Economic collapse is now unavoidable. Whether this happens via a deflationary or an inflationary or a stagflationary collapse is an open question, but also academic. In any of these future states, the average person gets economically harmed while the wealthy do relatively better.
And by “collapse” I don’t mean “things suddenly go all Mad Max all at once.” I mean 1) whole sectors (like finance) will retreat and don’t come back, 2) printing money comes to be regarded as an act of sabotage that harms more than it helps (thereby ending a 40-year-old regime of currency debasement), and 3) we all suddenly have to begin living within our means.
Those who can grasp these macro trends have the opportunity to fare far better than those who don’t. While there are no guarantees in life, at least you can stack the deck in your favor. If you haven’t already done so, please watch the Crash Course – a video series I first made available to the world back in 2008 and updated in 2014. It is both predictive and explanatory.
So, my message is simply this; a recession is on the way. Possibly a very bad one. It will scare a lot of people, especially those in Europe who are facing an extraordinary energy shock to boot.
Eventually, the central banks will cave in to pressure (mainly from their rich and powerful friends) to once again resume printing. That moment will be the starter’s pistol for the next phase of our decline.
To get through this in style and with a minimum of disruption, we’d need effective, bold, and well-informed leadership. Sadly, we haven’t got any of those sorts in charge at the moment.
So, buckle up, this next year is going to test us all. Become resilient and find your tribe!
Raise rates, crater stocks, bonds and real estate… AND bankrupt the heavily indebted US government? I’d love to hear someone talk about how high interest rates can go before the US defaults on it’s debts.
I have the feeling that, push come to shove, it’s going to come down to something like this: https://en.wikipedia.org/wiki/Trillion-dollar_coin
Crank out 30 of these puppies, plus a couple more to cover the student loan debts, a few more for consumer credit cards, drop off at the deposit window down at the local Fed branch, and voila, national debt paid off in full plus a lot of very happy debtors. Yeah, the results would be ugly, a depression probably, absolute financial chaos for a year certainly. Hyperinflation, very probably. Two large swaths of the population (people with student loan or credit card debt) would however vote the sitting administration back in, period.
No, no, no, I’m not seriously proposing this. The downstream effects are completely unpredictable (chaos, remember), with lots of probable very bad outcomes, and at some level it’s dishonest.
But, is it any crazier than what they’re doing right now? Yeah, that’s how bad the situation is.
I like Chris’s idea of ‘outside in’. It’s like a macrocosm of what I learnt living in Southeast Asia and South America in the ‘80s and’ 90s:
‘Hmm. Why are people rushing to get on the plane when my ticket has an assigned seat number on this plane at Laos’ s main airport? I’m just gonna calmly stroll over to the plane… Damn! Everyone’s ignoring the assigned seats and I now have to sit at the back with no window and all the luggage (including stinky, noisy chickens) falling over me.’ - Outside in.
‘Hmm, indigenous people are on the news clashing with the police somewhere out there in Ecuador… Damn, why didn’t I take more notice? I went on a break for a few days to a small southern Andean city and now there’s riots on the streets and I’ve been stuck here for almost 2 weeks because they’ve blocked the roads back down the mountains with buses. I can’t get back to my job!’ - Outside in.
Etc. etc.
Always keep an eye on what’s going on afar, and never assume that it’s not going to affect you at some point.
From 1913 until 2008 the value of the USD fell between 96- and 98-percent. This is a commonly acknowledged fact. The only thing in dispute today is how much the value of the USD has actually fallen – 4-percent or 2-percent.
Doesn’t matter anymore.
With the Crash of 2008-09 the value of the USD fell to ZERO. Since the Crash of 2008-09 the USD has been worth nothing. Money means nothing when it is worth nothing, but that is not what has been happening. Exponential printing of worthless money is just one example of money being worth nothing.
Since 2010 we have been living a delusion out of habit and dependency.
Dr. Chris, thanks for sharing your thoughts on this.
Could I conclude from your thesis that one should be aggressively invested in the stock market at this point?
I see many bullish stock market indicators right now, but I’ve sitting mainly in cash this year. It’s frustrating.
I’m mainly an options trader, but I do hold physical gold. I’ve been tempted to go all in on the physical gold/silver and just ignore the markets. I feel like there is a tremendous amount of risk for a systemic crisis, but my instincts for this have been wrong in the past.
Maybe I should dive in to the stock market instead.
Any thoughts would be greatly appreciated. Thanks.
It Was Well Known The Balance Sheet Wouldn’t Decline Until June 15 Earliest
Chris, just FYI, I do investment work and follow the bond market pretty closely. It was well known to most bond traders that the Fed planned to reduce its balance sheet by letting bonds mature without reissuing, and that there were no maturities until June 15 or later. Reports I follow were pointing out last month that the reductions wouldn’t really begin until mid-month at the earliest with a $14.9 billion non-reinvested maturing issue. According to this Bloomberg article from June 1, the balance of the ~$48 billion maturing this month will all mature on June 30. What’s interesting about the June 15th total you show is that, if the Fed figure is accurate and includes the $14.9 as reinvested - that they had the option to reduce the balance sheet by on June15th, it would mean that QT (balance sheet reduction) won’t really begin at all until the last possible day of the month, on June 30th, and that all $30 billion required for the month will wallop markets on that day. https://www.bloomberg.com/news/articles/2022-06-01/fed-starts-experiment-of-letting-8-9-trillion-portfolio-shrink
I think you’re quite right that the Fed loves to support wealth and the stock market and gets very nervous when stocks are tanking. Nonetheless, bond traders worldwide follow what the Fed does in intense detail, and it would be a huge deal if the Fed doesn’t follow through and reduce their balance sheet by the end of the month as they said they would, so I think that scenario is pretty unlikely. How long they’ll be willing to keep doing it is another story, and in that regard, your description of the Fed’s faint heartedness in the face of failing markets will likely ultimately prove accurate.
In the 80’s, working in the energy industry, I had the pleasure of getting to know M.K. Hubbert, who was at the time pointing out that oil was a finite resource. After the Arab oil embargos, we were of course madly looking for American oil.
A few years later, after the next oil glut, nobody paid much attention.
For years, the main criticism was the fact that new technology kept increasing supply, producing cyclic oil gluts. The modern version of supply limits is more subtle - decreasing NET ENERGY. Yes, there is a lot of hydrocarbon still out there, but eventually we will only use it for plastics, etc., NOT for an energy source because it takes more energy to produce a barrel than the energy in that barrel.
Chris reminded me of the Crash Course, which is how I became familiar with his work. I still refer people to it all these years later, especially the parts about exponential growth…Yankee Stadium!