The End Of The Long Term Credit Cycle

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The Fed is expected to raise interest rates this week for the first time in nine years. This could be a turning point in the overall economic landscape. The Fed in its latest meeting has sighted a healthy employment picture and an expectation that inflation will normalize in the near term as the reasons for a rate hike this week. We typically think of low inflation and low unemployment as keys to a healthy economy and this is for the most part true. However, our economy is faced with low wage growth and high debt as a nation. In my opinion we are very near the end of the long term credit cycle. We typically see a long-term credit cycle last around 70-80 years. The next leg of this credit cycle would call for deleveraging. When we have high levels of debt we would want moderate inflation so that our debt burden would not be as hard to pay off. For this to happen we need inflation that will cause an increase in wage growth. So far, we are just not there.
Thus far the Fed has pumped $2.5 Trillion of reserves into the banking system in an attempt to force savers to spend and borrow and invest in risky assets. This is not something that is happening only in the U.S. it is happening all over the world. The bank of Japan has launched the biggest monetary easing program of all and is buying not just Government bonds but also equity ETFs. The Bank of Japan has increased its balance sheet from 25% to 75% of the country’s annual output. The told the world they would bring

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