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THE DOLLAR MILKSHAKE THEORY:
This is based on the fact that – the US dollar serves as the reserve currency for the entire world.
However, as other countries begin to slow down, relative to the United States, their currencies DECLINE in value, making it more expensive to pay for good and services in US dollars…right at a time where they can least afford it. It’s called a “Milkshake Theory” because – in this scenario – the US would extract more dollars from around the world, resulting in cascading defaults throughout every other large economy.
All of that is to say that – people are borrowing more, to pay for products and services that cost more, and – if the economy enters a sharp, and sudden recession – DURING a time where interest rates are going UP – people may have a MUCH MORE difficult time paying down their debts.
Effectively, borrowing can only be sustained for so long until – eventually – it’s going to result in a time in which people begin to cut back…substantially. In fact, JP Morgan just recently came on record to say that “they’re bracing themselves and we’re going to be very conservative with our balance sheet” – while, at the same time, banks become WAY more careful in terms of who they lend money to.
On the one hand, in terms of our own National Debt – some experts say that – when you look at our debt, in relation to how much we MAKE – it’s actually NOT that bad, and we’re actually quite a lot lower than many other countries. You can see here that, sure, we might OWE the most amount of money…but, we also MAKE quite a lot of money, as well.
HOWEVER…others say that this debt is a a massive issue…because, over the next three decades…it’s projected to increase past 200% of GDP…at the same time when “interest payments” would be the single largest US Expense. At that point, social programs and spending would be severely reduced – and, we’d be forced to go further and further into debt, hurting our entire economy as resources dry up.
That’s why – we’re in a weird spot. On the one hand, The National Debt isn’t an urgent issue – and, it could be easily swept under the rug for another few decades…BUT…we ALSO can’t have an economy with perpetual 8% inflation…so, there’s no other choice but to raise interest rates, shock the market, and then – hope that demand will eventually match supply.
So, in terms of what to PRACTICALLY DO…realistically, it’s best to stay away from ANY AND ALL CONSUMER DEBT, avoid variable interest rate loans, and ALWAYS do your best to save at least 20% of your income. This should put you in a better position to weather any economic uncertainty, and continue investing during a time where prices are lower.
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