The Debt Cycle Is Turning

Why A Transformational Downturn May Be Closer Than You Think

Economic cycles are like the tide—sometimes they rise, sometimes they fall, but they always repeat. For investors, business leaders, and policymakers, understanding these cycles is crucial. We’re in the midst of a critical phase right now, with debt reaching new heights, central banks pulling every lever they can, and asset prices going through the roof. But where does that leave us?

Photo by Markus Spiske on Unsplash

Now, if you’ve followed me for a while, you know I’ve been predicting a downturn for quite some time. In fact, I like to joke that I’ve predicted six of the past two recessions. But here’s the thing—while my timing might have been off, I’m still convinced that the dynamics we’re seeing today favor a transformational downturn in the relatively near future. The writing is on the wall, and the numbers don’t lie.

The Global Debt Landscape: A Snapshot of October 2024

As of October 2024, the global public debt is projected to exceed $100 trillion. That’s a staggering 93% of global GDP, with expectations to hit 100% by 2030, according to the International Monetary Fund (IMF). While these numbers might seem abstract, they’re very real for countries like the U.S. and China, whose borrowing has soared in response to the economic fallout from the pandemic.

Debt, by itself, isn’t the villain. If used wisely, it can fuel growth, drive investment, and help pull economies out of tough spots. But when debt piles up with no clear plan to repay or stabilize it, trouble is brewing. The IMF has already issued several warnings that many countries are walking a fiscal tightrope. This isn’t just a theoretical issue—this is a live wire situation that could trigger major market shifts in the coming years.

Central Bank Interventions and Liquidity Injections: The Big Question

Both the Federal Reserve in the U.S. and the People’s Bank of China (PBOC) are going all-in on their efforts to stabilize their respective economies. But are these interventions solving the underlying problems, or are they just postponing the inevitable?

The United States: The Federal Reserve’s Role

In the U.S., the Federal Reserve has been aggressive in its approach, slashing interest rates and purchasing securities to inject liquidity into the financial system. If you look at the Fed’s balance sheet, you’ll see trillions of dollars worth of assets, part of their long-term strategy to manage liquidity and keep things stable.

For now, it seems to be working—markets are hitting new highs, corporate profits are solid, and consumer confidence remains strong. But what happens when the Fed starts pulling back? When interest rates rise or the Fed stops buying securities, we could see a sharp market correction. And if inflation keeps creeping up, the Fed might have to tighten the screws sooner than expected, which could send shockwaves through the economy.

China: PBOC’s Stimulus Efforts

Meanwhile, China’s central bank, the PBOC, has been pumping billions into their economy through stimulus packages, interest rate cuts, and reductions in reserve requirements for banks. In total, they’ve injected around 1 trillion yuan ($142 billion) to keep their growth engine running.

Most recently, in October 2024, the PBOC announced a new 500 billion yuan ($70.62 billion) funding scheme aimed at supporting the capital markets. While this flood of liquidity has kept things stable for now, it’s also created a lot of uncertainty. At some point, China’s debt levels will become unsustainable, and when that happens, the global ripple effects could be enormous.

Asset Market Dynamics: Where’s the Safe Haven?

In times of uncertainty, investors are always on the hunt for safe havens. Right now, we’re seeing some interesting trends across various asset classes.

Gold: The Safe Haven of Choice

Gold prices have surged to over $2,700 per ounce, a new record. Investors are flocking to gold as a hedge against inflation, currency devaluation, and general economic uncertainty. It’s the classic move—when people aren’t sure where things are headed, they buy gold.

Equity Markets: Defying Gravity

Despite all the concerns about debt and economic slowdowns, equity markets like the S&P 500 and the Dow Jones have been hitting new record highs. This rise has been driven by strong corporate earnings and continued economic optimism. But we’ve seen this story before—when markets seem unstoppable, a correction is usually lurking just around the corner.

Cryptocurrency: The Digital Frontier

Bitcoin is often hailed as “digital gold,” but I’m not convinced. Every aspect of its performance points to it being a high-beta asset, meaning it’s far more volatile than the broader market. When the market goes up, Bitcoin soars. When the market drops, Bitcoin crashes harder. That’s not what I want from a store of value. Until it shows more stability, I see it as a speculative asset, not a safe haven.

The Dangers of Elevated Debt Levels: History’s Warning

Here’s where it gets serious. Historically, excessive debt accumulation tends to end badly. When debt gets too high, servicing it becomes a challenge, and that’s when things start to unravel. You get inflation, stagnant growth, and, in the worst cases, financial crises. We’ve seen this play out time and time again—from the Great Depression to the Global Financial Crisis in 2008.

The IMF has been clear: governments need to consolidate their fiscal policies. In plain terms, that means reducing deficits and creating some breathing room to address future economic shocks. If they don’t, markets will force their hand, and that’s never a good position to be in.

Learning from History: Don’t Ignore the Signs

If there’s one thing we can learn from the past, it’s that unchecked debt growth is a dangerous game. Economic cycles follow patterns, and every boom eventually hits a bust. The trick is recognizing the warning signs early enough to do something about it.

One of the problems is that when times are good, people tend to ignore those signs. It’s easy to convince yourself that “this time is different.” But economic fundamentals don’t change. When debt gets too high and central banks overextend their influence, something has to give.

Policymakers and investors alike need to pay attention to the signals. We’re seeing cracks in the system already. The question is whether we’ll have the foresight to address them before they become gaping holes.

Conclusion: A Critical Juncture

So, where does all this leave us? The global economy is at a crossroads. Debt levels are at all-time highs, central banks are keeping things afloat with aggressive interventions, and asset prices are soaring. But as history shows, this can’t go on forever.

The next few years will be critical. Governments and central banks must figure out how to unwind these massive debt loads and manage the fallout. And while I might’ve been early with my predictions in the past, I’m more convinced than ever that we’re heading toward a transformational downturn. The exact timing? Well, I’ll leave that to fate. But the dynamics are clear—the current trajectory is unsustainable.

As we look ahead, the smart money is on those who can see the bigger picture and plan accordingly. Understanding the interplay between debt accumulation and economic cycles is key to navigating the challenges that lie ahead. Stay vigilant, stay informed, and be ready for whatever comes next.

The debt cycle is always turning, and those who prepare will be the ones standing tall when the dust settles.