--- title: "Market Memo" source: https://www.perissosprivatewealth.com/insights/market-memo-6 publisher: Perissos Private Wealth Management published: 2025-05-20T02:54:32.72732+00:00 updated: 2026-05-06T19:25:15.466152+00:00 topics: long-term debt cycle, market memo oklahoma, currency devaluation cycles, central bank monetary policy, economic history cycles license: Educational content. Cite with attribution. Not personalized financial, tax, or legal advice. --- # Market Memo The Long-Term Debt Cycle Explained Today we saw the highest inflation rate since 1982 (6.8%), which I am sure you will see on the news tonight. The Long-Term Debt Cycle Explained Today we saw the highest inflation rate since 1982 (6.8%), which I am sure you will see on the news tonight. Unfortunately, the media and most people, for that matter, focus only on the present and forget that inflation, political polarity, large wealth gaps, currency devaluation, and wars/revolutions occur in cycles, although over very long-term cycles (typically around 70-100 years). When you study these cycles from a 30,000-foot view and look at the data over decades instead of monthly or annually, they begin to come together for logical reasons. Just as everything around us has a lifecycle – a seed is planted, and the tree grows over time, but eventually, it weakens and dies – empires/countries have lifecycles too. Although an empire/country typically doesn’t die, their currencies do. Since I believe we are near the end of the long-term debt/credit cycle in the United States and other developed countries, I thought I would break down this cycle from the research I’ve done looking back over hundreds of years of history and books studying other economies. While the details of each cycle vary, the overarching cause/effect relationships are identical. Therefore, I will simplify this explanation and hit the high points as not to bore you with details. Money and credit are the biggest drivers of wealth and power (remember, credit spends just like money but is a claim on future money). If you understand money and credit, you will understand how the “Roaring ’20s” led to a debt bubble that produced a large wealth gap between the rich and the poor. Then the bursting of that debt bubble led to the Great Depression of 1930-33, which led to conflicts over wealth all over the world. Understanding this, you would see why FDR was elected President in 1932 and why soon after becoming President, he and the Federal Reserve would print a lot of money and provide a lot of credit (similar to what is happening today). Follow the money and credit, and you would see why the world changed as it did in 1933 and the leading up to World War II, and how the United States dollar became the world’s reserve currency. M oney and Long-term Debt Cycle Explained Money goes through a long-term cycle and is directly linked to the long-term debt cycle. Money always starts as “hard” money, meaning it is made out of a commodity such as gold and, to a lesser extent, silver. However, it can be made of almost anything of value (the Chinese used copper during the first century). These commodity-based coins/money have an intrinsic value; in the case of gold coins, they can be melted down, and the metal exchanged. On the other hand, debt assets like paper money, which is a promise to deliver value, have no intrinsic value. Since carrying around a lot of metal is inconvenient and risky, and creating credit is profitable for both borrowers and lenders, banks arise that put hard money in a safe place and issue paper money that is a claim on it. Over time, people treat these claims on hard money as money itself since they can be redeemed for hard money. At first, there is the same number of claims on hard money as there is hard money in the bank. Then comes the formation of credit and debt. People that have money lend it to the bank and earn interest payments. The banks then lend that money to others for a higher interest rate, allowing the banks to profit, and the borrowers like it because they can purchase things immediately instead of waiting. Everyone likes it because it leads to asset prices and production going up, and since it is so well-liked, it gets done A LOT. Debts rise to the point that there is not enough income to service the debts, and since one person’s/government’s/company’s debt is another person’s/government’s/company’s asset, a debt restructuring would be harmful to both parties. Therefore, the easiest way out of a debt crisis is for the central bank to print money and create credit to fill the holes in incomes and balance sheets. Let me explain, think of debt as negative earnings. When a person, company, or government takes on debt, that debt has to be repaid, which comes out of earnings/incomes. Therefore, when incomes fall, there is a need to cut expenditures, and when that’s not enough, there is a need for debt restructuring or default, or the central bank can print money and provide credit which is the easiest path and the one taken most often. Up to this point, money is still considered “hard” money since it is backed by something of value, typically gold. However, during this phase of the long-term debt cycle, people begin to dought their ability to sell their debt holdings (i.e., bonds) to get money to buy goods and services. When debt holders find out that they can’t readily convert their debt holdings to real money, a “run” occurs. During the 18 th and early 19 th centuries, these were called “a run on the bank.” This occurs when many debt holders try to liquidate their holdings and convert them to real money. The bank is then forced to decide between letting money flow out of the debt asset, which will cause interest rates to rise, worsening the already bad economic problems, or printing money. As a result, they generally decide to print money. They do this by issuing bonds and buying enough of the bonds to prevent interest rates from rising, hoping that this will reverse the run. As a result, central banks inevitably break the link to hard money, print the money, and devalue the currency to avoid a deflationary depression. The key at this phase is that the bank will print just enough money to offset the deflationary depression and not too much to create an inflationary spiral. Germany’s Weimer Republic is a good example of printing too much and creating an inflationary spiral. Central banks and governments want to make the money and credit cycle last as long as possible because that is less painful than the alternative. So when the system of hard money and the claims on hard money becomes too painful and constrictive, governments typically abandon it in favor of “fiat money.” Fiat money is not backed by anything, there is just paper money, and the central bank can print as much as they want without restriction. This phase began in the U.S. on August 15, 1971, when Nixon removed the U.S. from the Gold Standard. With the Central bank freed from the worry of having its hard money stash depleted and the constraints on the supply of tangible hard assets, they now run the risk of creating ever more money and debt assets and liabilities in relation to the amount of goods and services being produced until the day when those holding the massive amount of debt will try to turn it in for goods and services or money which will have the same effect as a run on a bank and result in either debt defaults or the devaluation of money. In the 1960s, the U.S. government spent a lot of money on military and social programs, properly called the “guns and butter” policy. It paid for this policy by issuing a lot of debt, and the debt, which was a claim on money, could be exchanged for gold. Investors, of course, treated this debt as an asset because they got interest on the bonds and because the government promised to exchange the bonds for gold. As time went on, the spending and budget deficits grew, and the U.S. had to issue even more debt (remember, this debt was a claim on gold held in U.S. vaults, and the amount of gold didn’t increase. Also, keep in mind when I say debt in this context it also refers to money in general). Eventually, investors noticed that the outstanding claims on gold were much larger than the amount of gold in the vaults and knew that if this continued, the U.S. would have to default on its obligations. So, they began turning in their debt claims. To most people during this time, the thought that the richest country in the world could default on its promise to pay gold to those that had claims on it seemed impossible. However, it was possible and was why Nixon removed the U.S. from the Gold Standard. When the credit cycle reaches its limit, it is a classic move by central banks to create a lot of debt and print money that will be spent on goods, services, and investments to keep the economy moving forward. This has happened since the creation of money and has happened in the U.S. on numerous occasions, such as during the debt crisis of 1929-1932, the debt crisis of 2008, and more recently in a huge way in response to the plunge triggered by the COVID pandemic. This brings us to the last phase of the long-term debt cycle. As long as the money being printed is used during a downturn to fill a credit gap or put to productive use, such as increasing productivity or production, there typically isn’t a big issue with increasing money growth. The problem is when money is printed, not used productively, and people/countries stop using it as a storehold of wealth. When debt burdens get too high, and the economy is faced with a downturn while interest rates are at or near zero, we begin to see the cracks in the system. Printing money and buying assets (typically bonds) keeps interest rates down, stimulating the economy through borrowing and buying. That does a good job of pushing up financial assets but is inefficient at getting money and credit to those who need it. During most downturns when interest rates were at zero (the early 1930s and 2008), the central bank handled the situation in this manner. However, during the 2020 pandemic and continuing to this day, the central government is borrowing money from the central bank (which prints it) so the government can spend it on what it needs to be spent on. Printing money to buy debt is called debt monetization and is a politically less offensive way of shifting wealth from the rich to the poor instead of raising taxes (which it looks like may be happening anyway). When governments print a lot of money and buy a lot of debt, they cheapen both. This acts as a tax on those who own it making it easier for debtors. When debt holders realize what is going on, they shift their assets to other storeholds of wealth, such as gold, commodities, certain stocks, and other real assets. This brings us to where I believe we are in the long-term debt cycle. During periods of money printing, there are two possible outcomes, a) a new money and credit expansion cycle (like what occurred after the 2008 debt crisis) or b) devaluation of money that produces monetary inflation, which is good for inflation-hedged assets such as commodities, gold, TIPS, certain stocks, etc.). It is still too early to know whether we will see a new credit cycle, but with debt burdens around the globe at levels not seen since World War II, I believe the probability of higher monetary inflation is greater than the probability of a new money/credit expansion cycle. How well the last phase of the long-term debt cycle is handled is critical. If debt burdens rise to a point where the currency devaluation is extreme, the money and credit system breaks down, and governments tend to go back to some form of hard currency to rebuild people’s faith in the value of money as a storehold of wealth. This happened at Bretton Woods in 1944. Most countries had to abandon the gold standard to fund their war expenditures (except for the U.S.). When the war ended, they had such high debt burdens and had devalued their currencies so much that people lost faith. So at Bretton Woods, world leaders created a new monetary system in which the U.S. dollar would be backed by gold, and other currencies would be pegged to the dollar. And as we know, that agreement ended in 1971 when the U.S. left the Gold Standard. While I left out a lot of detail I hope this 30,000-foot view provides enough detail that you can still see the cause/effect relationships as they typically play out. Maybe in my next memo, I will write about the rise of the Dutch Guilder and the subsequent decline which I found fascinating in my study of currencies. If you made it this far, congratulations… this memo very quickly turned into a short research paper. Still, I hope it helps you understand the long-term debt cycle and puts into perspective approximations of where we currently find ourselves within the cycle. As always, I will continue to monitor the economic environment and your investments daily, keeping you up to date as things evolve. All my best, Brandon VanLandingham, CFA, CMT This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security Investment advisory services offered through Perissos Private Wealth Management an Oklahoma Registered Investment Advisory. ## Frequently asked questions ### What is the long-term debt cycle? The long-term debt cycle is a recurring economic pattern, typically lasting 70 to 100 years, characterized by the gradual accumulation of debt and credit followed by a period of deleveraging or restructuring. ### How do central banks respond to debt crises? Central banks often respond to high debt levels by printing money and expanding credit to avoid widespread defaults, though this process can lead to currency devaluation and inflation over time. ### What is the difference between hard money and credit-based paper money? Hard money refers to currency backed by a physical commodity with intrinsic value, like gold, whereas paper money is a claim on that value or a promise to deliver value in the future. --- Source: [Perissos Private Wealth Management](https://www.perissosprivatewealth.com/insights/market-memo-6) — fee-only fiduciary wealth management in Bethany, Oklahoma. 405.212.9690. This article is educational and is not personalized financial, tax, legal, or investment advice.