Will This be the Next Great Depression?

[Music] in 1929 years of wild debt fueled speculation over company stocks came to a halt with the worst economic disaster in history in 2001 years of wild debt fueled speculation over technology companies that were apparently going to revolutionize the future came to a halt when most of them were shown to be worthless and in 2008 years of debt fueled speculation from borrowers that just needed that fifth investment property and the bankers that were more than willing to accommodate this to sell some more mortgage bonds came to a grinding halt when people realize that everything propping up this speculation was based on absolute garbage as of making this video we have just lived through the fastest 30% market decline in US history outpacing all of the examples I just listed above and it is easy to think that this one's just a bit different all of those examples were pretty clearly based on wild speculation and poor investment whereas this crisis is caused by an invisible enemy that must not be named well no not really this disease has been a fantastic excuse for governments and businesses and individuals to rid themselves of blame in causing this economic crisis they have all agreed to Pat each other on the back and say there there this is just a 1 in 100 year event that we could have never seen coming it wasn't our fault but make no mistake about two things the lock down actions taken by governments around the world in recent weeks will cause an economic recession this was not caused by those actions it was really a long time coming we find ourselves in the same debt fueled speculative bubble today that we did on the brink of every other economic recession the only difference is this time we have something else that we can try and blame instead of ourselves what makes it all that much worse is that unlike all of the other economic recessions in modern history governments are not acting exclusively to rectify the economic problem because they need to balance their response to the economy with their response to public safety and in many instances those two actions are at odds with one another this video is the extended part two of the two-part series on the economics of a crisis in the first video in this series we explored how governments typically react to economic downturns such as the one we are about to go into in this video we will explore the mistakes that actually got us here and how we are destined to repeat those mistakes all over again and as with a lot of financial issues it all starts with debt [Music] debt is something that we have almost all dealt with in our lives we use it to buy homes in cars and boats and new plasma screen TVs and and even in education these days now we can break this debt into two main categories good debt and bad debt bad debt is exactly what you would expect guess what if you rack up a credit card bill by buying a jet ski and a lovely designer wardrobe you are going to be saddled with very high interest rates and a whole lot of junk that is going to depreciate in value just as quickly as that annex bill racks up now good debt is a little bit different from this if you borrow money to buy a house or take out student loans to get a decent education in a marketable field it is likely that you're going to be able to make more money long term than you would have otherwise been able to without that loan a home loan these days may be charging around 3% or even lower depending on what country you're in and the hope is that this property will appreciate in value faster than those interest rate payments meaning that you are wealthier long term there having taken out this type of loan the same is true for larger institutions governments around the world have taken on more and more debt in order to run budgets that provide prosperity to their economies in the short term in the hope that this economic growth outpaces the repayments on the debts that they are paying off and perhaps more pressingly of all businesses have found themselves increasingly reliant on debt business debt has always been seen as the ultimate form of good debt the reason for this is because businesses are ultimately profit seeking institutions and the assumption is that businesses would never take on debt if their interest expense would be greater than the additional profit they would be generating from having taken on that debt to put that in a less confusing way take the following exam if a company can borrow 100 million dollars to build an automated supply chain that will save them 10 million dollars a year in personnel cost and the repayments on that line would only be five million dollars a year then you would see that is a sensible economic decision and the business would take out this loan the assumption that businesses are always extremely prudent with their borrowing has meant that most economists don't see any level of business debt as a problem in fact in many schools and universities around the world today a high level of business debt is seen as a really really good thing because it is evidence of a strong and prosperous commercial sector that has the ability to grow rapidly and you know what for the most part that has been through most businesses are very very responsible borrowers but it has to be remembered that in 2007 people would have told you that home loan debts were basically the ultimate form of good debt and no one would ever default on those the truth is these days we have seen an increase in business lending as interest rates remain at historic lows but regulations around mortgage lending has become far more stringent in the shadow of the 2008 mortgage crisis the actual progression is eerily similar to mortgages in the early 2000s banks and financial institutions first went after very very safe borrowers they would provide project finance to profitable companies that could easily afford the loans even over shorter repayment periods these would be supplied through company bonds or simply by private agreements by cashed up banks around the world this was extremely profitable for these institutions especially considering that they were able to raise cash from their central banks potentially even at negative interest rates and then pass it on to businesses and pocket the difference as with mortgages in 2008 though the supply of these kinds of loans rapidly outgrew the genuine business demand for so banks investors and financial institutions started scraping the bottom of the barrel going from servicing very reputable and profitable businesses to slinging a loan to anybody with a registered company regardless of the credentials cheaper credit and more relaxed lending has meant that businesses can take on more and more debt and just sell it to shareholders leverage a majority of business debt in the USA today is rated triple B which for those of you who don't know is basically God so this assumption that business debt is always good debt and not a risk to the economy is not something that we can rely on anymore business debt like this is temperamental at the best of times but if you add in the complication of no a nationwide shutdown that causes a pausing cash flows even for a few days well then you are going to have yourself a recipe for disaster this debt is not exclusive to just businesses anymore though in many ways it looks as if irresponsible lending has permeated through our entire global economy and perhaps most specifically into a nation that may not have learned it's lesson the last time around [Music] now we have explored the economy of Australia before on this channel and found that the median net worth of the average Australian was higher than any other country in the world which is great but it was ultimately fueled by two themes the first was their ingenious system for retirement savings which has meant that every working adult in the country is saving close to ten percent of their income as a requirement and the second was the housing mark as a resident of Sydney myself let me tell you about this housing market it was one of the most costly in the world with most houses within driving distance of the CBD being sold for well over 1 million Australian dollars now there have been a few things driving this the first is that tax law in Australia is heavily geared towards favoring property investment over investments into other asset classes there has also been a lot of skilled migration into the country that has increased the demand and hence the cost of housing but it gets a bit murky though when you consider the underlying fundamental house prices are ultimately a function of two things incomes and how easy it is to access credit if more people in an area receive higher incomes it stands to reason that they will be able to afford more expensive homes and so house prices rise to naturally meet that level of demand given that there is ultimately a limited supply and this is great for the most part not many people have much of an issue with this because it is a genuine indicator that people are just getting wealthier but here is the thing in most modern economies around the world today including Australia wage growth has been pretty much stagnant barely keeping pace with inflation so how have properties doubled in value many many times over in these previous decades well we have been allowed to take on more debt home lending before 2008 was seen as a great way of investing both for banks and individual and then after 2008 we entered a period where interest rates remained at record lows for year after year meaning that more people could borrow more money and artificially bring more firepower two options that were still happening on a limited supply of houses and hence higher prices the reason this became particularly apparent in Australia of all places though who is because it never really fully felt the fallout of 2008 because it never actually went into a recession which sounds great but in reality it may have just given the economy a longer time to become all the more inflated with a further way to fall I pick on Australia because well I live here and it is one of the most blatant example but the problem of debt driven growth rather than fundamental driven growth is becoming an issue all over the world that may be particularly difficult to deal with in this instance it has become evident that this will be the most aggressive economic downturn in recent history we are facing an external shock that is very severe with very immediate impacts on employment and businesses in advanced and developing economies alike but that cannot distract from the biggest issue that we are now more leveraged up than ever the economic crisis of 2008 was a debt crisis that was caused by people borrowing more money than they could afford and set off by banks that ran into liquidity issues the economic crisis of 2020 is going to be a debt crisis that was caused by businesses and individuals borrowing more money than they could afford and it will just be set off by an invisible enemy that must not be named if businesses and individuals were not mere days away from defaulting on their debt repayments at any given time an economy in lockdown would not be such a bad thing things could theoretically just come to a stop relatively peacefully and sure it's not ideal but it's nowhere near as bad as what will actually happen people cannot afford to stop working today because they will not be able to afford next week's rent landlords can't afford to not collect next week's rent because they will not be able to afford next month's home loan payments and banks can't afford to pause home loans because they will have the same liquidity problems that they had 12 years ago the same is true for businesses that can't afford to close because they won't be able to pay their expenses there really is no flexibility in this chain given the level of debt that is currently in the system everybody owes money to someone and nobody can stop collecting because of it now governments around the world have attempted to ease this problem by enacting huge fiscal stimulus policies the USA is set to pass the largest government stimulus in history the UK is enacted a huge income security program and most other developed countries have followed suit this huge influx of cash hopefully means that people will maintain the cash flow required to remain a functioning link in the debt chain which is great and hopefully a useful side effect of this is that people are less likely to need to work in jobs than the at-risk but on a macroeconomic level it may not be the Silver Bullet we need because of a phenomenon known as crowding out crowding out is one of the scary things that governments have to address when they find themselves in a debt crisis the logical response to these sorts of downturns is to assist those that are impacted with a stimulus to make sure that they have their needs taken care of but perhaps more importantly so that they can remain good little consumers and keep the economy ticking along this of course costs the government a lot of money which they would normally raise through taxes but the last thing that a government wants to do during a time like this is tax people more because it sort of defeats the purpose of a stimulus in the first place so instead they just borrow the money by issuing government bonds these government bonds are bought up mostly by institutions seeking a nice risk-free return during these uncertain times and this lets the government spend generously while also avoiding placing the burden on the poor old taxpayer to fund that generosity the problem with this though is that it soaks up a lot of liquidity in the market oftentimes governments will put out huge demand for cash in a very very short space of time raising hundreds of billions of dollars and leaving absolutely no money left over for businesses or households if JP Morgan has just spent ten billion dollars buying up government bonds well it's not gonna have much left over to fund the slightly riskier loans like those home loans or business lines this is what we mean by crowding out really safe and attractive government lending crowds out the market for all types of lending and when markets like housing and businesses that have been propped up by debt for decades are suddenly removed from this generous flow of new money they crash hard so this would still be a really bad outcome it would be like giving a blood transfusion to an economy that you are also using as the blood donor you are really just kind of moving the problem around so what nations will do instead is conduct these measures in parallel with printing more money quantitative easing is just a fancy way of saying introducing a ton of money into the economy by printing more and more of it over at the central bank this means that financial institutions are able to quickly build up more liquidity and with their newfound wealth they can provide loans to the government as well as regular borrowers which keeps the whole system going and avoids the issue of crowding out that we saw earlier so that's great then the government gets to fund its stimulus without impacting taxpayers and without limiting people's ability to still get a loan right well no there is always someone that will pay so who's footing the bill for this one in this case it is savings you know the people that were responsible and had a decent amount of cash lying around so that they would be safe in a situation like this as more and more cash is introduced into the economy savers are impacted with higher rates of inflation which eats away at the effective principal of their savings so while there is not a direct outflow from their wallets they are the ones that are indirectly funding this exercise now the financial community's response to this good savers they should have been out there spending and racking up massive debt to be good little consumers our economy depends on spending and savers aren't doing their part to help and in many ways they're kind of right but it's still pretty unfair that the more responsible members of our society kind of bear the burden of other people's poor decision making process to add insult to injury controlled inflation like this is actually really really good for debt holders say someone borrows 1 million dollars to buy a 1.1 million dollar property well they have $100,000 in equity but then the government comes in and Chuck's on the money printer or no I don't know let's say doubles the supply of money over a decade now let's just say all other things been equal this turns a 1.1 million dollar property into a 2.2 million dollar property because there is just now double supply of money so it's worth half as much it doesn't exactly work like this but it's close enough and let's just go with this for simplicity well either way that property owner has increased their equity position 11 times over from $100,000 to 1.1 million dollars and this was not because they added value to the economy at all or even because they made a particularly wise investment this property has not actually increased in genuine value at all it's just because their debt position walls eroded by inflation the real big winners in a crisis like this will be people with a lot of debt that can stay solvent and when the system in place to deal with a crisis effectively encourages people to partake in the type of behavior that causes the crisis well I mean it's easy to see why we are in the same situation every 10 years or so unfortunately a lot of what the future holds is speculation at this point and people predicting that this will be the next great depression may look just as silly as the people that said this would all blow over two months ago what can be said for certain though is that this is going to be an economic downturn of our own creation we can't wipe our hands of this mess and say it's the fault of things outside of our control because the underlying truth of the fact is that people got greedy and put themselves in precarious situations that would blow up in their face in situations like this and again what is going to make this all that much worse is that unlike all other economic recessions in modern history governments are not acting exclusively to rectify the economic problem because they need to balance their response to the economy with their response to public safety and in many instances those two are at odds with each other this lack of economic focus along side underlying issues that were caused by the last economic meltdown threatened to make GFC 2.0 longer more severe and more widespread than any other economic downturn the working population has seen today hi guys thanks for watching I hope you enjoy the latest video and that you're all staying safe and well if you did enjoy the video please consider liking and subscribing or maybe even supporting me on patreon like these lovely people did otherwise I will leave a link in the video description to a discord server so feel free to jump on that or participate in Q&A sessions and also enjoy the discussion amongst other economics nerds like myself jeez guys bye

Channel: Economics Explained

Views: 1,271,062

Rating: 4.9038401 out of 5

Keywords: economy, economics, crash, market, downturn, depression, recession, stocks, profit, losses, economics explained, s&p500, investing, speculation, business, dow jones, money, inflation, quantitative easing, federal reserve, bailout

Id: jQ_Z-wZK5ps

Length: 19min 30sec (1170 seconds)

Published: Thu Mar 26 2020

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[u/ChemsAndCutthroats]

This video explains how the global financial market is a giant house of cards fueled by debt. COVID-19 is the accelerant for an inevitable economic crisis that was already coming for us.