Macro Cycles Ultimately Drive Markets

If your the type of person who enjoys deep dives into "HOW IT WORKS" this is the post you want to read. Enjoy!

What Drives GDP Growth

A nation that fails to grow its GDP (economy) is a nation on the verge of losing jobs for its citizens and its competitiveness on the world stage.

GDP must grow because it is the lifeblood that keeps the economic engine running. GDP growth is a combination of Population Growth, Productivity Growth, and Debt growth.

U.S GDP Growth Rate (red) vs Total GDP (black)

The Role of Population Growth

• The Decline of the Labor Force

Population growth directly boosts GDP growth by increasing the number of workers (labor force)—more people working means more economic output and more spending. However, in the U.S., population growth peaked in the mid-1990s, while the labor force participation rate has steadily declined since the early 2000s.

Do you think the rise of the INTERNET had anything to do with population decline or was this just a coincidence?

As the baby boomers began to retire in the 2000s, the number of inactive workers accelerated (Below).

A shrinking labor force ultimately slows the U.S. economy’s growth rate. If Population growth doesn't work, it's time to utilize debt growth.

Accelerating Debt Growth

• The Debt Explosion: A Turning Point

In the late 1980s, Government debt exploded as the government leaned heavily on borrowing to stimulate the economy. Population growth alone could no longer sustain GDP growth.

Notice how debt rapidly accelerated in the 1940s (WW2), 1980s (Cold War), and 2010s (Great Financial Crisis).

By the 2000s, U.S. government debt had risen to 50% of GDP. By 2015, it reached 100%. Imagine if your credit card debt grew faster than your income—it’s an unsustainable trajectory.

Can Debt Replace Labor?

Ironically, the rise in government debt mirrors the rise of inactive workers. As fewer people contribute to economic output, government borrowing becomes the go-to tool for stimulating growth.

The Debt Burden Suppresses Growth

While debt growth has helped prop up GDP, it comes at a cost. Over time, larger debt burdens suppress GDP growth by diverting funds toward interest payments rather than productive investments. Just as rising credit card payments shrink your disposable income, growing interest obligations shrink the economy’s growth potential. We also see that recession become less frequent. One theory is that the speed of information enables government quickly respond to financial instability. However, debt growth is the main solution. Kicking th can down the road.

The Rapid rise in Federal Debt (purple) has resulted in lower GDP Growth Rates (red).

To manage this, the system is forced to keep interest rates as low as possible. Lower rates reduce borrowing costs and keep the economic engine running—but at what cost?

Notice how US short-term rates (black) and GDP growth (red) were much lower after the 1980s. Debt growth (purple) seemed to have exploded in the decade after the 1980s, which led to lower rates to support debt growth.

After the Great Financial Crisis, Debt growth (purple) accelerated while short rates (black) were lowered to zero. With 0% rates, GDP (red) still struggled to grow at the rate of previous decades, illustrating how reliant the economy is on debt growth and low debt servicing costs.

The Role of Free Market Rates

Even with central banks setting near-zero short-term rates in the 2010s, they had no direct control over free market rates (long-term interest rates). The bond market determines long-term rates.

Free market rates (red) averaged 2.5% in the 2010s, while Fed rates (black) remained near 0% during the same period.

If Free Market Rates rise too high, borrowing costs skyrocket, GDP growth slows, and the risk of financial crises increases. This makes it critical for the government to indirectly suppress long-term rates by implementing policies that ensure borrowing rates remains affordable.

Suppressing Free Market Rates

The US Treasury Market sets long-term rates, but we should understand its function and purpose before discussing how these rates are suppressed.

The national debt (also known as Federal or Public debt) is money the government owes to creditors (investors) who took the risk of lending to that government by investing in that governments bonds (debt).

These investors include retail investors, banks, mutual funds, pension funds, and foreign governments.

Owners of US Treasury bonds

These investors are basically lending their money to the government in exchange for an asset (debt) that yields them passive income. In the US that government asset is also called a treasury security.

Treasury securities are an asset to the investor because they produce income. It is a liability to the government because they are obligated to pay the interest.

The Gov must pay back the principal at the end of the term. Essentially, the government is indebted to the investor.

The treasury investor is lending money to the government so the government can cover its obligations, which include defense spending, social security, and Medicare.

Where It All Happens

The U.S. Treasury market determines long-term rates based on supply and demand. When more buyers than sellers exist, Treasury prices rise, and yields (interest rates) fall. Conversely, when sellers outnumber buyers, yields increase, making borrowing more expensive for the government.

The government needs consistent demand for treasury securities to keep borrowing costs low. Without enough buyers, interest rates rise, increasing the government’s interest payments and squeezing funding for critical programs like Social Security, defense, and Medicare. What if there aren't enough buyers?

Refinancing the Debt - Quantitative Easing

Central banks step in as buyers of last resort to stabilize rates. By creating money and using that new money to purchase Treasuries, they artificially lower interest rates, effectively refinancing government debt payments. This cycle of debt monetization provides liquidity to the system and reduces the government's borrowing costs.

Liquidity is a refinancing mechanism.

Here’s how it works:

• Quantitative Easing (QE): Central banks print money to buy government debt (Treasuries) or other assets like mortgage-backed securities.
• Increased Liquidity: This injects cash into financial institutions, allowing them to lend more and support economic growth.
• Lower Rates: With higher demand for Treasuries, interest rates fall, easing the government’s debt burden.

Roughly 70% of U.S. government debt matures within 1–5 years, meaning these refinancing cycles are inevitable. Liquidity injections tied to these cycles often coincide with periods of economic expansion and asset appreciation. This is the liquidity cycle.

• US debt Structure 👇🏽

Visualizing the Major Holders of America’s Debt

What We’re Showing This graphic illustrates the composition of U.S. debt, broken down by domestic and foreign investors, as well as intragovernmental de…

https://www.voronoiapp.com/debt/Visualizing-the-Major-Holders-of-Americas-Debt-3252

Liquidity and Market Cycles

Liquidity acts as a powerful force behind market cycles. When central banks inject cash into the banking system, base money (also known as reserves) multiplies. An increase in base money enables banks to leverage or multiply the amount of available credit.

For every $1 of base money, banks can create $10 of credit. This means liquidity injections into the banking system allow the banking system to "leverage up." They have more credit to offer. The combination of more credit and lower interest rates incentivizes investors, hedge funds, and real estate players to purchase more assets, driving up the value of risk assets.

This is why we see explosive market rallies during these periods of liquidity injections. Bitcoin, for example, has been the best-performing asset during these cycles, reflecting its sensitivity to liquidity-driven dynamics. Technology also performs during these liquidity cycles. Technology is the number one driver of productivity growth. So, ultimately, debt growth flows into technology, which drives productivity, which drives up GDP growth.

Bottom Line

Governments have no choice but to ensure debt can be continually refinanced, resulting in predictable patterns of liquidity that drive economic and market cycles. (Markets and Economies progress in cycles). Bitcoin and Big Tech are prime example of assets that capture the most liquidity during these debt monetization cycles .

The Ultimate Goal of Liquidity

The goal of debt cycle liquidity is to generate enough GDP growth to keep the system going. Nothing generates GDP more efficiently than productivity growth.

Throughout history, the evolution of of technology has been the main driver of productivity. Therefore, liquidity will always find its way into the companies, or assets that generate the most GDP at the cheapest cost.

Innovation attracts liquidity

Technological innovation has been a driving force behind economic growth from the beginning of time. Naturally the market rewards companies and or assets that flow of money wealth transfers into equity and asset holders of those technologies. Here's a short history of technologies who benefitted from this transfer.

The Evolution and Economic Impact of Technology

https://mindgrowth.io/jfielderstrat/the-evolution-and-economic-impact-of-technology

MASTER LIQUIDITY CYCLES

The True Skill of an investor is finding the companies or assets who are best positioned to benefit from innovative technology when the prices of these companies or assets reflect extreme fear. This is most likely to happen when the liquidity cycle is at it low point.

Next-generation Technology Themes

Infrastructure Layers

• AI
• Robotics
• Energy Generation/Storage
• Blockchain
• 5G
• Genomics/Biotechnology