NWPL President Eric Larson explains debt bubbles, market cycles, and crashes. Over the past ten years, we have been in a massive expansion period, but where is it coming from? There is a huge debt bubble that cannot grow forever, it’s unsustainable. Are we nearing the next recession?
It doesn’t mean this is any more sustainable than this was. So I don’t, is the world going to collapse? No. Is this going to go on forever? No, it can’t. It can’t. So people say, well, why is it, why is it doing that? Where’s it coming from? I don’t know. I have some ideas.
All right. So this is my, this is from the lab. My buddy, Jared Siegel was supposed to be here. He’s my counterbalance. I’m kind of the bear. I’m the doom and gloom guy. I’m the sky’s falling person. He’s like, it’s never gonna fall. It’s always gonna work out. And his slide is this. His slide is this. He said, if you took a dollar back in 1931 at 32 and you invested it and you just never took it out, you’d have $10,000 today. And that’s true. If you are running a race and you were running a marathon, but the stock market has one of the best returns on your investment. Anything you can, you can invest in just the Dow Jones. This is the S and P 500. You just took the money for this. And you buy a hundred. It’s growing at a large rate. Here’s the exact same graph, except I’m not going to chart it logarithmically. See how this goes. One, ten, one hundred, one thousand. I’m just going to go 1, 2, 3, 4, 5, up to 30,000 with the DOW. That is that exact same chart from 1930, up to today.
It’s just not plotted logarithmically. Is the gains the same? It’s exactly the same data. Of course it is. But what you can see is bubbles. Now you can start to see the bubbles and you can see what’s happened here. So we did not have nearly the inflation. If you bought a house in 1850, that house was with the same price in 1900, it was worth the same price in 1910. We didn’t see the same inflation and you didn’t see the same. You didn’t see the same stock price. You got a dollar, a dollar used to buy you something. So you buy a lot with a dollar. People carry around a dollar, and now you can’t. And the reason is, is back in the seventies, we got off the gold standard. We used to have our money–used to able to take $35. You can go buy an ounce of gold and we couldn’t print more money than we had gold.
So it forced our, our treasury to only print what we had. It’s a lot like… If I can, if I make a thousand dollars a month, how much am I going to spend? If I don’t have any credit, I’m going to print. I’m going to spend a thousand dollars a month, maybe less, but I can’t spend $2000. But if you give me a hundred thousand dollar credit card, how much should we spend? Maybe more than a thousand, right? Because I can. That’s what happens when we got the gold standard, back in the eighties, it allowed us to print money as much as we wanted. And we did. And so this, the stock market has gone up this much. It has, but so has our inflation. It’s the stock markets–it’s not like the dollar in 1980. The dollar that my mom bought groceries with when I was a kid, isn’t the same dollar today.
It doesn’t buy the same amount of goods. Doesn’t buy the same amount of stock either. It doesn’t mean the stock market’s gone up in so much value you’ve needed to have it go up this much, just to keep pace, because we have inflation. Part of the reason the stock market goes up is because we have inflation. Part of it is because we generate goods and services part is we have more gross domestic product, but we also have inflation. It’s both. So first I want to show here is that we have bubbles. This is the dot-com bubble, the longest expansion period in US history of the whole 300 year, last 300 years. This is from 1990. This drop up to year 2000 is exactly 120 months. It was 10 years exactly. We created the internet. Cell phones became something that we all have. And we started laying fiber-optic cable around the world.
We started connecting the world in the nineties. Even then, even then we overdid it. There has never been in our history, more economic growth, more new ideas, more companies started than in this time. And it created this bubble. You all got greedy, I remember this time we were saying, it’s a new economy. It doesn’t matter if your company makes money or not. It’s how much–what’s it going to do in the future. Right? I remember saying that in 1999, and then what happened? Oh my gosh, I had a stock of $72 in Lucent, they were doing fiber optic cable. Guess what happened? They laid all the fiber optic cable. Went down to $2. That was terrible. That’s what can happen. It’s not that the world ends, but you can’t have this kind of growth forever because it’s unsustainable. This is not how humans live.
We don’t eat food this way. We don’t buy houses this way. We don’t do anything this way. We do things, as more of us are alive we buy more food. We keep more houses, but it’s like this because there’s the human population isn’t expanding like this in the United States. It’s like this. So anytime you have these bubbles, you can say, this probably is not going to last. It’s not sustainable. Now I couldn’t have told you when it was going to pop, but here’s how bubbles work: When they pop, they usually take about as much time–come back to the bottom–as they took to get up to the top. That’s the bubble period. Here’s 2008. Boom. We have a crash in 2000 and then we start, there we go, January, 2002. And we go up to the housing market bubble. But what do they do? You started giving loans.
George Bush said people should own homes. Owning a home is an American right. Remember the second George W. And so we started giving loans to everybody and this created a housing bubble–and he wanted to, as part of the reason we got out of the dot com bubble. He started printing more money, but giving it to people to buy houses. This was our housing bubble. But look, what happens? It crashes down. There’s a natural supply and demand. It’s not that houses become not valuable. They’re just not as valuable as we think they are. And supply and demand has to catch up with it to make it valuable again. This is the bubble we’ve created now. We’ve never created a bubble like this ever before. It’s not sustainable, it’s not normal. It’s unusual. We’ve gotten used to it because we’re people. We live in the cycles of, of summer, winter, fall. A year is a long time to us.
It’s amazing. Something really horrible can happen to you and you’re going to forget next year, right? Eight years is a long time. It’s amazing how 2008 can just be such a fondest memory, we’re doing so good now. And it’s okay. We doing good. We’re lucky, but it doesn’t mean this is any more sustainable than this was or this was. So I don’t…is the world going to collapse?. No. Is this going to go on forever? No, it can’t. It can’t. So people say, well, why is it? Why is it doing that? Where’s it coming from? I don’t know. I have some ideas. So I didn’t know. And this is the question: I looked in this bubble. Why is this happening? And then it kind of freaks me out. Where does all this money coming from? Are we generating the internet? Have the self-driving cars come out? We all sold our cars and have new cars now? No. Why? This is more, there’s more growth. Twice as much growth as we had when we created the internet and cell phones together. Where’s this coming from?
This is the Dow Jones Industrial Average. This is S&P. So Dow Jones is 30 stocks. This is 500 stocks, but they have similar curves, similar curves. So at the end of the day, if I trend out where’s human people, what’s the supply and demand? I don’t know what your slide man is. And it’s different for every industry. But if I looked at the stock market, I would say there’s a natural curve. It’s probably sloping at two to three or 4% growth because that’s what GDP grows at. So if I, if someone were to ask me, what do you think the downside is? Someone says, Hey, I think this is a good buying opportunity now to drop a couple of thousand points. I don’t think so. I’m not an economist, but that’s not how bubbles pop. If you would have said, “Hey, look, what a great time to stop that the housing market dropped 2000 points I should buy right now. ”
Well, no, you wouldn’t. You would’ve been killed, right? I think right now we’re in an undulation period. And I think that for a lot of reasons. I think we’re going to have a down market. And it’s going to be steep. It’s gonna be steep for a lot of reasons. I’ll tell you about that. But here’s this data. I took this data right here from 2009 to, as far as I could. And I plotted against the Fed’s balance sheet. The Federal Reserve, right? We’re the richest people in the world and we’ll buy whatever we want. And we have a printing press that it’s free money, right? So I can just print it and give it away. What did they do? From 2009 to 2015, they printed four and a half trillion dollars. And I’m going to show you a video of what a trillion dollars looks like because it’s unbelievable. We lose perspective. When numbers become familiar to us, a billion dollars used to be a huge sum of money. There wasn’t a billionaire. A millionaire was a really rich person, but a trillion dollars is such an unfathomable amount of money. I would just want to say, just remember, we’ve printed four and a half trillion dollars. The red line is the S and P 500. That’s the stock market. This line is the Fed putting money into circulation. The alignment of graphs is called correlation. If you have one graph, that’s going up and down here and it’s down over a here, the correlation is low. When you have a line that basically follows another line that’s correlation. And usually correlation means there’s something entangled there. If the graphs are correlated well, that means there’s entanglement in the data, which means someone says, well, where did the four and a half trillion dollars go?
Well, I don’t know. I think a lot of it, went into the stock market. We printed the money, we gave it to the banks. The banks lent it to people to buy houses. And the companies, companies have borrowed more money during the last eight years than anybody else. And what’d they do? They bought their stock back, right? Most companies didn’t build a bunch of new facilities. We didn’t build new auto plants in the states. They just bought their stock back. And they’ve been killing that. They borrow money for free, basically half a percent, 1%. They bought their stock back, and their stocks went up three times. So this, this where the 2008, 2000, I think it was the.com bubble that stimulated our growth. In 2008 it was housing. This time, it’s debt. And I’ll show you why I also think that. Take a look at this: This is the amount of US debt that has been printed over the last 30 years, right? There it is graphed by itself. This is our US debt. We didn’t use to have billions of trillions of dollars. Again, this is new.
This is new.
There’s 1940. To have a billion dollars or $2 billion of debt was a big deal for our country. We have $22 trillion in debt. Now there’s that same graph. I just took this line and I transposed it over the Dow. That is a high correlation to debt to the stock market. It doesn’t mean the stocks isn’t valuable. It doesn’t mean the companies aren’t producing goods. It just means that a lot of the value is created because we printed the money and it’s debt-based. So I just want to ask me, “How long do you think the stock market’s going to continue to go up?” I would stay as long as this debt curve looks like this. I think that stock market curve will also look like that. Could the stocks would have 30,000? Maybe. I don’t know. Two things allow us to print money, but, either we print more money and the stock market keeps going up, or people stop believing that we can use the dollars that we have.
People start saying, “You know what? I don’t want dollars anymore.” You’ve printed $20 trillion. At some point in time, people might not take them like they have, right? This happens. And this is a cycle we’re not familiar with. This is a cycle that’s repeated throughout human history. Every single, every single culture. In history, the Greeks, the French, the English, the Romans, everybody debased their currency. Why? It’s easy. I can print money for free. I can spend money on wars and services, and goods. And my people–I have a Republic and they vote for me. The more money I spend, the more votes I get. So who do we elect? We elect the people who spend the most money for what I want. I want tax cuts, right? That’s spending money. I don’t want to pay taxes. That’s me spending money. I want free housing and I want free healthcare.
And I want free this– that’s spending money. And we vote for those people. That’s why we continue to make more debt and we’ll print it until other people won’t take it. So what to do about that? I don’t know, but that’s, there’s a data right there. I’m going to show you something else. Check this out. Everyone should look at this. This is the US debt clock. And we forget this. This is produced by the Fed. The Federal Reserve puts this out. And this is the running tally of our US national debt. We’re almost at $22 trillion. It was at $19 trillion not that long ago– a year or two ago. It’s that $22 trillion. Every year, the current deficit… So because the US government, we have a GDP. We all make money. You make money, you make money. And we all pay taxes. All the taxes the US government takes in.
The US Government takes in $3.3 trillion in taxes. We take in more money in taxes that most countries GDP in the whole world. We have more money than almost any other country in the world. We make so much in taxes. But we spend so much more. And what do we spend it on? We spend it on Medicare, social security, defense, and interest on our debt. Okay? The Medicare and Medicaid is $1 trillion. Social security is $2 trillion. That’s 2.2, $2.1 trillion. We spend $2 billion a day just on excess spending. And that’s comes from Medicare and social security. Almost two thirds of our spending comes from entitlements, Medicare and social security. And the truth is, are those going to get any smaller over the next decade? No. The baby boomers are all retiring. More people are on Medicare or people are getting social security. We haven’t even hit the top of the bubble of the people who are going to need more money.
We have interest on the debt. We spend three, $300 million just on the interest. And that is at quarter percent interest…a year. But what happens if we raise interest rates, which we’ve been doing right? How we pay debt is really complex. And so I’m explaining it. But if you say, if I spend $320 trillion dollars or $300 billion on debt and is a quarter percent interest, and I raised the interest to 1%, what’s my, what’s my cost on the debt it’s twice. It’s not just twice as much as it’s three times, four times. It’s two doubles. Because if you go from a quarter percent to half a percent, that’s a double, right? So that goes from three to 600, 600 billion. And then from half percent to 1% is another double that’s $1.2 trillion in debt, just by raising it just to 1%.
So someone says, can we raise our interest rates back up high enough so that we can stave off inflation? No, we can’t afford it. To raise interest rates mean we have to raise interest rates on ourselves. That’s another unique thing. We’ve got to the point where so heavily debt, there’s a lot of levers that aren’t available to us. And so that’s another factor that’s going on. And these numbers where your Medicare in some period, they’re not going away anytime soon, they’re only getting bigger. So is the debt going to go down? No. So is the stock market going to go down? I don’t know. If we’re gonna keep printing debt, maybe it doesn’t go down. Maybe keeps going, but at some point in time, someone says, “This isn’t sustainable. You guys, this isn’t gonna work. So I’m not going to loan you any more money. I’m not going to do this anymore.” And that’s kind of, that is the cycle that we’re completely coming into.