At first this seems counter-intuitive…….
But we, the American consumer, have to go bust and start over in order to straighten out the national financial debacle that hasn’t ended yet. After going through it I can only tell you that is the scariest thing for most people to even think about. That’s why we vote for Big Government to put off the reckoning that will arrive.
Be ready for the boom. Clean up your credit. Save and pay off “junk” debts. In 5 to 10 years the next bust hits and everything becomes dirt cheap for people with cash and good credit. Happens after every deflationary bust.
In the forties if you had a couple of thousand you could have bought a mansion in the city, 5 0r 6 new cars, a lifetime supply of booze…. Whatever. This is history.
I just bought $250 more in food. Wait til you see the prices this summer. Expect oil to rise because production has been cut and foreign countries are using American money to buy.
There is no reason for them to hold a dying empire’s cash. Check this out……
So, what does this mean for the American and global economy?
1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect). That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
6. I believe this dynamic will induce a Scylla and Charybdis of inflationary and deflationary forces, forcing central bankers to add and withdraw liquidity in a manic way. The likely volatility in government spending and taxation gives you the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
8. From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
That’s my thesis. What’s your view?