While financial news channel talking heads keep telling us that the new normal is gradual economic growth and that key statistical trends are right on track, there is a growing groundswell of clarion calls coming from economists, politicians, and even one key former central banking head that things are not all right. Debts have increased beyond where they were before the Great Recession. Central banks will not have the “tools” they need to deal with a major economic downturn, and financial pundits are already referring to next year, 2020, as “The Year of the Next Big One”.
Marc Friedrich, a finance strategy consultant and best-selling author based in Germany, recently discussed how we arrived at where we are today:
Since the 2008 crisis, we did not solve a single problem. We lowered the interest rates to a record low level and we flooded the world with cheap money. The central banks created one financial bubble after the other and now we have the biggest bubble in history.
Friedrich went on to state that inflated bubbles are everywhere, especially in government bonds. He believes that trillions of dollars have been wasted in trying to deal with innate problems in the global economy, only to create a bigger mess. When this bubble bursts, it will be epic.
One does not have to look far to find worrisome bits of negative economic detail in the U.S. market, the current developed economy that is leading a pack of stragglers:
- U.S. debt is in excess of $21 trillion and is growing at rates much greater than GDP growth rates;
- U.S. government monthly operating deficit exceeds $1 billion, and monthly trade deficits are setting new record highs;
- American consumer debt has increased from 22% ten years ago to 26% of current income levels;
- Central banks of the world bloated their balance sheets by $8.3 trillion, with only $2.1 trillion worth of GDP growth to show for it;
- New home and vehicle sales are down from a year ago, from 3 to 5%, while even iPhone sales are off by 17%;
- By April of this year, retailers have already announced that 6,000 outlets will be closed in the coming months;
- Credit card and auto loan delinquencies have hit seven-year highs;
- U.S. citizens looking for work or out of the labor force exceeds 102 million, a figure greater than during the previous recession.
Ron Paul, a famous libertarian and a staunch critic of the federal government in Washington, believes that, if central banks return to an accommodative stance as professed, then we will be in for an unraveling event like no other in recent memory:
The seriousness of it will become evident to all, as the need to pay for our extravagance becomes obvious. The financial system has been left with a bubble mania financed by artificial credit and unsustainable debt. The correction is what the market requires, not the resumptions and the dangerous inflationary policy that caused the bubble economy.
Sheila Bair, who headed the Federal Deposit Insurance Corporation (FDIC) during the 2008 crisis and who saw the subprime mortgage crash coming, is now more concerned about the debt that is piling up in so-called “zombie companies”:
I do think that we are going to see distress in the corporate market, which can have a very strong and significant impact on the real economy. There are just so many of these companies that are just up to their eyeballs in debt. With subprime, at least you had a bit of a flow-through. It took a while. There was a market shock. But in terms of real economic impact, it was more gradual.
Interest rates remain near zero and negative across the globe. Per Ron Paul:
Central banks now own almost $10 trillion of negative interest yielding bonds.
As a result, central banks will not have the flexibility needed to deal with the next shock. Former Federal Reserve Chair Janet Yellen has noted in the past:
I think it is a real concern that the Fed might not have all the tools that are needed in order to respond [to a new crisis]. The fundamental reason why it’s a problem is that even before the financial crisis, the general level of interest rates in most developed economies, including the United States, had been drifting down.
Is a big economic meltdown coming in 2020, as many analysts are predicting? Even Donald Trump before his election had said:
We are in a big, fat, ugly bubble.
His policies have only served to delay the inevitable, but many concerned individuals are feeling a need to prepare for the worst. Many have also suggested that Bitcoin and precious metals may be a good hedge against the deflation that will most definitely occur in major fiat currencies. Time will tell.