Korva is a scroll of the internet’s best ideas.
Every cycle ends with more debt
Why credit flows freely
Over long periods, debts rise faster than incomes. Lenders keep extending credit freely, because everybody is focused on what has been happening lately: incomes are rising and the stock market roars. When people use borrowed money to buy goods, services, and financial assets in large amounts, it is called a bubble.
The debt burden
The ratio of debt to income is the debt burden. As long as incomes keep rising nearly as fast as debts, the burden stays manageable. Asset values soar as people borrow huge amounts to buy them, and people feel wealthy, which keeps borrowers creditworthy for a long time.
The long-term peak
Over decades, debt burdens slowly increase and repayments grow larger. At some point repayments grow faster than incomes, forcing people to cut spending. Incomes begin to fall, people become less creditworthy, borrowing goes down, and spending drops further. That is the long term debt peak. It came in 2008 for the United States, Europe, and much of the rest of the world, in 1989 for Japan, and in 1929 for the United States.
Why do booms convince everyone things are fine?
Carmen Reinhart and Kenneth Rogoff documented in This Time Is Different (2009) that financial crises across eight centuries and dozens of countries were each preceded by confidence that the old rules no longer applied. Psychologists Daniel Kahneman and Amos Tversky showed in 1973 that people judge how likely something is by how easily examples come to mind.
Recent gains in incomes and stock prices supply plenty of easy examples.
How did Japan's 1989 peak unfold?
Japan's Nikkei 225 stock index closed at its record of 38,915 on December 29, 1989. Land prices in Tokyo had also soared through the late 1980s, and banks lent heavily against property. After the bubble burst, the Nikkei fell to under 8,000 by 2009.
It did not pass its 1989 record until February 2024.
How did borrowing fuel the 1920s stock boom?
In the late 1920s many US investors bought stocks on margin, putting down a fraction of the price and borrowing the rest from their brokers. Brokers' loans climbed to roughly $8.5 billion by late 1929.
The Dow Jones Industrial Average peaked on September 3, 1929, and by July 1932 had fallen about 89 percent.
More from Principles by Ray Dalio
