Wednesday, June 3, 2020

Repost from Jan 2018: Why Our Economy Is In Depression And Will Get Only Worse

I wrote a blog entitled "We're Reaching the End of the Road" where I laid-out a litany of reasons for why our economy is mired in prolonged near-recession conditions and why things won't be improving anytime soon.

I mentioned poor demographics, the declining utility of debt, and the effects of reaching the limits of resources, such as affordable oil, as some of the causes. All these are true and have caused Central Banks all over the world to "pump-up" the money supply to absurd levels, backstopped all markets to maintain desired "wealth effects"and governments have spent borrowed money like never seen before. These emergency measures have continued for 10 years. They are now trying to stop these emergency measures now, but it won't be possible to stop them for long.

Soon, it will become apparent that we're in recession without end; which resembles Depression in duration. It may not be a sharp downturn--since we never had a boom--just a generally slow "sinking" perhaps interrupted for a number of months by the Trump Tax Reform, for example. Think "Japan" for the past 20 years, for example. We're really becoming Japan. This "recession" will not end and emergency spending and "printing"will re-start. Government intervention will only increase. The recession won't end, but the governments may not allow markets to "correct." This is because market declines would worsen the economy and it likely won't be allowed. It's not being allowed even now.

Governments and captive Central Banks have already subverted markets, making them policy tools, by manipulating all of them: first and foremost the bond markets. Governments around the world have manipulated the "risk-free" interest rate (govt bond T-bills) to near zero and below. This itself manipulates all other asset prices. Central Banks have provided a "backstop" to the markets and investors know it. It's causing extreme bubble conditions that will continue. The "appearance" of prosperity must be maintained!

The first chart below shows that world population turns negative this year and declines FOR DECADES.  This means perpetual recession/depression ahead.  If there are a declining number of new workers, there is declining demand for new houses, new furniture, new appliances, new cars, etc. Demand has already been declining because population growth is declining, including young people. All of this causes economies to suffer across the world. These trends are irreversible. We've already been in near-recession but governments are manipulating the data to hide it.

World Population Is Going Negative This Year and Is Negative for Decades Ahead. Declining Population Means Declining Economies For Decades Ahead -- Recession Without End.  (Graph by Chris Hamilton at Econimica blog)

Population Growth in All The Important Economies (Excluding Africa) Has Slowed And Will Decline for Decades Ahead.  Note That Debt Began To Balloon Just After The Peak in Population Growth In 1981. Debt Is Now Rising Exponentially As Pop Growth Slows.  
(Graph by Chris Hamilton at Econimica blog)

There is no rescue from the newer generation either. US fertility has been negative for decades and there is no surge of young people coming who'll join the workforce (and buy cars, rent apts, etc). US immigration has also slowed remarkably in 2017 also.

There Is No Surge Of Young Adults Ready to Enter The Workforce  
(Graph by Chris Hamilton at Econimica blog)
US Fertility Rate Has Remained in Contraction Since 1972. There Is No Population Surge In Sight  (Graph by Chris Hamilton at Econimica blog)
The emergency measures of debt-fueled spending, primarily in China, but also in the US and EU has hid the prolonged recession, by pumping-up demand through debt spending. This debt-fueled spending is counted as "GDP growth" and masks underlying weakness or depression. The government is also under-reporting inflation which has the effect of "boosting" reported real GDP. In the Obama years they reported 2% real GDP growth for 8 years. Since inflation is actually about 4%, and under-reported by about 2%, the economy was really flat-lining at near-recession levels during the entire Obama administration.

Governments have tried zero interest rates or absurd negative interest rates in Europe in order to boost a too-slow economy. But this is now causing pension funds to fail, hurting insurance companies and hurting retirees. Numerous cities and states have huge liabilities caused by too-low interest rates (and under-funding). There are negative effects to these so-called "emergency measures."

US Federal debt doubled in the past 10 years to "prop-up" the weak economy. That spending is counted as GDP. Ten trillion of debt-funded spending and under-reported inflation has masked near-recessionary conditions.
US Government Spending (Debt) Has Masked Depression In US and All Other Countries (Esp. China) By Creating Demand Where There Is Insufficient Organic Demand  (Graph by Chris Hamilton at Econimica blog)
It isn't just governments who are using debt. It's corporations and individuals too. Individuals are using credit card and other consumer debt too to "stay afloat". The following chart shows how consumer disposable income is falling behind expenses. They are using consumer debt (credit cards) to "fill in the gap." How far can this continue?? When do defaults raise consumer interest rates which cause defaults to increase, rates to rise more and so on and so on??
Consumers Are Increasingly Using Credit Cards, Other Debt To Stay Afloat (Graph by Lance Roberts at Real Investment Advice)
But additional debt taken on by governments is increasingly giving LESS bang for the buck. It used to be that, when the government borrowed a $1 and spent it, it would result in nearly $4 in economic growth due to "multiplier" effects. Twenty trillions of dollars of debt later, additional debt is providing about $0.10 of "growth." So even debt-spending binges have their limits---in China too!.  In the near future, when negative GDP growth REMAINS negative despite spending, the "marginal utility of debt" will indeed become negative.
The "Bang For The Buck" of Debt Spending Has Dramatically Declined.  In The Years Ahead, Incremental Debt Will Go Negative Because GDP Will Go Negative Despite Deficit Spending
There are not enough jobs because the economy is too slow. Millions of young people are taking on Federal student loans to go to college---whether they are qualified or not. Government students loans are allowing huge numbers of (mostly unqualified) young people to go to college as a giant welfare program to preoccupy these people since youth unemployment has remained high. Many other people have given up looking for work. There are an increasing number of people being absorbed in the Social Security Disability program as the government began bending the rules starting in the Bush administration. Of course millions of adults are retiring each year. Older and retired people spend less in retirement, which is another important drag on the economy. Unemployed or under-employed people have lost hope and have become hooked on opioids. Some 50,000 died last year due to overdoses. Well paying 'breadwinner' jobs have languished while minimum wage and part-time jobs have taken their place. All of these effects are removing people from the workforce or reducing job quality and is responsible for a misleadingly low unemployment rate. The Employment-to-population ratio has declined to 45 year lows tells the true story about employment even though the number of part-time or minimum wage jobs have inflated the job count.

Nothing can stop the coming economic decline. Demographics are truly destiny. Government deficits will rocket higher as they try to arrest the decline, but it won't work as I show above. HERE'S THE BIG PROBLEM: What happens to all the debt that brought us (the world) to our current position??  Again, I see governments bailing out corporations, banks, cities, states by assuming their debt and adding it to the national debt. BUT WHO WILL BAIL OUT THE GOVERNMENTS??  The answer is money printing or debt monetizing by the Central Banks. The same thing will happen in the EU and China. It's been happening for decades in Japan already. Debt revulsion will emerge, but even that will be squashed by the long arms of governments. All currencies will see huge pressures and declines, but since all countries will be in the same situation, it'll be a race to the bottom for the major currencies. Minor currencies and emerging markets currencies will be CRUSHED.

In this scenario, only gold looks attractive as the ultimate money. Only Gold will remain standing in the end. In the coming months and years there may be declines in gold prices (which may already be manipulated lower by government-sponsored agents to 'hide' poor economic conditions). I would continue to add physical gold to your safety deposit box or safe. I can see having nearly 100% in gold at some point in the next few years -- held in safety deposit boxes in non-TBTF banks or in hidden safes in your home. You have to buy it now while it's still available and still legal!  Remember, FDR made owning gold illegal in the 1930s.

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