When the Global Financial Crisis first reared its head in 2008, I initially thought that it would quickly lead to financial implosion and another Great Depression. Then after a year or two had passed and nothing much had changed, I had to re-evaluate.
In consequence, my assessment changed to reflect the experience of the 1930’s Depression. That was a slow motion train wreak that ground on for years and years and into greater and greater depths. (For some countries at least: those countries that made radical changes bounced back pretty quickly, those that tried to sustain the status quo just dug themselves in deeper)
There is plenty of commentary on the web about how this current situation can’t end well… and how that which can’t be sustained – wont be… and the lunatics are running the asylum, etc etc.
While that may all be true, look out the window and actually very little has changed on the ground. The world still rolls along, we all live our lives much as we ever did. Cars still clog the roads, food is still on supermarket shelves, TV still broadcasts American Idol. Society, the economy, the world, hasn’t collapsed or stopped.
Things are tighter, balancing the budget a bit tougher, but we don’t have legions of beggars on the streets. So what’s the story?
As I say on my home page, the Great Depression wound on for years, for over a decade in the case of the United States. And they only came out of it with the advent of the second world war – saved by war (and there’s your answer by the way, if anyone ever asks you what war is good for).
However, war isn’t my point here – a decade of depression is.
And the question of: how long can this farce keep going for?
A LONG time, assuming people don’t start shooting first.
A decade from 2008… is 2018.
As we are only up to 2012 currently, then that would indicate we are in for another six years at least of pain.
Followers of Finance and Markets always go on about how you can or can’t Time it. The point being that timing is the only metric which really matters. If you could time it, then it doesn’t matter if things rise or fall, you would buy or sell just in advance of it, and viola you win either way.
The problem arises when you have no idea when it will break. Do you ride it a while longer, or bail out early. Timing is everything, and ultimately, a complete gamble. Whatever you may know, or think you know about a situation, especially a chaotic one like world financial markets, you don’t really. Old hands will attest to that. You just do the best you can, the winners get lauded and the losers get forgotten.
So whatever our opinions about the world economy and the the crisis in global finances, really we just make our best guess, place our bet and take our chances.
My guess is that we are in this dive for the long haul. A decade or more, and that is assuming we start getting smart at some point about solving it.
As for whether the slide continues indefinitely or hits the wall with an explosive crisis, I really couldn’t tell you. There are good arguments either way.
However – on the positive side, for me at least, I just read an article that pretty much articulated my basic position. It is good to get affirmation.
Here it is. [ heavily edited to pull out the points I want to focus on ]
~ Terry Coxon of Casey Research
Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can’t be sustained, but from which there is no graceful exit. With few exceptions, all of the noble souls who chose a career in “public service” and who’ve advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. [There and here equally. ~R]
The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren’t complaining (yet), and taxpayers generally tolerate deficits as a lesser evil than a tax hike.
Deficits are politically convenient for a second reason. They can take a little of the sting out of a recession. That effect is transient, and it’s not strong – but it can be enough to help a struggling politician get past the next election.
Balance the budget to the penny, but later. No one proposed anything close to dealing with the deficit now. So stay up as late as you like on election night to see who wins, but the deficits aren’t going to stop anytime soon. And the debt mountain will keep growing (that part of it that the government actually acknowledges).
Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.
Inflation as Savior
At some point, the government will be forced to pay higher and higher rates – and the accelerating interest cost will make the deficits that much bigger. When that happens, the problem will be feeding on itself. The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for.
In short, the cost of postponing the bankruptcy of a government engaged in nonstop deficit spending will be progressively higher rates of inflation. There is no inherent stopping point in the process short of hyperinflation and the destruction of the currency.
Will it actually go that far?
My guess is that it won’t, but that’s a guess about politics, not about economics. At some point, perhaps at an inflation rate of 30% or 40%, the turmoil that comes with runaway inflation will become so painful that the public will accept, and the politicians will find it wise to deliver, a balanced budget and a return to a stable currency. But even a year or two of such high inflation rates, while not a Weimar experience, would be a calamity. Most people’s savings would be destroyed. Most businesses would be badly damaged, and most investment portfolios would be ruined. It would be like the economy hitting a wall.
But when will the economy reach the wall toward which it is headed?
Not soon, I believe, but in the meantime there will be plenty of excitement.
Japan’s ratio of government debt to GDP, to cite an extreme example, is over 230%. The US may outdo Japan’s ratio before hitting the wall. How rapidly the US ratio of debt to GDP will grow depends on a list of barely-guessables, including how long the recent recession drags on, and the level of the public’s tolerance for deficits.
Assuming that the recent level of deficits continues indefinitely, it would take on the order of ten years for the US debt-to-GDP ratio to get where Japan’s is now, which would bring us near 2022. After that, several factors could still buy the government a few years more.
That adds up to a long time to wait for the end of the world.
What the Fed will be doing, what the effects will be, and when they will be felt, all can be anticipated with a bit more clarity than the doings of Congress – although it remains guesswork.
Approaching the Wall
The M1 money supply has grown by 52% since the Federal Reserve opened the spigot in October of 2008. The holders of that 52% are becoming more and more disposed to think of it as excess cash that should be spent on something. That feeds a (slow)recovery. Given the slow pace, it should be perhaps two years until the economy seems more or less normal, but the excess cash will still be at work.
Give it one more year, and price inflation will emerge as a noticeable complaint.
Then the Federal Reserve will let interest rates rise, but only slowly at first. By the time it tightens in earnest, price inflation will be approaching double-digit rates. It will look like the 1970s.
And despite all the statistics it publishes, the Fed will only be feeling its way in the dark, since there is no reliable, real-time indicator of how much excess cash there is in the system.
So inflation will keep rising, and the Fed will keep tightening until it produces a rerun of 2008-2009, with crashing investment markets announcing a new recession. But there will be two important differences vis-à-vis 2008-2009.
First, it will be happening with the US government far deeper in debt than it was when the last recession began, and in a tightening phase, the government’s interest expense will jump to new record highs.
Second, it will be happening with the rate of price inflation already at a troubling level.
Another round of the monetary therapy the Fed applied to cure the last recession would push price inflation to levels beyond those reached in the 1970s. They’ll do it anyway.
This gets us to 2016 or 2017 with the system in turmoil but still functioning. No wall yet, and there will be room for at least one more cycle of reflation. But it will be a fast cycle, since in an environment of already high inflation, people will be quick to spend the newly created cash. That means a quick recovery from the 2017 recession and a catapult into the 20% plus range for price inflation.
Then the wall may be in sight.
Yup, that is the best cogent summary and timeline I have seen. And fairly nicely matches my best guesstimate as well.
So there you go, if you want an indicator of how to time this, then there it is. Place your bets.
(dependant on Black Swans and other unknowns of course)