Please Watch this Video and Tell me what you think

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RDenner
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Please Watch this Video and Tell me what you think

Personally I found it to be one of the most eye opening economic speeches I've seen since watching the original Crash Course back in the day... It is a very in-depth explanation about why we are where we are economically speaking.. Revolves around the idea that the fed has created all this potential inflation, like to the tune of 1600% inflaiton based on 16X reserves at the US Fed and yet inflation is nearly flat. As it is around the world.. WHY?

His explanation I believe is dead on and is worth the 1 1/2 hours to watch. Recorded in 2016 before the election and befor the taper tantrums of the Trump administration and before the EU did more QE.. If what he says is correct, it portends a very fast and very messy end to the QE experiment, expecially in this era of closing foreign trading and the possiblity of trade wars.. Would love some feedback on this..

 

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Please Watch this Video and Tell me what you think

RDenner, I'm very familiar with Koo's thesis; the dude is brilliant. I also agree this video should be watched by anyone wanting to understand the macroeconomics of the last two decades (and the next decade of investing). I'm  not sure you will get much interest from this blog though; more ideological/less pragmatic. Myself, I'm in your camp and remain amazed at how ignorant the narrative is about the last 30 years is. I can't believe the FED is stupid (hell, they read Koo, he's one of them) so maybe they are just laughing all the way to the bank while guys like Koo remain honest? I don't know. I just treat it non-emotionally like the weather and make money off it. Because people didn't understand this they were not well positioned in 2008, don't get investing in PM, and nor do they understand the latest stock market boom.

If what he says is correct, it portends a very fast and very messy end to the QE experiment, expecially in this era of closing foreign trading and the possiblity of trade wars..

I'm not sure what you are saying here. If anything, trade wars need to increase based on this video, since a big problem lies in the "mixing" of different economies and said debt (watch the part of on the EU for a good example here). But could you be more specific as to your point?

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RDenner
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Thank you for your time in

Thank you for your time in replying. 

 

I think I see the issue with Trade wars(of which I am in favor of BTW) as it goes to Mr Koo's theory is that above all else you cannot let your productive enterprises dwindle. I think he fears that trade wars will fuel another unstoppable force(like deflation) where a tit for tat war destroys entire swaths of an economy at a time when those jobs are needed here and now to continue the decade(s) long process of winding down bad debt..

For me, I am of the opinion that we should take the short(albiet very very bitter) road of debt forgiveness or Jubilee if you want to call it that. For in reality that is what I feel Mr Koo is explaining.. He understands that the debt has reached a complete saturation point and there aren't enough borrowers to fill the bucket and way to many debtors paying their debt and keeping the water flowing out the bottom of the bucket.

Two ways to fix the problem.. Set up a economic circumstance where you can keep your job(full employment) but keep your future expectations tamped down(high interest rates) so that inflation is kept in check.. You keep employment up by increasing .gov spending. Even if it is literally the 1st shift digging ditches and the 2nd shift filling them in.. The point would be to keep money circulating in the system.

The other way is the way they will never take because it means the system breaks.. Dept Jubilee, reset the system and let the chips fall where they may.. It would be a 5 year process where we might actually go over the edge into rebellion. But if not, we come out the other side like Iceland with the bankers off of our throats and our balance sheets clean..

 

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Also agree with your thoughts

Also agree with your thoughts about the post Great Recession decade and most making the wrong assumptions. I was one of them.

I was convinced that after 2009 everything would change. 9 dollar gasoline 10k gold, 2000 dow, etc. And in actuallality it went completely the opposite because I didn't understand what Koo was saying even as far back as 2009 where he first started giving this speech. 

In retrospect I give the Obama administration a little more credit now. I think they for sure understood what Mr Koo was saying because they actuality did most of it. It appears that the only mistake was QE 1 and QE 2, which we will be regretting for a long time to come.. They kept employment and business stable, but avoided it going overly inflationary by keeping future expectations down. Not sure if that was their intention, but that was the result of 8 years of Obamanomics. 

Now we have Trump running around in a room filled with 10,000 gallons of gasoline(potential inflation) with a sparkler in his hand claiming how great his economy is.. I think the only thing saving him right now is his trade war with China which is acting as a huge drag on an economy that wants to shoot to the moon and take us hyper-inflationary...

Or maybe he is a mad genius and that is his plan, either way...

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MKI
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More Koo, comments to follow

Here is a good ore recent Koo presentation on the free trade issue. I have a lot of comments on your post, but if you watch this first it will help me summarize my thoughts better.

 

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Watching now.. I think i see

Watching now.. I think i see what you mean, by not understanding my comments of Free Trade.. He is already explaining why I was wrong in what he said.. Free Trade=Balance of Trade as well.. Back to listen.

 

Thank you for sending this. I couldn't find anything new from him ..

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Watching again too...

I'm watching again and again and realizing how much I've forgotten. I think you dead on to be focused on this issue. It is best summarized as:

1. Investment, labor, and debt flees to less developed countries.

2. No jobs, no desire to borrow in wealthy country, so wealthy counntry FED doesn't matter any more (QE doesn't work without solvent borrowers).

3. Wealthy country cash has no place to go. All QE money that "leaks out" goes into real estate and stocks. This is what folk here keep missing.

4. Fiscal policy must dominate; government must spend in self-funding projects to keep GDP. Trump/Bernie rule. Government must dominate the economy.

5. Desperate FED stupidly keeps doing QE1, 2, 3, 4...and are 100% ineffective AND have creatd a monster FUTURE inflationary barrier to growth. If/when companies do start to grow again the QE overhang will create massive inflation. This is the PM heyday. BUT the FED will NEVER risk this and crushes any attempt at growth. But will they miscalculate? That's where PM comes in...

Note Koo worked at the Fed of NY. He knows the score. He saw it all in Japan.

Note also that this means that those of us who think "the sky is falling" and "gold is going to $14k" may be totally wrong for decades and miss out of the biggest bubble in stocks & real estate we will ever see. Note the constant complaint in these parts about how the stock market "just won't fall!" Look, we could hang on to this situation for 100 years and we are all long dead. Or it could collapse overnight like 2008. Nobody knows. Needless to say, I've told my children where my 10-20% NW of PM is buried since I may never need it. Also, there are many different types of investing that become clear when seeing the Koo "non-ideological" reality.

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Great video. Again thank you

Great video. Again thank you for shaing...

This video is coming to me at a very critical point and really makes me want to think it though.. I am currently in the process of selling my home. I did the same thing in 2005 as I saw the end of the Housing bubble coming. It actually lasted longer than I thought, but for my home in my neighborhood late 2005 was the peak.. We rented for 3 years and bought back in towards the bottom and got a foreclosed home for around 50% less than the peak.. Took another 3 years for it to truly bottom.. We eventually went upside down from 2010 till about 3 years ago when it came back up to what we owed. And 18 months ago the price just skyrocket in our area.. Now we are looking at prices above where they were in 2007...

Our hope is to sell and rent again as our kids are now graduated but still living with us likely for a few more years.. The house is in an area we don't want to be in anymore. Taxes are high, its getting congested, etc.. Our hope is to save and wait for the bottom to fall out again and buy something further out in the country.

Issue I see now after watching Mr Koo's videos and TOTALlY understanding where he is coming from, I feel like he has filled in some crucial missing pieces as to why I predicted so completely wrong in 2009.. And I now wonder if there will ever be a dropping out of the Real Estate markets or the equity markets for that matter. If he is correct, so long as the US Dollar remains the reserve currency(not a given by any means) they will be able to string this out for a decade or longer. With all that excess savings chasing real estate and stocks and anything else that can hold real value(at least as they see it)...

Would love your insights..

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More thoughts...

Man you have me thinking about nothing else today.

One of the lessons I learned from Koo is that no matter how smart I think I am, the Black Swan rules the day. Nobody knows anything. They still call Japan equity markets "The Widowmaker" for a reason...everyone knew it "must" collapse decades ago. 30 years of "until or unless". Really smart guys have lost their ass, and I mean billions of $, on trying to guess the future. Same losses with gold; Paulson of "Greatest Trade" fame (what was it $15 billion on a single trade in in the 2009?) lost it ALL back and then some by foolishly investing in gold because he "knew" what would happen when the FED went QE. Everyone thinks they have it figured out, that they have a "sure thing", only to find nobody has any clue.

I remember I stupidly got to the point of "ready to click" on a Japanese short trade but chickened out. Thank God I'm a coward as it also saved my bacon in 2008 (2X NW by being out when it happened) only to freeze up on the recovery I so desperately wanted to cash in on the "guaranteed" deflation which "must" follow. I just froze watching the Federal government break existing laws and bail everyone out. I was a fool. I should have known they would (and will) do anything. So in the end I just bought distressed dividend blue-chip stocks (no mutual funds with all the included garbage) and churn those but am scared *hitless. There is no real value there and so keep my stop losses firm. But there is zero safety anywhere IMO. Imagine the law change possiblities when the big Kahuna arrives.

Cash flow is the only thing I believe in anymore. Not stocks, not bonds. Which kinda puts PM in an ugly spot w/ no cash flow and a strong possiblity of being outlawed/taxed in uselessness. But I think the future is completely unpredictable so I won't be surprised if the FED gets it all back before my investing adventure is over...

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When I have time tomorrow I

When I have time tomorrow I will chime back in on this. Glad to have found someone who really gets this and has had more time than myself to digest this.. Not since I came across Peak Oil and its implications in 2003 have I felt so strongly that I stumbled on to something that nearly nobody else is understanding.

Regardless of your feelings on Peak Oil, it has directed nearly everything politically and economically since the .dot bubble. Starting with the super spike to 146 post Katrina, to the wars we fought and continue to fight.

When I learned of the term Peak Oil, it sent me down a 15 year rabbit hole that took me from 9/11 back in time to the Russian/Afghan war and futher back to our overthrow of middle eastern governments in th 1950's and all the way forward to the 2008 crash. All of them are linked through a common thread of energy, the US dollar system and the US military.. It literally took me 2 years of nearly manic study to piece together in 2005 that the housing bubble was in fact not just a run of the mill turn of the economic cycle. But that it would lead to the bankruptcy of Fannie and Friddie and GM(and I thought Ford at the time, but they barely made it).

I tried to tell everyone at the time that it was coming and barely anyone would listen..  And when it happened, I promptly assumed that their reaction would lead to a 2 year 2nd bubble and promptly crash again.

This video proves why I was wrong. For 10 years I've tried to find that missing piece to my thought process and here it was.. I found the video, much like I did the term peak oil as a completely random response to an online article I was reading. This time on Zerohedge...  Amazine how Serendipity works

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It is catching on.. From

It is catching on.. From Zerohedge, that bastion of old world free economics and Ludwig Von Mises..

 

https://www.zerohedge.com/news/2019-04-15/rabobank-mmt-red-pillblue-pill-moment-many

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It is catching on.. From

It is catching on.. From Zerohedge, that bastion of old world free economics and Ludwig Von Mises..

 

https://www.zerohedge.com/news/2019-04-15/rabobank-mmt-red-pillblue-pill-moment-many

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MTT & Peak Oil

On both issues:

A: Peak Oil (PO) full disclosure: First, I'm an oil guy (20+ yr biz). Second, don't think "resoruces are running out" (or any resource like oil dominates the economy, I'm a Paul Romer guy on this). Third, I do expect PO within a decade (been saying that for over a decade heh) but think this a minor deal. These ideas have held up well plus made me good $, but I'm always up for intelligent discussion that challenges/tests my opinions (that is, I'm not dogmatic about my "fact based' opinions like most on PP are). I just wanted to disclose where I'm at.

B. MTT: I haven't found much I disagree with Koo about here. Is there something specific you believe that Koo would disagree with regarding MTT thinking? I'm open-minded yet never found MTT to be very interesting. What am I missing?

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Koo Interview re balance sheet recession & QE trap

Thank you, RDenner, for starting this thread! Am very glad to have learned of Koo's work and explanations. Seems we are well on our way to another "balance sheet recession" given all corporate borrowing and shedding of cash via stock buybacks! Concur, or?

Found this pithy version of Koos balance sheet recession explanation (~13 mins) from 2015 especially easy to digest.

"Escape from the balance sheet recession and the QE trap - an interview with Richard Koo"

 

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Well on our way to another "balance sheet recession"?
dabenham wrote:

Seems we are well on our way to another "balance sheet recession" given all corporate borrowing and shedding of cash via stock buybacks! Concur, or?

2015 talk  is great because it's very basic. However, it doesn't cover #2 below very well:

1. Balance sheet recession (BSR) as companies all are paying off debt from the prior boom...AND...

2. ROI is greater abroad so companies invest QE cash abroad & local jobs disappear, making growth only there. And institutions many cannot (by law) invest outside home country so they must flood existing assets at home...AND...

3. USA/Japan/EUR QE pile of money keeps growing and is just waiting for the slightest uptick in economic growth...the millsecond this happens companies will flood home and all inflation hell will break loose w/interest rates through the roof (think 1979). In the 2018 talk at 14 min Koo covers this: "You don't want to be long USD at that point!"

At 20 min in the 2018 talk Koo talks about how #2 dominates now, not #1 like before. I don't think Koo understood #2 very well in 2015 because Trump had not been elected yet and nobody believed it could happen (see his comments at 4:50 "No to TTP!" and how even HRC was anti-free trade when she got nominated). The world, but especially Asians, are scared to death their unfair trade is, as Koo says, "over".

So in summary, I don't ncessesarily concur another BSR is on the way anytime soon. Sure, it might if the FED gets frisky again. Remember, the FED must keep flooding the stock market & aseets to avoid the painful inflation that will happen if our companies return home with QE all at once. Basically, we are now just like Japan, only 20 years behind...and Japan has been doing this for 30 years now with no end in sight, and they haven't even started to unwind! The USA might only be 10% into this artificial & controlled stock market / housing bubble. The USA might be forced to play this game until 2100, sitting between fire and ice. Or as I said before the FED could miscalculate and blow everything up tomorrow. Better have gold - real gold, at home - if that happens.

I was working for a multinational in 2014-15 and remember plotting oil and financials cackling with cooworkers how oil didn't matter at all anymore (if it ever did). It was all FED, all the time. Koo puzzled me back then because he never spent much time on #2 or #3: what the hell happens when our QE chickens come home to roost (which they eventually must); that is, we have our next real expansion? In 2018 he is far more alerted (or maybe he's just in Asia so probably can't get away with lying to those guys who know what's coming).

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Since you seem to have a

Since you seem to have a pretty good feel on this, what are your thoughts on the US Dollar as reserve currency and your thoughts on if that privilidged position is at risk any time soon if ever.

Many I speak with say that the US Dollar supremacy scheme will only end when the United States no longer has nuclear weapons. Meaning that it will take an act of war against us where we lose, before that privilidge is removed from us..

It is because of our privilidged spot at the top of the economic system, that we can continue to deficit spend on our infrastructure and ironically our military...

 

Would love your thoughts..

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BSR, ROI Abroad & Resolution of Trade War(s)

MKI
Agree that Koo's 2015 interview did not cover your #2 - the impact of greater ROI abroad for corps greatly inhibiting economic recovery at the central bankers’ homeland – whereas his 2018 talk does. Perhaps a balance sheet recession (BSR) should be reframed as an accelerant on #2’s negative impact on the homeland’s economy.

The debt load for US corps has exceeded $6.3T as of late 2018, according to S&P Global. Once one removes the top 25 cash rich US corps (Apple, MSFT, my former employer Cisco, Google, etc), the remainder have a cash-to-debt ratio of 12%. It was roughly 14% in 2008. That is the basis for saying we seem well on our way to another BSR. But to your point, since the Fed hasn’t kept the QT/rate increases going (that’s “frisky,” correct?), BSR hasn’t happened yet.

Coming back around to your #2, we don’t yet know what will become of POTUS’ trade deal with China and what impact that will have on view of ROI abroad vs home for US corps. If it is more like the USMCA nothing-burger (beyond dairy farmer’s potential upside), then wouldn’t an “attractive ROI abroad” still dominate? If it instead has some serious changes, chances are it will drive up CPI. If so, wouldn’t that pressure the FED to get at least a tad more “frisky” and here comes (another) BSR?

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Nukes & USD's Reserve Currency Status

RDenner
Not sure if you wanted others' 2 cents, but here I go anyway ...

Our having nuclear bombs, or more generically, our military might and its geographic scope, has indeed stopped smaller efforts/chatter (eg, Libya, Iraq, etc) around moving to another reserve/oil currency.   Further, if we use our military might to force Venezuelan oil to be purchased in USD, then this will bolster the its reserve status in the short term.  But against China’s eventual rise, our nuclear bombs are not relevant (note 1), IMHO.

As long as China’s continues a monetary policy that is easier than our FED’s, this reduces the Yuan’s attractiveness and accounts for why it is still one of the smallest in reserve today.  But if China is playing the long game (eg, Silk Road+SouthAmerica and Russia partnership) better than the USA, which is now also actively trying to reduce its imports, then I cannot think of how we’ll stop that eventual transition.  It may take a long while to happen, but still inevitable.

Perhaps we can get out of our protectionist/nationalistic trend and successfully steer things toward a collection of currencies (eg, SDR), or to a crypto, instead of the Yuan when the timing makes sense … just pondering what might be plausible.

Feedback?  Your predictions?

Note 1:  One wildcard exception = If the powers that be in USA can manufacture enough consent to use our military might / nukes pro-actively on China.  The fact that we are so repeatably gullible might make this wildcard's threat more effective than I am presently including in my calculations.

 

 

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US Corp debt load over $9 trillion
dabenham wrote:

The debt load for US corps has exceeded $6.3T as of late 2018, according to S&P Global. Once one removes the top 25 cash rich US corps (Apple, MSFT, my former employer Cisco, Google, etc), the remainder have a cash-to-debt ratio of 12%. It was roughly 14% in 2008. That is the basis for saying we seem well on our way to another BSR.

From CNBC in Nov 2018 we get this much larger estimate of US corporate debt loads:

Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent, according to Securities Industry and Financial Markets Association data.

(Source - CNBC)

So instead of any balance sheet reduction, the US corp machine has seen fit to swap equity for debt.  This has been a profound leveraging, the exact opposite of a deleveraging.

When, not if but when, the next crisis comes, all of that leverage will really bite.  That's what the central banks are so afraid of.

Consider:

 

  • 14% of companies are zombies (meaning last three years of op inc did not even cover the interest costs)
  • Pensions in as bad or worse shape and than before the GFC and now exposed 60% to equities
  • Median households without any emergency funds, let alone investments.
  • Fiscal deficits already at the top end of the historical range before any recession hits.

In other words, the central banks have plenty of reasons to fear any sort of a downturn.

Unfortunately, they are a fact of life, and all of their market jamming and jawboning aside, there's not a lot they can do about that except forestall to make the eventual crash that much worse.

After all, the claims cannot grow 2x faster than the underlying wealth creation of the economy forever.  
But that's exactly the model they have been pursuing with blind zeal.

When, not if but when, Japan's experiment ends, it will be really ugly for all concerned.  It will turn out that placing more and more debt upon a shrinking and ageing popualtion wa nt the correct answer for anybody - except the banking system (for a while).

At any rate, great conversation, I am learning a lot.

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One way the dollar ends quickly
RDenner wrote:

Many I speak with say that the US Dollar supremacy scheme will only end when the United States no longer has nuclear weapons. Meaning that it will take an act of war against us where we lose, before that privilidge is removed from us..

For my money, the dollar supremacy scheme ends rather suddenly when the first US aircraft carrier is sunk by a swarm of comparatively cheap hypersonic antiship missiles.

The projection of power is the essential component, not the ability to end all life on the planet.  That's a thing, to be sure, and will limit what any other countries can do in terms of invading the US, but force projection is the means of maintaining US sway over the world.

Can't project what you can't ship.

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BSR & USD as RC (reserve currency)

DR: Hey, I do not have a good feel for any of this stuff. I'm completely lost. Why I can't let Koo go...

I am probably wrong about thinking this, but why is the USD as RC a "privilage" anymore in the era of fiat? Everyone prints whatever fiat they want; nothing is backed but by a national economy. Case-in-point: Japan...they've built more debt/GDP than the USA without having 1. RC, 2. a single nuke, or 3. natural resources! WTF? All they have (like the Germans) is a very, very productive economy run by smart, hardworking people. All their money? BS fiat, like ours. In fact, the only reason I can see that Venezuela or Greece (or even the USSR) get into trouble is they stop working. The only privilage I see the US having these days is their jobs stolen by Japanese, German, and Chinese workers where we lose our skills, our families, and our health. Some deal! I'll take 1950 and half GDP again, please.

 

DA: I see your point on the BSR. Companies are all leveraged up again and it must come down, thus BSR.

The problem I have? Japanese firms have already cut their debt but are not borrowing money again. And they don't even have a Trump with nukes/RC who can tweet anytime he wants that he will enforce fair trade. If that happens the US booms and all will have to borrow to play. It's what happened in Japan in their bubble, right, when Tokyo was worth more than CA? Where is the debt line?

Look, I have zero idea why we even got this far. But what stops Trump from pulling another TARP X2 to goose the economy at a slight hint of recession? Use imagination: bridges to nowhere. Another war. Nationalizing whatever & hiring everyone. To my simple mind we haven't even started to play Koo's game yet. Why not CPI 10%-20%, a war or two, and the FED buying everything still for sale? I'm sure 1,000 new companies with zero debt will spring into existence to get in on the free money and thus service the leveraged (read: zombie) ones. The US plays the tune now, and the corporate world must dance.

Look, I'm sure I'm wrong here. I am just waiting for somebody, anybody, to tell me how our post-2008 BSR even gets started with our massive trade deficit, Trump tweeting, and activist FED. To my feeble mind we are already 5 years late. Why not 25?

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One Last Link: Predictions & Humility

DRenner: I still can't stop thinking about your Koo video (and wife & kids are sick of my rambling so I'm dumping here) with one last link:

Mauldin: Just like I am predicting that much of the US deficit will end up on the balance sheet of the Federal Reserve, I said the same thing would happen to the Japanese. I also said it would devalue their currency. I actually put real personal money on the prediction. I bought a 10-year yen put option. That trade has not worked out so well. I don’t even want to open the envelopes from J.P. Morgan containing that information.

But I learned a lesson and I had a great deal of company. Many hedge fund managers and other investors made the same bet. In essence, we said that Japan is going to print money and the same thing will happen to it that happened to every other country in the same situation: The currency will lose value.

Instead, it brought one of the most surprising macroeconomic outcomes that I could imagine. Talk about thinking the unthinkable back in 2008.

I'm sure sane people will be proven correct "in the long run". However, as Keynes says, in the long run we are all dead!

https://www.mauldineconomics.com/frontlinethoughts/the-rules-will-change-but-thats-probably-ok#avoiding

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