is too strong for trust to be lost in it
Fourth Turning Counters:
Lack of empirical evidence
A simplistic interpretation of history
Vague
Over-deterministic
Retrospectively fitting but not a good predictor of the future.
Synthesizing all three of these together and considering the potential that this does not happen - let’s explore what this all might mean.
My Hypothesis Revamped
I introduced my hypothesis on a global economic collapse in October of 2022. You can view my prediction in Part 1 and Part 2; each is a three-minute-long video. Interestingly, the hypothesis I presented in those videos is similar to what Balaji explained when asked to describe his thesis in one sentence(timestamp - 53:35).
To summarize Dom from October's Idea:
In 2008, when the housing market collapsed, it was caused by the banks, who defaulted on debt. I predicted that within 3-12 months, there would be a chance that we are in a period where government and Central bank mismanagement and irresponsibility of monetary policy would cause fiat money to crash, and Central Banks and governments being the ones who default on the debt.
My newly renovated hypothesis is as follows:
A United States default is incoming because of an overarching problem - Debt! There are many other economic crises and issues occurring in the economy currently, as Balaji puts it - an economic polly-crisis.
The US Treasury Bills issued before the interest rate hikes began are now in a period of substantial loss. The logic is that when interest rates were low, investors who purchased long-dated bonds (because they provided greater % yield) are now worth less because as interest rates go up, the bonds purchased in the low-interest rate environment have a lower comparative yield, making the old bonds substantially lower due to the magnitude of increase by the FED. Since they went up so much, likely losses are sitting in many different places. This is what we saw happen to Silicon Valley Bank.
If we extrapolate this across the debt markets, who knows where unknown and unforeseen cracks sit. I don't know what straw (market collapse) will break the camel's back (Trust in the Fed and the Dollar). Maybe the commercial real estate market, banking, the debt ceiling... tough to say with all the markets that do not look so sweet.
Getting the timing right is nearly impossible, and the precise cause is complicated to pinpoint, but the general cause will be debt, and downstream from it - the money printer.
I look at this as a trajectory, and on its current path, I believe that the United States will see a debt crisis and a loss of faith in its financial system, in which 1 of 2 things will happen.
1. They will have no option but to print money to pay off the debt -> leading to an era of extremely high inflation.
2. They will let the markets play out and falter, leading to an era of below-sluggish growth and massive economic depression.
The hypothesis in one sentence: The amount of debt of the US government and in the US markets is impossible to pay off without printing money, and therefore there will, at some point in the future, be a massive devaluation of the dollar due to printing money and/or a depression on the scale of 2008; this time there is a chance that there is an unrecoverable loss of faith in the U.S. economy.
The simplest counter to the counter-point is that while the arguments laid out are likely overdetermined - The data, trends, logic, and analysis backing them are far too strong not to build a hedge for the future.
I'm hoping that these discussions get to the ears of the public and the country's leaders to make it a priority to try and find solutions to mitigate the debt problem.
With all this gloom, let’s talk about the brightness of the future!
Remaining Optimistic - Hopeful Visions for the Future
Making a case for an optimistic short-term does seem difficult - but chaos cannot reign forever! There is an optimistic vision for the future that will certainly emerge on the other side.
The era of technological innovation is moving at an exhilaratingly fast pace across so many domains! AI, biotech, nanotechnology, quantum computing, nuclear fusion, space exploration, and blockchain are all technologies that make me optimistic about the sovereignty of the individual and the future of humanity.
These technologies, especially in tandem, will help us all retain and hold more freedom than ever before, which I will certainly elaborate on in a future essay. For now, here is a perfectly timed newsletter from my favorite, Not Boring, that perfectly highlights what we have to be optimistic about! And here is an essay from the brilliant Marc Andreessen on why AI will save the world.
With optimism in mind, what can we do to ensure we are safe if these predictions come to fruition?
How to Prepare
My preparation comes at three levels:
Physical
If Dalio is right - physical conflict is highly likely. If that's the case, first and foremost, I want to ensure I am not where the fighting is.
Financial
The crucial first step here is to have sound financial basics down. Start with a budget. It helps me know what I'm bringing in, what's going out, and what levers I can pull in disaster scenarios. Here is my free budget template and a 3-minute video on how to use it.
If a debt crisis comes, and the dollar's value is printed away - outside money is a great hedge. Outside money is Gold, Bitcoin, and any other trusted currencies. My personal bet is on Bitcoin.
I may be a CPA, but I AM NOT a financial advisor. So please evaluate all of this independently :)
Mental
In the era of chaos and crisis, there is an increased susceptibility to the nation being hijacked by an evil, evil idea that may be disguised as compassion.
I am on high alert for EVERY AND ALL politician running for president to control a country. Remember that in an authoritarian regime, it's not only the tyrants who are at fault; it's also the people who buy into the ideas passively. Why would people do that? Well, usually, because the evil leader's words are striking deep emotional feelings that people have, consciously or not. It’s possible, especially when deeply rooted negative emotions arise that everyone collectively falls into a dream that pervades society until they snap out and finally realize that what they've done is terrible and evil.
The idea here is to try your best to avoid becoming hijacked by ideology, which we will be more susceptible to in times of chaos, and do your best to think for yourself.
Remember - please evaluate what I have said only in the context of your given circumstances. I am not trying to prescribe a one size fits all solution; rather, I want to inform and inspire action to help make the world a better place!
Concluding Thoughts
Predicting a massive crisis is a loser's game. If it doesn't happen, you are wrong. If it does happen, You may be correct, but you were right about something terrible for everyone involved, including you and your loved ones… so you certainly did not win.
While it's a loser's game and it’s not fun for me - I do think it's necessary to stare into the abyss to find the monsters that lurk so that we can be prepared to not fall into it.
knowing that terrible times may be upon us is valuable insofar as you use the information to prepare so that if something terrible does happen, you're at least partially ready to make your next moves so that you stay safe, whatever that looks like for you.
I've said this before, and I'll repeat it - I may be wrong, Dalio and Balaji may be wrong, but as far as I can tell - the information is too convincing not to consider.
Upon consideration, if you come to a similar conclusion, I hope you too can find an optimistic way forward into the future, avoid falling into a pit of nihilism, and instead bear all that you can help bring that vision of beauty to life.
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Thank you all, and have a wonderful week! Reach out to me on Twitter if you would like to discuss any of this 🙂
Dom