The Longest, Deepest Depression in US History
Yesterday’s good news was that there will be no 25-year recession. “We should be so lucky,” is the way a New Yorker might react. Because the bad news is much worse. The logic of the “long depression” is simple. Aging populations, debt, zombification – all of which slow growth.
How many old people and zombies do you need before an economy comes to a halt? Nobody knows. But the drag from debt is observable and calculable. Over the last three decades, approximately $33 trillion in excess debt has been contracted – above and beyond the traditional ratio to income – in America alone. And growth rates have fallen in half.
That’s because dollars that would otherwise support current spending are instead used to pay for past spending. Our old debts have to be retired with current income. The money doesn’t disappear, of course. Some goes to creditors who spend it. Some comes back as capital investment, which is a form of spending. But as credit shrinks, generally, so does the economy.
Howling, whining and finger-pointing are well-worn traditions. Especially when the question is where the money disappeared to and whodunnit.
Cartoon by Thomas Nast
And that brings us to the impossible situation we’re in now. In order to get back to a healthy ratio – say approximately $1.50 worth of debt for every $1 in income – you’d need to erase all that excess that has already been contracted. In other words, you’d have to take $1 trillion out of the consumer economy every year for the next 33 years.
It would be the longest and deepest depression in US history.
Debt, more debt and economic output. Legend: total US credit market debt outstanding (funeral-black line), total federal debt outstanding (vomit-green line) and nominal GDP (alarm-red line). What could possibly go wrong? – click to enlarge.
A Credit Crisis, Complete with Howling, Whining, Finger-Pointing
Take a trillion out of the US economy and you have a 4% decline in GDP. Then, as the economy declines, the remaining debt burden becomes even heavier. Try to pay down debt and it becomes harder and harder to pay down. You stop buying in order to save money. Your local merchants lose sales. Then they try to cut expenses, and you lose your job.
In other words, no “steady state slump” is possible. When the credit cycle turns, it will not be a gentle slope, but a catastrophic cliff… a credit crisis, complete with howling, whining, finger-pointing … and more clumsy rescue efforts from the feds.
As we said yesterday, there are two solutions to a debt crisis. Inflation or deflation. Central banks can cause asset price inflation. But it is not always as easy as it looks. Consumer price inflation requires the willing cooperation of households.
With little borrowing and spending from the household sector, credit remains in the banks and the financial sector. Asset prices soar. Consumer prices barely move. US consumer price inflation over the last 12 months, for example, was approximately zero.
The assumption behind the “long depression” hypothesis is that central banks cannot or will not be able to cause an acceptable or desirable level of consumer price inflation. As a result, the economy will be stuck with low inflation, low (sometimes negative) growth and low bond yields.
But what about deflation? If inflation won’t reduce debt, why not let deflation do the job? More tomorrow …
The year-on-year rate of change of CPI is currently stuck near zero, but market-derived US inflation expectations have actually soared in recent weeks – click to enlarge.
The yawning emptiness of a post-crash wallet, previously leveraged.
Image captions by PT
Charts by: St. Louis Federal Reserve Research
The above article originally appeared as “Take Warning: The Next 94 Days Could Be Bad for Your Wallet” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
Does the Fed manufacturing crises?
http://bit.ly/11qhEl7
The rate of change for inflation has been dropping for two decades or more.
Also, inflation–largely credit inflation, which becomes a proliferation of IOU-dollars–has almost entirely flowed into assets (perpetuating the illusion of wealth), not most day-to-day expenses (imagine if the cost of food/rent/clothing had done what a share of AAPL did in the past 13 years!!)
Oil topped 7 years ago.
Gold topped 4 years ago.
The CRB index of commodities topped 7 years ago.
Bond yields bottomed two years ago.
The only thing left at near or soon to be All Time Highs are the major stock indices. THE ONLY THING.
They are the most visible of all the things cited above, and they are the last water in the wave to crest. When they roll over, the wave will be in “crash onto the rocks” mode, as the excess (mental) wealth created during the Great Credit and Great Asset manias evaporates.
It is going to be an EPIC deflation, one for Guinness Book of World Records. It has to be, because THEY ALREADY PLAYED the inflation card. It’s what we have lived for 83 straight years, culminating in a graphic, stupendously moronic rise that lasted so long that people seriously began to think its exponential increase could be permanent.
all of this assumes the fed watches this occur and does nothing. First deflation, then inflation. A situation like the one above could very well bring about the ‘helicopter drops’ of money on the entire US population to spur spending. Big banks can’t handle deflation like that, too much debt needing to be written off renders them insolvent. Since 4.5 trillion in QE didnt do anything but boost asset prices, next time will be “QE for the people” it will look like it is working for a little while, but it won’t fix the underlying debt, merely grow it even more. Hell, a large number of people will use this money to pay off their existing debts, which would just give the money to the same unproductive banks QE and bailouts were supposed to rescue. It will all crumble one day, when it happens is the million(several trillion?) dollar question
“In order to get back to a healthy ratio – say approximately $1.50 worth of debt for every $1 in income ” —– from the article
My dad had a much simpler formula; $0 debt regardless of income. The ONLY thing (literally) he ever went into debt for was the mortgage … and that was only about $120/mo. Me? I wasn’t that smart.