I am finally sensing that we’ve come to the “tipping point” in this now 15-year battle against a deep recession/depression and debt detox since the last recession set in around the beginning of 2008.
The point where we’ve run out of tricks, cover-ups, excuses, and something for nothing policies that just kick the can down the road. We’re at the end of that road it appears! There is finally nothing to do but face the obvious:
We have record and astounding levels of debt as a percent of GDP at all levels – and we have to go through a restructuring of that debt. In business we call it that a Chapter 11 bankruptcy.
And by the way, that brilliant approach was first introduced in the United States in 1978. The first laws around bankruptcy appeared in the Bankruptcy Reform Act of 1898, but Chapter 11 was added to Chapter 7 in the Bankruptcy Reform Act of 1978. In Chapter 7, the company goes bankrupt, terminates, and then the assets are sold off to compensate creditors depending on their seniority of claims.
Chapter 11 introduced the brilliant, more enlightened approach. Protect the company long enough for it to re-negotiate with creditors and cut costs, etc., and have a chance at profitability again – a win-win for the company and creditors. Now the company can talk to creditors while being protected from them temporarily and say something like: Would you accept a 50% reduction in your debt to us rather than likely getting only 10% or 20% if we just go under and have a fire sale on our assets?
Chapter 11 bankruptcy was actually a huge breakthrough in history, and it first occurred in the U.S., the leading country since World War II. And it was in at least in small part a contributor to the greatest boom in history from 1983 into 2007 – before we entered the greatest, never-ending emergency stimulus program in history from 2008 into now.
Of course, there was a larger reason for that great boom: the Baby Boom generation. I was the first to both explain and predict that cause and effect in my first book in 1989 Our Power to Predict followed by The Great Boom Ahead in late 1992. It was simple: The largest generation in modern history would cause the greatest boom ever as they moved predictably into their peak spending at precisely age 46 on average.
But Chapter 11 bankruptcy was a big deal and one of the greatest legal financial innovations in history. How do you encourage the innovation and entrepreneurship that most characterises the U.S. if you make failure a death sentence. And no surprise we saw the greatest boom in history since 1982 from the Baby Boom and this legal reform. But now since the Baby Boom Spending Wave peaked in late 2007 as predicted, we’ve seen a 15-year unprecedented, never-ending, off-the-charts stimulus program. What does that never-ending stimulus program look like: The Fed Balance Sheet in the chart included with this article.
DEFICITS, PRINTING, AND DEFLATION
This chart simply shows the cumulative money printing by the Fed to fill in for the natural decline in spending as the largest generation continued to age past its peak spending years…until the next Millennial generation kicks in on a now 47-year peak spending lag from 2024 forward. And this does not count the unprecedented fiscal deficits, mostly in boom times, to add to that monetary stimulus. Normally we’re supposed to run balanced budgets or surpluses in good times to make up for the natural deficits in bad times when government revenues shrink and social expenses mushroom…Not since 2008!
After the greatest natural generational boom in history, and then the largest artificial stimulus program in history to follow to keep it desperately going for another 14 years, we have run out of tricks to put off a great, and much needed, fiscal and financial reckoning!
Along with runaway money printing, fiscal deficits became a way of life to offset a natural generational slowdown. That has been celebrated by many economists. But I see it as a grave mistake, an attack on the greatest innovation of all, free market capitalism, that first merged with its opposite “spouse,” democracy, in the late 1700s. I call that “When Harry Met Sally.”
To put it most simply: 2008 to 2023 has been the natural period of economic slowing between our two largest modern generations. And after the Millennials peak ahead in the U.S. in 2037, demographic spending trends here and in the broader developed world will see a longer-term decline for as far as the eye can see. That’s something we have NOT seen in modern history: a generation not followed by a larger wave of earners and spenders in the next one. It’s all about the emerging world – the other 7 billion (rising towards 10 billion mostly in Africa) – after this!
The telling sign of how great a deflation and debt detox we are likely in for is the also simple fact that M2, or money supply, has already actually contracted for the first time since 1930-32… and we haven’t even officially entered a recession yet. So, there is much more to come, and I say it will be called a depression after it has revealed itself more fully in the next few years. Deflation is simply a sign of a great restructuring of debt and financial asset bubbles, as only last occurred on a high level in the 1930s. This is the longest period in history without a deflationary debt spiral to cleanse the economy. Such periods were more frequent between 1870 and 1932 as this chart shows.
THE WORLD NEEDS A DEBT DETOX
The truth is we have never seen a greater need for a debt detox to get healthy again…the very thing central banks are fighting! Time for the U.S. and other debt-aholic countries to go into detox! And as I’ve been saying, we’re one of the best houses in a bad neighbourhood after the greatest debt binge in history.
And it’s not just the U.S. and North America going into deflation after Japan started the trend for the developed world in the 1990s. The Eurozone has seen two bouts of actual deflation in prices, the first in 2010 and the second one that will go much deeper just starting in 2023.
Banks are indeed tightening lending standards again just as they did before each financial crisis in this longer boom. I keep reminding that the Fed thinks the economy is fundamentally strong and can handle a $1 trillion balance sheet contraction and 525 bps rate rise that may go to 550bps just ahead.
I say this apparent economic strength is 100% from that $5.25T in monetary stimulus plus all of the fiscal deficits… a roughly $10T cocktail, or near 50% of GDP. We should be growing much faster given that! The illusion is that economists don’t clearly see the peaking and fading of the $5.2T in COVID stimulus now and forward while the 525bps+ and $1T balance sheet tightening keeps hitting harder into late 2024.
This should be obvious, but most don’t see it due to the 1–1.5-year lags in monetary policies. It’s a simple calculation. The $5.25 balance sheet expansion peaked in March 2022 and falls around now forward into late 2024 on that lag. The 525bps rate hike and $1T balance sheet contraction hits on that lag well as well now into 2024…I see no way that 2024 is not a recessionary year – and with this unprecedented debt bubble, it will ultimately go down as a short depression! EG