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Today we go back to Vern’s Paris planning meeting for the book with Bill Bonner…]
Bill: You know, a person in our business, he has to decide when he’s going to be wrong because he’s going to be wrong. You’re either going to be too early or you’re going to be too late. And so you have to decide. I’ve decided I would much rather be much too early on something like this because being too late will be fatal.
Being too early is not necessarily going to hurt you. What more are you going to get out of the bond market? Not much.
Vern: Or the share market.
Bill: Or the share market, yeah.
Vern: At these levels…hanging around for that last drop is silly…I see what’s coming is going to be the greatest capital destroying episode or period.
Bill: Yes, absolutely.
Vern: Since the depression, and none of us were there for that. So I’d rather be two years too early.
Bill: Yeah, yeah.
Vern: Than two days too late.
Bill: You can almost calculate it. I mean you can. We know that the normal ratio of capital to GDP, we know what that is. We know what the normal ratio GDP to debt is. And I did some figures on it. These are all back of the envelope figures because you can’t really know.
But if debt in the US had remained at the same level that it historically had been, which is 1.5 times GDP, we would have today about $27 trillion worth of debt. Instead, we’ve got $60 trillion.
So, that’s about to me — this is back of the envelope — that’s about $33 trillion worth of excess debt, debt that shouldn’t probably be there. And a lot of it is founded on values that are probably not very good. The collateral is probably not worth what they think it’s worth whether it’s a painting, or a car, or a company, or a house, or whatever. So, I would guess that in the coming debt destruction, we’ve got about $33 trillion worth of assets that are going to disappear, and that’s not going to be very pleasant for people.
Vern: Even if that’s only the half of it! That’s just the US!
Bill: Yes. Yeah.
Vern: $60 trillion of asset values.
Bill: That’s right. One year of GDP disappearing.
Bill: People think, ‘Oh, that’ll be ridiculous. That can never happen.’ But it’s happened in Greece. It’s happened in Greece in the last few years. They were spending more than it could afford. Debt was sky-high. Crucially, it didn’t control its own money, which made a big difference in the way that it happened. The Greek GDP collapsed, and it’s not coming back. So, we’re going to see a —
Vern: And it gets into a spiral.
Bill: Gets into a spiral. I mean it’s a very complicated story, but—
Vern: It is. It’s a tipping point.
Bill: And it’s so complicated that people tend to give up and say, ‘Oh, well. That’s just the way it is.’
But there’s a real benefit to trying to figure out not the whole story and not all the details, but the big story. And the big story is we had a huge run-up in credit. Every time there’s a credit run-up — this is classic economics — every time there’s a huge run-up of debt, beyond real savings, [chuckles], it’s always followed by a debt contraction and a recession or depression. So that’s what we’re looking at, and I don’t see any way to avoid it.
It might come in many different forms, which is also confusing: hyperinflation, deflation, it could crash. It could come in a lot of different forms. But one way or another, all of that wealth, which is really debt, that is going to disappear.
Vern: Would be destroyed.
Bill: Would be marked down, yeah.
Vern: And again, as you said, the average person, it’s difficult — and even for us, we…we muse over what may happen and the way — which path it will take. But I think there’s just some decisions in life you have to get right.
Bill: You have to get THIS one right. [Laughs]
Vern: You have to get this one right…If you’ve got 20, 30, 40 years of living left in you, it’s going to be a make or break moment. That’s the way I see it, which is why I’m so passionate about trying to protect wealth. I was in an industry that didn’t always do that.
Bill: No, we don’t always do that. And the thing is that we are now accustomed, habituated. We are…we’re trained to believe that if there’s a…if there’s a pullback in the stock market, the best thing to do is just ride it out.
Vern: Yeah, or buy.
Vern: Buy more… Buy the debts.
Bill: Get into stocks, just stay there, stop worrying because we know from the last 50 years of history that whenever you get in the stock market and stay, you’re okay. You know what — the biggest danger you have is getting knocked out, becoming fearful in a sell.
But, those 50 years — I keep saying — those were not normal 50 years. They were very special 50 years. And if the next 50 years…are different, which they should be, that buy and hold formula won’t work. It’ll be disaster.
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