Greater Depression Now!?
Economics / Great Depression II May 27, 2022 - 06:37 PM GMTBy: Raymond_Matison
Most investors know that a recession is defined by a decline in national GDP for two quarters, that is, two three month periods. Investors also have experienced economic pundits writing or announcing that “we may experience a recession in the next several quarters, or expect one in the next one to two years”. It seems that we are actually never in a recession, but rather a recession may be experienced by the public in the not too distant future.
In one respect that viewpoint is understandable since it takes several months for the National Bureau of Economic Research (NBER) to confirm that the economy has previously experienced two quarters of negative growth, and thus they can never confirm that we are in a recession, but rather we can only know with a lag that we have previously experienced a recession. It could take up to a year for the NBER to confirm that we were in a recession, but by the time they are able to confirm this fact – we may already have exited that recession. Also, it requires significant lags of time to confirm that the economy continues to remain in a recession. Thus, such information may be valuable and interesting to economists, but because of reporting and confirmation lags, it has essentially no value to the consumer.
The definition of a depression, perhaps because it occurs much less frequently, is much less precise. An economic depression is perceived to be much longer lasting than a recession, but no specific period has been adopted. A depression may be steeper in its decline, but it does not have to be; and the longer decline may have a period of some growth within the depression. Thus a depression is longer in duration or greater in severity than a recession, but nothing is precisely defined.
John Maynard Keynes defined a depression (as printed in James Rickards book “The New Great Depression”), a “chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” A more earthy definition of the two economic conditions can be stated as “if my neighbor is out of a job, it is a recession; if I’m out of a job, it is a depression”.
Gross Domestic Product (GDP)
The Federal Reserve, International Monetary Fund, World Bank, and many other notable financial organizations around the globe have recently reduced the outlook for GDP growth, despite massive financial stimulation from central banks and fiscal stimulation from governments. This should not be surprising, as recent wage growth has been lower than official inflation, and consumers have a reduced capability to spend on items that would expand GDP growth. And over the longer term, as measured in decades, wage growth adjusted for inflation has essential been stagnant since 1972. Inadequate wage growth is dangerous to a healthy consumer-driven economy.
It should also be clear that the calculation for inflation has been persistently modified downward ever since the passage of the COLA (cost of living adjustment) to Social Security in 1975 to reduce the official rate of inflation so as to reduce monumental increases in government expenditures on Social Security payments. Indeed, John Williams of Shadow Government Statistics, who computes inflation on the government’s own pre-modified basis shows that inflation calculated on the old basis for the last twenty years is two to three times higher than current official statistics. Of course consumers sense this true rate of inflation from shopping for food and buying gasoline for their cars.
The Bureau of Economic Analysis (BEA) somewhat surprisingly recently reported that GDP in the first quarter of 2022 had declined by 1.4%. Not only is it likely that some future accounting periods will show additional downward surprises, but if our accounting had remained consistent through the years, we already could have been experiencing a recession or perhaps even a depression.
One can review official GDP statistics of the BEA on the St. Louis Federal Reserve site, and its data shows 1980 GDP at $2.8 trillion, 2000 GDP at $10.0 T, and 2020 GDP at $21.5 T – representing a 3.6 times expansion for the 1980-2000 period, but only a 2.2 times expansion in the 2000 -2020 period. This represents a 6.7% growth rate for the 1980-2000 year period, and a 3.9% growth rate for the 2000-2020 period. Therefore, under Keynes definition of depression, that of depicting a “chronic condition of sub-normal activity for a considerable period”, one could argue that the United States has been in a depression since 2000! See: Gold’s Role in the Depression of 2020 http://www.marketorale.co.uk/Article67212
Debt and GDP
With current debt to GDP ratios, most of the economically advanced countries of the world are at a point beyond where debt can be paid off, and therefore, are headed eventually to national bankruptcy. Global central banks have been printing currency to expand programs, roll over the maturing debt, and to service the interest costs of that debt. Accelerated currency printing has caused massive inflation, and therefore additional currency printing can no longer stimulate or save our economy. The historical, statistical evidence shows that as debt grows, GDP expands at a lower rate.
In addition, since the size of our existing national debt is at a size that interest rates cannot be raised without collapsing the economy - the only remaining option is to debase the currency through continued issuance of more fiat currency. This option impoverishes everyone as the purchasing power of the currency decreases proportionately to the inflation or hyperinflation of the currency. In the meantime, as interest rates rise from global investors seeking a rate which provides some measure of protection against inflation, those elevated interest rate costs to its debtors will necessarily collapse economies.
At present, we are well beyond the tipping point of a stable economy and monetary system -which will implode our bubble financial markets, collapsing Social Security and private pensions. In addition, intentionally instigating the Ukrainian proxy war with Russia, a nuclear power, for the doubtable benefit to maintain our global hegemony moves the nation to its most dangerous time since the founding of this nation.
Superficially seeming masterful, this geopolitical strategy has suppressed the acceleration of trade between Asia, Russia and Europe, to the benefit of the United States military-industrial complex owners, which will be able to sell higher priced energy and weapons systems to an increasingly debilitated and impoverished Europe, soon collapsing its union. All of Europe is hopelessly dependent on Russian gas and oil, and its very ability to compete in global markets is based on low cost energy. Paying high prices for alternative sources of energy and buying new and expensive weapons systems is likely to reduce GDP growth meaningfully, compound its economic malaise, and because of our global interconnectedness, become the catalyst for global collapse. Neither Europe nor America can afford these contrived geo-policies or their consequences. This strategy is fraught with incalculable future danger.
Our wars of supremacy over the last half-century been financed by additionally-issued U.S. debt, purchased ironically in large part by its major global competitor China. Thus China, holding more than $1 trillion of U.S. debt has been financing our hegemonic war strategies. That is unlikely to continue for long. Japan also holds more than $1 trillion of U.S. debt; and because of its long-term monetary quagmire, it may not be able to long continue financing our wars.
These wars which are intended to maintain America’s primacy in the world, when financed by debt, raise inflation which weakens and destroys its currency leading to a diminution of its global authority. Thus the incalculable future danger comes from our coming sovereign debt crisis in which America will not be able to issue additional debt to refinance its accumulated liabilities, or expand its indebtedness. Historically, when previous empires were in decline, wars became the diversionary tactic – the present conflict in Ukraine, which is a proxy war between the U.S. and Russia is a foreboding parallel.
Financial markets, real estate, pensions
Financial markets have become increasingly volatile with the stock market showing marked declines. It has not mattered whether the reference is to the famous FAANG stocks, growth stocks, NASDAQ, or any individual component sections of the market – investors have recently experienced an uncomfortable feeling, raising their fear of holding stocks. In fact, investors have been fleeing stocks, creating huge outflows from domestic and foreign equity funds. The FED’s recent moderate raising of interest rates, when compared to the historically high officially reported, but realistically depressed level of true inflation has traumatized fixed income and equity markets alike – reducing market values by trillions of dollars.
Fear of future volatility and declines has finally counseled investors to perhaps to not buy the dip. This fear and market decline, together with the rapid rise of consumer goods prices will reduce consumer spending and economic growth. In turn, such reduced consumer spending will reduce corporate earnings growth, the effects of which will cycle back to negatively affect all financial markets – stock, bonds, and even digital assets.
Another important measure of economic, and market health relates to commercial property and office occupancy rates, commercial and residential real estate activity, and foreclosure rates. Ever since the beginning of the virus epidemic in 2019, desperate measures have ruled economies of the world. Lockdowns have caused millions of small businesses to close their doors forever, as large businesses were greatly injured. Some cities may not recover for years, if ever, as remote work advantages rise and remain permanent, leaving office space vacant. Also, a recent new survey noted that 34% of retailers surveyed could not meet their current rental payments. As a result, we can expect that office and retail occupancy rates will be permanently reduced, with some commercial loan failures.
Residential real estate had experienced dramatic increases in sales earlier this year even as the price of new construction has risen to record heights – all due to record low mortgage rates which have now started to rise. As the virus-driven nationwide moratorium on foreclosures has expired, foreclosures have surged. Thus urban real estate may be challenging as many city dwellers flee to more rural, convenient and safer areas. Foreclosures and bank loan defaults will in turn impact bank’s loan portfolios which in a daisy chain will destabilize the nation’s banking system. Mirror image events can be expected to take place globally, expanding the misery and collapse worldwide. This description is not that of a recession – it may prove to be “chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”
Perhaps the most significant effect of volatile or declining financial markets together with raging inflation will be that on pension assets and pensioner future living conditions. Even without this added complication, the FED-contrived and enabling near zero interest rates have negatively affected interest income for decades and decreased their funding of these massive liabilities. See: Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO http://www.marketoracle.co.uk/Article65715.html Even worse, Europe’s Central Bank has reduced interest rates to less than zero, as in negative rates, which destroys pension solvency and people’s lives. Thus as trust in governments worldwide and dependency on social pensions is destroyed, such governments will likely be replaced in a proactive manner.
Manufacturing and supplies
Virus lockdowns in China have caused multiple problems, resulting in significant slowdowns in their manufacturing and delays in shipping, in turn bringing component product shortages to the U.S. manufacturing sector. As a consequence, some domestic manufacturing plants have been temporarily idled or closed due to this parts shortage. The foreign shipping industry’s morass, and backup at our ports also spills over to our trucking and rail industry, disrupting and reducing its viability. Record high diesel prices adds to the trauma. That, in turn causes reduced domestic and international sales, and lower GDP growth. This also impinges on the velocity of use of the global dollar currency – weakening its demand and exchange value.
Manufacturing disruptions due to a components shortage may be distracting or even troublesome, but food shortages around the globe could prove to be uniquely disastrous. No less impactful organizations than the World Bank and the United Nations is alerting the global populace of soaring food prices and shortages. Both Russia and Ukraine are significant producers of grains and other agricultural products, and as a result of their war, price spikes and shortages are guaranteed, driving riots and regime changes in affected areas.
No less important, President Biden on this year’s trip to Brussels has warned that our sanctions on Russia will lead to “real” food shortages in the world. He stated that “The price of these sanctions is not just imposed upon Russia, it’s imposed upon an awful lot of countries as well, including European countries and our country as well.” All that sounds a little more serious than a short upcoming recession sometime in the future.
Inflation and interest rates
Earlier in this report we noted that government inflation statistics have been manipulated lower in order to maintain a low official rate of inflation, and reduce Social Security COLA increases. However, substitution of lower cost alternatives is not possible when it comes to oil, gasoline, and heating fuel, which cannot be substituted with lower cost products. Such energy products have spiked 50-100% in a year, while the cost of natural gas and diesel fuel has risen more than 100%. A war-induced reduction in oil and gas supply, suggests that energy prices are likely to remain high for some time spreading negative effects throughout the global economy.
Product import and export prices have risen more than 10%, and given the afore-mentioned supply issues with manufacturing and shipping, will take time to reduce. It is convenient to blame Russia for the recent price spikes and shortages. Of course, prices were already accelerating before this war, and Russia did not stop their export of energy and agricultural products – our sanctions stopped their flow. So how does one assign the responsibility for these global price increases and shortages? Right or wrong, it is assigned by the government that controls the majority of global media, and propaganda.
With justifiable doubt about inflation statistics, how reliable is the data from the FED?
An article issued on April 18 by Phoenix Capital Research states “the Fed supposedly ended QE… but right as stocks began to break down, “someone” suddenly panic bought the markets forcing them higher… and then it turns out the Fed was actually expanding its balance sheet by $55 billion over the same time period. So again, the Fed are total liars. QE didn’t end. In fact, it became larger!” So it appears that we also can no longer rely on any banking statistics.
Jared Tate & Andrew Knapp authors of the comprehensive and excellent book on digital assets, cryptocurrencies, and blockchain technology, published in 2019 titled “Blockchain 2035” observe and state: “Today and well into the future, there will be a crisis of truth in our democracies. Politicians lie, governments lie, and the media and collectivist tech are not a trusted source of truth either. There needs to be a decentralized, auditable record or reality if we are going to stay sane and maintain the integrity of our institutions.”
Famously, more than three decades ago President Ronald Reagan, when dealing with a Communist led Soviet Union, said “trust, but verify”. Unfortunately today, when verifying the real intents of our own nation’s monetary, financial, military and geopolitical policies, it is confirmed that such trust has been misplaced for decades. See: Neither the FED nor US government Can Print “Trust” https://www.marketoracle.co.uk/Article70109.html
The FED just raised its interest rate by 50 basis points, while the Bank of England raised its interest rate by 25 basis points. In addition, it warned that England may experience a recession later this year - which is really familiar language by now. Of course raising interest rates by .25-.5% when inflation is soaring is equivalent to continuing the lies. So central banks have not really responded to the inflationary crisis, and they cannot – as a credible response in raising interest rates would lead to a collapse of financial markets and the economy. Failing the credible response from central banks, we can confidently expect that investors will demand higher returns on debt to compensate them for the higher inflationary/investment risk. That in time will accomplish what the Central Banks are unwilling to do.
Multipolar power and monetary system
For several decades already, America has been scrambling and struggling to maintain its global leadership position. From its position in 1990, being the sole superpower in the world after the demise of the Soviet Union, its decline has been slow but steadfast. Overly selfish capitalists seeking the lowest cost of labor over decades transferred significant manufacturing to China, enabling it to become America’s foremost competitor. Selfish politicians have spent un-saved treasures on deficit programs necessitating increased government debt and currency issuance. Selfish government influencers have caused military spending and wars to flourish, which has sapped its global respectability and influence, and caused the rest of the world to rise against its geopolitical policies.
With its proxy war, pitting Ukraine against Russia, it is hoping to win militarily and economically, thereby regaining some of its prior influence. As stated earlier, this geopolitical strategy is fraught with incalculable future danger. For example, our erroneous geopolitical actions has strengthened the economic and military alliance between Russia and China. America’s sanctioning Russia’s dollar reserves, alerts China and 190 other countries that their holdings of U.S. dollars is not safe. In effect, sanctioning Russia’s foreign exchange reserves, America is destroying its own dollar hegemony. These sanctions have also created commodity inflation and shortages which are doing more harm to the dollar global reserve currency status and the EURO, than to the ruble.
Russia and China have been building their gold reserves, and thus in this environment of our humongous sovereign debt, inflation and paper currency devaluation, their financial solidity is arguably more credible than the debt-ridden U.S. Both Russia and China are nuclear powers with strong and growing military might, and as a result, America has lost its unitary global power status. Its military results in Afghanistan, Iraq, and Syria corroborate this assessment. In addition, America and Europe combined have lost the ability to influence Russian decisions as evidenced by the Ukrainian war, and have even less influence if one is to consider any combined Russia/China policy or action.
Where are we now?
Recent videos show the picture of a seemingly kind and elderly well-groomed gentleman who has also written an important book suggesting that “by 2030 we will own nothing and be happy”. This reminds one of a previous book authored over 150 years ago that promised a utopia for humanity once the leaders of the world’s economic engine give up their means of production to an unelected group new society leaders. The consequence of that philosophy was the destruction of hundreds of millions of people, two world wars, and misery for over a century on a scale not previously experienced by humanity. Mr. Klaus Schwab’s current proposal seems the modern incarnation to that of Karl Marx. Someone is going to own all the goods in the world, but it is not going to be you; someone will make all the decisions, but it won’t be you.
Ironically, it is the international capitalists, with Mr. Schwab in the lead, who volunteer to help us to ascend to communism - to own nothing and be happy. Over the last century everyone learned that a centrally planned and controlled communist system cannot work – and we witnessed its collapse. A new generation of leaders now want to create the illusion that in a capitalist system with its central bank control and managed by a communist style elite - it will work and make people happy. Mr. Schwab, this centralized system destroys individual freedom and choice, and therefore, it will be resisted and eventually will not work. But it could create a lot of destruction in the interim.
Legendary investor Ray Dalio, founder of Bridgewater Associates, the largest hedge fund in the world has long been a keen observer of economic principles - those which work in real markets. Over recent years he has authored many articles, video interviews, and books on this “dismal science”. His most recent book “The Changing World Order” published in November of 2021, covers principles of dealing with this change, and why nations succeed and fail over time. This book is his magnum opus, which covers centuries of economic history analyzing repeated cycles of empires as they rise becoming global leaders and observing reasons for their eventual fall. This book should be on the list of essential reading for every citizen, and mandatory for politicians. The book is an easy read as it is written with common citizens, rather than economists in mind.
As the author of this book, Mr. Dalio is keenly aware of America’s current position in this history of empires, and he is singularly careful not to criticize our politicians, semi-independent government agencies, and government leaders. However, he ventures to make his truthful observation that “The United States is in an unfavorable position in its economic and financial cycles, with a high debt burden and relatively low expected real growth over the next 10 years (1.1 percent per year).” To this humble reader of his comprehensive work, and interpreter of Keynes definition of a depression – it seems that we are experiencing now that word which is worse than a recession, but which economists and government officials fear to use.
Don’t wait for the government to inform you as to when we are experiencing a recession or depression. Apply the entreaty of the former Chairman of IBM, Mr. Thomas J. Watson – THINK!
Raymond Matison
Mr. Matison was an Institutional Investor magazine top ten financial analyst of the insurance industry, founded Kidder Peabody’s investment banking activities in the insurance industry, and was a Director, Investment Banking in Merrill Lynch Capital Markets. He can be e-mailed at rmatison@msn.com
Copyright © 2022 Raymond Matison - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
