Sunday, June 8, 2014

The US and World Economy Could Face a Lost Decade

We live in a time of slowing global growth where manufacturing is in contraction in places like Japan and China and much of Europe is in recession.  America's first quarter GDP reading was contracting at a negative 1%.   Estimates for the US 2nd quarter keep dropping but are still positive.  The global economy is slowly sinking despite outrageous quantities of debt expansion and trillions of money printing.  

Most major countries still have a zero interest rate policies (except China), high deficit spending and rising debt levels even though we're 5 years past the financial crisis.  Money printing continues in the US and Japan but still world-wide growth continues to slow.   Government and monetary authorities are "all in" with stimulus -- but it's not working.

Central Bank Balance Sheets Show That We Live in a QE World
 I'll attach what I call "the most important chart in the world"  It's shown for the US but it's suddenly applicable to China too since their debt has rocketed by more than the US AND Japan debt increases combined in the past 5 years.   In China, overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis.  

Diminishing Marginal Returns on Debt
If this chart is true, then increasing debt (deficit spending) won't save us in the next recession.   It might hurt more than help  -- recession or not .   I'm calling into question whether there are any policy tools left to combat the next economic downturn.   In the past, the counter-cyclical policy tools included lower interest rates and deficit spending (increasing debt).   It's possible (now) that deficit spending will not work and if interest rates are already zero, there's no room to lower them either.   (Yeah, there's QE but that is proven not to work. Japan has doubled down on QE and it's not working!!)     Since our deficit is still some $500 billion, it would swell to something like $2 Trillion per year in a recession -- a scary thought.

The next recession will likely be the 3rd one in a row caused by a bursting financial bubble (caused by governments and central banks) that will probably originate in Asia.   But when an economic decline begins, I'm saying that we could have a lost decade coming because there are no "arrows in our policy quiver"to counteract the downturn!   (Only China has room to lower interest rates, but their debt levels are already near danger levels meaning that China itself may be the epicenter of the next bust.)   When there is recognition of this, then you'll have the 50% drop in stock market prices that Marc Faber talks about.   There might even be a gradual realization of this predicament -- with years and years of stock market (and corporate profit) declines.   2014 may be the first year of declines!   

It could be that the US is truly following Japan into another lost decade during which time cash and treasury bonds could be king.

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