Thursday, April 23, 2020

Our Dystopian Future: Recession Without End

I'm sitting at home on Thursday, April 23 and watching the DJIA soar nearly 400 points to nearly 24,000.  We're not far from the Dow peak of 29,000 set just a few months ago.  I'm watching this as another 4.4 million people filed for unemployment claims this week bringing the 5 week job loss total to 26.5 million.  This erases ALL THE JOBS CREATED SINCE 1998.
Figure 1: Cumulative Employment Gains Since 1998

Some folks are saying that 2nd Quarter GDP will be about -35%!  This is incredibly bad.  Remember it takes a 50% increase to reverse a 35% loss.  What are the chances that the US GDP gains 50% in the next few years or even in the next decade?   The chances are slim to none. (NB. 35% down is for one quarter, most expect 2020 GDP to decline by 6 to 8%, but even then it'll take years to recover at 1 or 2% growth.)  Government debt will be soaring further in the months and years ahead, adding artificially to GDP but putting even more of a long term drag on the economy.

In my post Why Our Economy is in Depression and Will Get Worse, and We're Reaching the End of the Road, I mention a number of reasons for why our economy has already been mired in prolonged recessionary conditions and why things won't be improving anytime soon. For instance, I've pointed out that if you subtract government spending that was funded by debt, US GDP has actually contracted since the first Great Financial Crisis (GFC).

US GDP After the GFC in 2008 Shows Organic Contraction
Figure 2 shows that the US GDP has shrunk by $5.9 Trillion if you back out debt-financed spending in the government sector alone. This is Recession Without End (otherwise known as "Depression").

I mention poor demographics, the declining utility of debt, and the effects of reaching the limits of affordable 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 the past 12 years.  

Now these "reality avoidance" measures are ramped-up on steroids!  You could say everything is fake in this country: the news media and news "personalities" are fake, government statistics are faked, politicians are completely phony and fake, GDP and final demand is faked, our country's debt load is faked in that our future entitlement costs are ignored but are really debt,  Our polls are fake. Our stock markets are fake.  Worse, our money is fake! See Extremes of Unsound Money and Finance Lead to Disaster.

From Charles Hughes Smith's "What's Collapsing Can't Be Saved: Our Fraudulent Economy" he says, "The entire stock market rally of the past 20 years is nothing but a gigantic fraud based on stock buybacks funded by debt. Stocks go up because the majority owners of the stock borrow money from a banking sector that gives nearly free money to financiers and corporations. The corporate insiders buy back shares with the borrowed money, and the company services the loan."

Now we're in the Great Financial Crisis #2, the lastest in a series of bubbles and busts spawned by unsound money from the Federal Reserve and government spending bubbles.  The government is working overtime, using whatever spending and debt schemes to prop-up the last bubble.  THEY. MUST. REFLATE.--- or the whole scheme comes falling down. If the all-important stock market crashes, it's over. The desperation is palpable. It's because if stocks crash, so does corporate credit.

And every time a bubble bursts, the resulting recovery becomes more anemic -- especially after the 2000 bubble/bust.

Now we have another bubble bursting. The result will continue to be Recession Without End .

What does this grim future look like? Gail Tverberg has been thinking and warning for some time about the potential of economic collapse as the world confronts limits of affordable energy.  In her most recent post Covid-10 and $1 Oil: Is There a Way Forward, she lists a number of changes that we should expect as much of the world's weakest debt is unwound thru defaults and failure. 

Between her comments and mine, I think I can summarize some of the big themes for the next decade.  
  • the earth's population is unlikely to be sustainable at 7 billion persons. 
  • Starvation will likely be a problem in Africa, the Middle East and in India starting nearly immediately. Population will continue to drop in most of the world and continue to drop in the developed world.
  • The EU and the Euro currency will fail which will likely cause a huge banking crisis in Europe.  
  • This collapse will be especially bad for the world economy because the real money supply to the world, the Eurodollar system and associated derivatives, reside on (and off) the balance sheets of EU banks. This shadow banking system is poorly understood by "Economists" and Central Banks. 
  • Expect political uprisings in many countries like Italy, Spain, Indonesia and maybe the US and China.
  • The entire middle East will collapse. This marks a continuation and conclusion of the collapse that was already underway in that region.  In my post Arab Civilization is Collapsing, I mention that most of the Middle East and North Africa had collapsing cultures most notable after the "Arab Spring."  I then suggested that the entirety of the region will be in collapse once oil prices collapse in a depression scenario.  This is coming true right now.
  • Oil producing countries in Latin America will fail: Mexico, Brazil, Ecuador and Venezuela. Starvation in this region is not out of the question .
  • The EU and Euro will fail. The WHO and UN may disappear.
  • Big cities will become problematic to live in. Big city populations will decline.
  • Most stock equities will be mostly worthless. Quantitative easing in some countries may support stock prices and housing for a few months, but eventually reality will prevail.
  • Supply chains are already breaking. Manufacturing and trade will decline and eventually there will be shortages of goods and food and drugs
  • Manufacturing will be done local and within regions. Globalization will be completely reversed.
  • Nationalization of utilities, banks, oil/gas production and pension plans will be required
  • Education will likely become primarily the responsibility of families, with television or the internet perhaps providing some support. Universities will wither away.
  • International wars and conflicts will erupt

Here's the full text of Gail's post: 

There are clearly parts of the world economy that are not working:
  • The financial system is way too large. There is too much debt, and asset prices are inflated based on very low interest rates.
  • World population is way too high, relative to resources.
  • Wage and wealth disparity is too great.
  • Too much of income is going to the financial system, healthcare, education, entertainment, and travel.
  • All of the connectivity of today’s world is leading to epidemics of many kinds traveling around the world.
In a less connected world, what we think of today as assets will likely have much less value. High rise buildings will be worth next to nothing, for example, because of their ability to transfer pathogens around. Public transportation will lose value for the same reason. Manufacturing that depends upon supply lines around the world will no longer work either. This means that manufacturing of computers, phones and today’s cars will likely no longer be possible. Products built locally will need to depend almost exclusively on local resources.

Pretty much everything that is debt today can be expected to default. Shares of stock will have little value. To try to save parts of the system, governments will need to take over assets that seem to have value such as farm land, mines, oil and gas wells, and electricity transmission lines. They will also likely need to take over banks, insurance companies and pension plans.

If oil products are available, governments may also need to make certain that farms, trucking companies and other essential users are able to get the fuel they need so that people can be fed. Water and sanitation are other systems that may need assistance so that they can continue to operate.

Gail goes on to say:
  • There will be a shake-out of governmental organizations and intergovernmental organizations. Most intergovernmental organizations, such as the United Nations and European Union, will disappear. Many governments of countries may disappear, as well. Some may be overthrown. Others may collapse, in a manner similar to the collapse of the central government of the Soviet Union in 1991. Governmental organizations take energy; if energy is scarce, they are dispensable.
  • Some countries seem to have a sufficient range of resources that at least the core portion of them may be able to go forward, for a while, in a fairly modern state: a) the United States, b) Canada, c) Russia, d) China and e) Iran.
  • Big cities will likely become problematic in each of these locations, and populations will fall. Alaska and other very cold places may not be able to continue as part of the core, either.
  • Countries, or even smaller units, will want to continue to limit trade and travel to other areas, for fear of contracting illnesses.
  • Europe, especially, looks ripe for a big step back. Its fossil fuel resources tend to be depleted. There may be parts that can continue with the use of animal labor, if such animal labor can be found. Big protests and failing debt are likely by this summer in some areas, including Italy.
  • Governments of the Middle Eastern countries and of Venezuela cannot continue long with very low oil prices. These countries are likely to see their governments overthrown, with a concurrent reduction in exports. Population will also fall, perhaps to the level before oil exploration.
  • The making of physical goods will experience a major setback, starting immediately. Many supply chains are already broken. Medicines made in India and China are likely to start disappearing. Automobile manufacturing will depend on individual countries setting up their own manufacturing supply chains if the making of automobiles is to continue.
  • The medical system will suffer a major setback from COVID-19 because no one will want to come to see their regular physician any more, for fear of catching the disease. Education will likely become primarily the responsibility of families, with television or the internet perhaps providing some support. Universities will wither away. Music may continue, but drama (on television or elsewhere) will tend to disappear. Restaurants will never regain their popularity.
  • It is possible that Quantitative Easing by many countries can temporarily prop up the prices of shares of stock and homes for several months, but eventually physical shortages of many goods can be expected. Food in particular is likely to be in short supply by spring a year from now. India and Africa may start seeing starvation much sooner, perhaps within weeks.
  •  History shows that when energy resources are not growing rapidly (see discussion of Figure 3), there tend to be wars and other conflicts. We should not be surprised if this happens again.

1 comment:

Ed Sessions said...

I hate to say this it pains me to know when to say this but I happen to agree with every word you just said.