George Gammon discusses the looming financial collapse, drawing parallels to the 2008 crisis. Key issues include stagflation, private credit risks, shadow banking, and the role of government and central banks. He emphasizes the importance of understanding labor markets, derivatives, and the circulation of money and credit. Preparation and education are crucial to weather the upcoming economic storm.
In a recent in-depth discussion, macro educator and entrepreneur George Gammon sheds light on the hidden mechanics of the financial system and warns about the formation of the next financial collapse. Drawing parallels to the 2008 Global Financial Crisis (GFC), Gammon breaks down complex global risks in an accessible way, emphasizing the importance of staying ahead of structural shifts to protect real wealth and families.
Stagflation, a term that has been increasingly discussed, represents a perfect storm where inflation and recession coexist. Policymakers often find themselves trapped between these two forces, but one critical variable remains largely uncontrollable: the labor market.
Historically, during the 1970s, recessions were disinflationary when unemployment spiked, even amidst high inflation. For example, inflation dropped from around 10-12% to about 5% going into 1976, despite still being high. This highlights the importance of focusing on the labor market as a key indicator.
During the 2008 crisis, oil prices surged to $140 a barrel, causing a short-term spike in the Consumer Price Index (CPI) from 3.5% to 5.6%. However, the crisis ended with disinflation and deflation due to a deteriorating economy and labor market. Oil price shocks act as a tax on consumers, reducing discretionary income and spending in other areas, which eventually slows the economy.
A significant concern today is the rise of private credit, often described as subprime credit, which is toxic and risky. Major financial institutions like Blue Owl, Blackstone, BlackRock, JP Morgan, Morgan Stanley, and Deutsche Bank have disclosed significant exposure to this sector.
Recently, Cliffwater, a $40 billion fund, halted redemptions—a major red flag indicating liquidity issues. Paul Atkins, former SEC commissioner during the 2008 crisis and now nominated SEC chair, was on Cliffwater's board until 2025. His history raises concerns about regulatory oversight and potential conflicts of interest.
Private credit funds often lack transparency, with valuations based on internal assessments rather than market realities. For instance, BlackRock recently had to revalue loans from 100 cents on the dollar to 90 cents, which many argue should be closer to zero. This opacity creates a free call option for fund managers, allowing them to market risk-free returns while investing in high-risk, low-quality loans.
The current phase resembles a Ponzi scheme, where liquidity for redemptions comes from new investors rather than asset sales. Redemption limits and secondary markets for toxic assets further complicate the situation, with large firms potentially buying their own bad assets to maintain appearances.
The government and regulatory bodies play a crucial role in the financial system's stability. Post-2008 regulations like Dodd-Frank restricted banks from risky lending, pushing riskier loans into the shadow banking system. This regulatory arbitrage allows banks to maintain clean balance sheets while still engaging in risky lending through private credit.
Gammon argues that the government, not the banks, is the root problem due to bailouts and distortions in free market capitalism. The revolving door between regulators and private credit firms exacerbates conflicts of interest and undermines effective oversight.
The economy depends on the circulation of money and credit, much like an engine depends on oil. Even with ample bank reserves, if perceived counterparty risk is high, banks will be unwilling to lend, causing the credit engine to seize up.
The 2008 crisis escalated from a recession to a global financial crisis because mortgage-backed securities, used as collateral, plummeted in value, halting credit circulation. Today, similar risks exist with private credit and derivatives.
Derivatives, complex financial contracts often used for hedging or speculation, have grown exponentially since 2008. The notional value of derivatives held by FDIC-insured banks is close to seven quadrillion dollars.
These derivatives represent a massive demand for U.S. dollars, as liabilities must be settled in dollars. This creates a paradox where the dollar can simultaneously appreciate against other currencies while losing value relative to goods and services domestically, contributing to inflation.
The U.S. economy is heavily dependent on asset prices, particularly the S&P 500, which is influenced by passive inflows from retirement plans and index funds. Many individuals contribute a fixed percentage of their income to these funds regardless of market valuations, driving prices higher.
However, rising unemployment can trigger net outflows from these funds, turning a tailwind into a headwind for the market. Models suggest that an unemployment rate around 5.5% to 6% could initiate this shift, with AI-driven layoffs potentially pushing unemployment higher.
Artificial Intelligence (AI) is expected to increase productivity but also displace jobs, potentially raising unemployment to 6-7% or more. Major companies have already announced significant layoffs as they transition to AI-driven models.
This displacement may lead to widespread adoption of Universal Basic Income (UBI) as a social safety net, similar to government programs during the COVID-19 pandemic. However, UBI could exacerbate inflation if not matched by productivity gains.
Discussions about returning to sound money, such as redeemable gold, highlight the tension between monetary stability and government control. Even with sound money, governments can impose high taxes or regulations, limiting individual freedom.
Gammon emphasizes the importance of small government to reduce these risks. However, human nature and political realities often lead to government expansion regardless of the monetary system.
While the exact timing and nature of the next financial crisis are uncertain, the probability of a significant economic contraction is high. Key indicators such as oil prices, labor market conditions, and private credit risks mirror those leading up to the 2008 crisis.
Education and awareness are critical. Burying one's head in the sand is a poor strategy. Being informed allows individuals to prepare and protect their wealth and families.
History shows that major crises also present significant opportunities. Those prepared can capitalize on market dislocations and emerge stronger.
George Gammon and his peers advocate for vigilance, prudent wealth preservation strategies, and community building to navigate the coming challenges.
For more insights, George Gammon's YouTube channel and Rebel Capitals events offer valuable resources and discussions with leading experts.
This comprehensive overview underscores the complexity and interconnectedness of today's financial system risks. Staying informed and prepared is essential for safeguarding your financial future in uncertain times.
