08/11/09 Ouzilly, France
What’s ahead?
A “Lost Couple of Decades…” says Comstock partners.
Yesterday, we estimated that it would take 19 years for the economy to complete its de-leveraging. It was not a very scientific estimate. But total debt has gone down about $2 trillion over the last 24 months. So, if it continued at that rate, it would take about 19 years to erase the extraordinary amount of debt built up in the bubble years.
Now, along comes the Comstock crowd with roughly the same guess – two decades. They figure that the savings rate will go up to 10% and that the effect of taking that money out of the consumer economy will be to put the United States into a long, soft slump – just as we predicted in our first book.
And there’s another reason to expect a very long period of downsizing: that’s just the way economies work. Market cycles are very long. Interest rates went up from the Great Depression all the way to the Reagan Administration. Then, they went down…and may still be going down. Stocks go up and down in cycles that last 30-40 years, peak to peak. The peak in ’29 was followed by another peak in ’66, which was followed by another peak in ’99.
Economic cycles are long too. Consumer debt, compared to disposable income, hit a low in 1945. It went up for the next 62 years. It only peaked out in 2007. If the chart were symmetrical, the process of deleveraging (getting rid of debt) would show a downtrend until 2069!
And maybe it will.
But there’s no point in looking that far ahead. What we have in front of us is the opening stage of a depression…a market crash followed by a major economic re-adjustment. The new reality is that consumer demand is down…and will stay down for a very long time, at least until debt has reached more manageable proportions. Ken Rogoff says that will take 6-8 years. We say it could take 19 years. There’s about $20 trillion in excess private sector debt to be eliminated. It will take time to get rid of it.
And it will take time to re-jig the world’s economies to the new economic realities.
John Hussman explains…
“If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn.
“Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Kool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.
“When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble – as we observed in the post-1929 market, the gold market of the 1980’s, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble – they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.”
Until tomorrow,
Bill Bonner
The Daily Reckoning
Sign Up for The Daily Reckoning e-letter and receive a chapter from the new Financial Reckoning Day... FREE!
We Value Your Privacy.
Yes 19 years if de-leveraging goes in a straight line. But human affairs never do. They are punctuated by disruptions, black swans, which distort the straight line big time. Some of the disruptions that may come:
- Desperate, another bubble is engineered and everybody jump in.
- US get into that old habit again – war. A big one. “Nothing fixes like war!”
- A major scientific discovery that changes the ball game.
- A historic natural disaster that hit high population areas.
Or none of above happens – we straight-line 19 years. At the end of which China becomes the true new superpower clipping the US in all areas. Loaded by ever faster compounding debt the US goes into sovereign default, civil wars and national break up. It becomes what China was back in 1900.
TC, that sounds too bleak. Rather, I would suggest that the US is able to produce enough for all of its citizens; the economy today was designed for earlier times, for a different reality, we will continue along just fine, and eventually, someone will devise a better way to manage the production and distribution of the essentials that reflects the new technology and changes in society.
So what would Bill recommend investing in? Cash/Bonds etc?
What about threat of default? What does that leave? Foreign equities?
If our markets tank – which I exect they will – the past year as a guide is foreign equities will fall HARDER.
So what would he recommend in such a deflationary period?
I´m still thinking World Economy won´t bear 10 years of winter US Economy, there aren´t any country to replace it, then People won´t resist 2,3,5 or 10 years, they have to eat. Retailers too. Remember XIII century, when kingdoms want People pay all debt for wars and disease, riots began in all Europe.
This time US can´t support any war because it don´t have resources to pay for. His Army are overextended and all countries are exahusted.
“We can use money we don’t have”.
To prove this “We can use money we don’t have”.
To prove this “We can use money we don’t have”.
To prove this “We can use money we don’t have”.
TC is right on the mark. The Banksters and Government Jokers are in the process of looting the coffers. One disaster or engineered disaster is all it will take to bring the US to its knees. The disaster that is the California deficit is only a precursor of what is to come for the whole country. This is a war and in war nothing goes as planned, prepare for everything.
Hello,
In your previous post you said:
“When you borrow money you take something away from the future and bring it into the present. That is not a bad thing…if you are doing it to increase your future output. In that case, you’ll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, the future waits for you…”
OK. I agree. But if you borrow money to increase future output someone has to increase its future consume, otherwise we have an excess of production crisis. Right? How do we find a perfect balance?