Debt Cycles: Why Booms Turn Into Busts
Credit Creates Cycles
🔄 Short-Term Cycle (Business Cycle)
Phase 1: Expansion
Credit grows
Good Times
Phase 2: Peak
Tight labor, rising inflation
Phase 3: Contraction
Credit tightens
Phase 4: Recovery
Fed cuts, QE
🏛️ Long-Term Cycle (Debt Supercycle)
Build-up
Debt/GDP rises for decades
Fragile
Rate Floor
Hit zero or near zero
🧰 Deleveraging Paths
Austerity
Spend less
Defaults/Restructuring
Wipe out debt
Transfers
Tax the rich
🔧 What To Do
Late-cycle (hiking)
Defensive
Cycle Aware
Pivot (cuts)
Risk-on
Deleveraging
Protect capital
Reset
Buy the bottom
The Mechanism
- Credit expansion boosts spending beyond income → boom
- Rising inflation triggers rate hikes → debt servicing costs rise
- Credit contracts, spending falls → recession
- Fed cuts and prints → cycle restarts (until long-term constraints)
Long-Term Constraint
- Each cycle requires lower rates to stimulate
- Eventually hit zero bound; rates can’t fall further
- Then QE and currency debasement must do the work
- Historically ends with reset (devaluation, regime change)
Signals To Watch
- Debt-to-GDP trend
- Interest expense / tax revenue
- Yield curve inversion
- Credit growth/standards surveys