There are four important influences that drive economies and markets:
- The short-term debt/business cycle
- The long-term debt cycle
- Politics (within countries and between countries).
There are three equilibriums:
- Debt growth is in line with the income growth required to service the debt,
- The economy’s operating rate is neither too high (because that will produce unacceptable inflation and inefficiencies) nor too low (because economically depressed levels of activity will produce unacceptable pain and political changes), and
- The projected returns of cash are below the projected returns of bonds, which are below the projected returns of equities and the projected returns of other “risky assets.”
And there are two levers that the government has to try to bring things into equilibrium:
- Monetary policy
- Fiscal policy
The equilibriums move around in relation to each other to produce changes in each like a perpetual motion machine, simultaneously trying to find their equilibrium level. When there are big deviations from one or more of the equilibriums, the forces and policy levers react in ways that one can pretty much expect in order to move them toward their equilibriums.