This has been a big week of change as a new president of the United States was sworn into office. One of the key questions on people’s minds is “what is going to happen to the economy?” The economy is in bad shape. There are a lot of economic indicators that are giving unusual results, and some people are even asking if the US economy is about to collapse. In this video, I am going to give an overview of what is happening and what I think will happen next. Everything I am covering in this video, I have talked about in videos over the last six months. I really just wanted to summarize it all in one simple video for you.
Before we get started, I just want to emphasize, on this channel, I do not give market predictions or stock tips. I will not say whether the market is going up or going down, and there is a lot of factors that go into those determinations. My goal today is to talk about the overall economic themes, so you can make your own financial decisions that are right for your situation.
What is happening with the economy?
- Interest rates are low. This is one of the biggest conundrums of modern finance. Interest rates are supposed to reflect the risk of the investment. But interest rates for US treasuries have been near zero for a long time. This makes the rates of return for all investments types unreasonably low. How is that possible? This seems like free money. I think it is easier to think of everything in terms of supply and demand. When there are unusual financial numbers, that means there is an imbalance in supply and demand. In this case, there is too much supply of people trying to put their investment money to work, and not enough demand from businesses looking for capital.
2) The biggest driver of this is demographics. Baby boomers are retiring. The baby boomers represent a huge population increase in the US which drove a huge increase in consumption, and profits for corporations. Baby boomers now want to take all the money that was earned during their careers, and live off the investment income during retirement. The only problem is that population has dramatically dipped following the baby boomer generation. Statistically, there cannot be enough entrepreneurs looking for capital to keep up with the investment demand. This pressure from supply and demand keeps interest rates low. Since the imbalance of supply and demand is caused by population we will continue to see pressure to keep interest rates low for a very long time.
3) Companies have too much debt. Corporations have taken advantage of the fact that interest rates are so low, and have taken on too much debt. I have argued that the real cause of the current economic trouble is not the pandemic, but that corporations suddenly found they could not pay all the interest on the debt they are carrying. Corporate debt is at all time highs. It is just not sustainable.
4) US Government debt is growing. Back in March 2020, former President Trump declared a National Emergency. The stock market crashed. The crash was happening because investors knew all these companies had too much debt, and could not handle a shut down of the economy. The Federal Reserve stepped in and started printing money. New US debt did three main things, 1) funded stimulus checks 2) funded companies so they did not go bankrupt, and 3) made massive investment purchases to stabilize financial markets. Most people applauded the Federal Reserve actions as the right decision, because if they did not step in, the US would likely be in a depression right now. However, this has not solved the problem, because US debt has increased dramatically since then. We have tried to solve the problem of companies having too much debt, by adding more US debt. President Biden is showing all indications that he will support increasing the US debt even further.
5) The stock market is at record highs. The stimulus caused the US stock market to rebound. With no risk of going bankrupt, stock investments have reached an all time high. This has created massive income inequality, as rich people with investment portfolios gain from the US stimulus, while poor people continue to struggle.
6) The poor suffers the most. You can look at any number of metrics and see that the poorest people in the US suffer the most in this economy. The poor have the highest unemployment, the lowest savings, and the hardest time buying food or paying rent. The poor are really struggling, at the same time when wealthy tech companies are doing great. So if we look at the big picture of what is happening, the US is taking on debt to provide stimulus to the rich while the poor struggle to eat.
News article on US poverty: https://www.cnbc.com/2021/01/01/the-covid-recession-brought-extreme-inequality-in-2020.html
So that is the current state of the economy. The economy is not good. Now my goal in this video is not to talk about government policy, or what the government should be doing. What I want to focus on instead is whether the US economy is likely to collapse, and what you should do in this situation. It is much more practical to understand what the average person should be doing.
First let us look at the question: “Will the US economy collapse?” The short answer is no. I want to bring this specific question up, because there are a lot of YouTube videos out there right now that are saying the sky is falling and everyone should prepare for complete economic collapse. Most of these people are giving you a sales pitch to try and sell you gold. However, if you take a step back and look at the big picture, what we are experiencing in the economy is a fairly standard debt crisis. We have a segment of the economy with too much debt. Stimulus is not working, and poor people are getting hurt. This is what happens in every major recession or depression. What you would expect to happen is for everyone to unravel their bad debt so the economy can move forward again. This is not the type of situation that causes total economic collapse.
I think a good example that everyone will remember is the recent default of Greece in 2015. The whole Eurozone was struggling economically, and Greece ended up defaulting on their debt. This is what typically happens in recessions. The whole economic system of Europe did not collapse. Just the worst actors defaulted. I believe the world is in the same situation today, where the worst company debt will default, and the worst country currencies will default, but the overall system is not going to collapse.
To investigate this possibility further, we do know what total economic collapse looks like. It has happened in history before. But it does not happen from a debt crisis. A debt crisis can always be unraveled. The difference between our current situation and total economic collapse is that total economic collapse happens from situations that cannot be unraveled.
For instance, here are some situations that could cause total economic collapse.
- Honeybee extinction
- Pollution and deforestation destroys oxygen levels
- Climate changes cause massive famine
- World War 3
These are all things you cannot unravel that could happen in the next ten years. These are the types of things that cause total economic collapse, not a debt crisis.
This brings us to the practical question. The economy is a mess, what should you be doing? The answer is really simple, because it is the same tried and true financial advice you should always follow in difficult economic times.
- Reduce your expenses
- Save more money
- Live within your means
- Make conservative financial decisions
These are four simple things that we have all heard before, but few people follow. I think it is helpful in uncertain economic times to focus on the practical choices you can make to set yourself up for a positive financial future.
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.