In the aftermath of the worst economic event in three generations, governments and central banks sprang into action, employing the instruments of both conventional and unconventional fiscal stimulus and monetary accommodations. To spur growth, borrowing, and spending, record-low interest rates were instituted, budget deficits were embraced, and the printing presses worked overtime.
Somebody obviously read Paul Krugman’s New York Times column.
About a decade later, the gaping holes have been plugged with gum, and our financial woes have been remedied with an artificial stimulus. Thanks to the insouciant occupants of the Eccles Building, and the so-called smartest men in the room in Ottawa, Beijing, London, Tokyo, and Frankfurt, our inevitable agony has been delayed for another day with the monetary equivalent of soma.
Is a financial reckoning on the horizon? The latest numbers from the Institute of International Finance (IIF) should not instill confidence in the likes of incoming Federal Reserve Chair Jerome Powell, ECB head Mario Draghi, or Bank of Canada (BOC) chief Stephen Poloz.
Global Debt Levels Hit a New High
According to the IIF, a Washington-based financial industry organization, international debt levels spiked $16 trillion in the first nine months of 2017, hitting an all-time high of $233 trillion in the third quarter. This is up from $87 trillion in 2000.
The planet’s pecuniary plight looks like this: $63 trillion in government debt, $58 trillion in financial sector corporate debt, $68 trillion in non-financial sector corporate debt, and $4 trillion in household debt. The biggest culprits of debt-binging last year were Canada, China, France, Hong Kong, South Korea, and Turkey – but Prime Minister Justin Trudeau told everyone budgets balance themselves!
As the legendary Howard Beale character shouted to television viewers, “This is mass madness, you maniacs!”
The U.S. body did witness light at the end of the tunnel: debt ratio to the global gross domestic product (GDP) had slipped for the fourth consecutive quarter. But the GDP is a worthless metric, unless you are a desperate politician, aiming to deceive the public.
Many proponents of priming the pump and channeling the animal spirits allude to a recent report to showcase how successful the Keynesian measures have been for the world.
In November, the Credit Suisse Global Wealth Report 2017 revealed that total international wealth climbed at a rate of 6.4%, or $16.7 trillion, to a total of $280 trillion. This is the fastest pace in five years. Moreover, wealth growth outpaced population growth: global mean wealth per adult increased by 4.9% for a new high of $56,540 per adult.
Bad news? Global debt is advancing approximately three times as fast. And researchers from the Bank of International Settlements (BIS), a global financial institution owned by central banks, argue that worldwide debt may even be underestimated by as much as $13 trillion.
Other bad news? The central banks and governments may be out of bullets come the next recession.
Can the Fed Fight the Next Recession?
What will trigger the next economic crash? There are many variables to consider: student loans are the biggest non-mortgage debt, auto loans are becoming trouble, the Dow Jones can’t post new records in perpetuity, and the bond bubble is worrying all kinds of economists and investors.
One can only imagine a game of dominos in the future.
To rescue the U.S. economy, former Fed Chair Ben Bernanke installed three separate versions of quantitative easing, lifting the central bank’s balance sheet to $4.5 trillion. In the process, the Fed formed several bubbles in the market: bonds, technology stocks, vintage assets, and debt. His successor, Janet Yellen, began to hike rates and gradually wind down its balance sheet.
But what happens when the next recession swarms the U.S. economy?
In June 2016, speaking in her semi-annual testimony to Congress, Yellen conceded that the Fed wouldn’t “have a lot of room using our traditional tried and true methods to respond.” She listed sub-zero rates, a fourth round of QE, and helicopter money as potential tools to prevent “a negative shock to the economy.”
With the Fed about to enter the Jerome Powell era, officials and academic economists are pondering what can be done in the event of another recession. (Of course, the Fed would never permit the free market to cleanse the economy.) Since the federal government has few options on the table, especially since deficits are on the rise again, the Fed can only perform one task: ask questions.
Although the Treasury Department is anticipating economic expansion for a few more years, when the contraction hits, the Fed can do very little. The central bank has already monetized an enormous amount of debt, rates are still at historical lows, and China won’t prop up the illusion, particularly as trade negotiations intensify and officials potentially end purchases of U.S. Treasuries.
It’s 2006 All Over Again
Beware: the average economic cycle has lasted for roughly 70 months since 1945.
History always repeats itself. We never learn from our mistakes. It’s 2006 all over again.
When the economic collapse impacted everyday Americans, they endured a lot of suffering, unseen since their Silent Generation predecessors. Today, Americans are singing a little bit too much of “Happy Days Are Here Again” rather than studying the errors of yesterday.
The personal savings rate has plunged to a pre-recession low of under 3%. Subprime borrowing is becoming eerily reminiscent of 2006. Total U.S. credit card debt has ballooned to well above $1 trillion. Though home equity has reached an all-time high, mortgage lending standards have blossomed into a moral hazard once again.
The public purse isn’t faring any better. The U.S. government may be giving Americans a sizeable tax cut, but President Donald Trump and Republicans are not complementing this stellar political maneuver with spending cuts. The national debt is nearing $21 trillion, budget deficits are on the rise, and the Treasury has already promised new rounds of borrowing.
President Trump repeatedly lambasted (rightly so) the Fed, the drunken sailors on Capitol Hill, and former Presidents Barack Obama and George W. Bush for their failed strategies. Taxing, borrowing, and printing are not sound fiscal policies. When the next recession strikes, the president would be wise to allow the market to do its thing: liquidate the debt and let the competent take over the assets of the incompetent. What can the White House do? The president, whether Trump or his successor, can help by taking a chainsaw to the budget, cutting taxes, and no longer kicking the can down the road.
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