We Are on the Brink of the Second Great Depression (Forbes)

[Snarkoleptic]

Last edited Tue Dec 3, 2019, 09:31 AM - Edit history (1)

https://www.forbes.com/sites/johnmauldin/2019/12/03/we-are-on-the-brink-of-the-second-great-depression/#1f485f0d6145

You really need to watch this video of a recent conversation between Ray Dalio and Paul Tudor Jones. Their part is about the first 40 minutes. In this video, Ray highlights some problematic similarities between our times and the 1930s. Both feature:

a large wealth gap
the absence of effective monetary policy
a change in the world order, in this case the rise of China and the potential for trade wars/technology wars/capital wars.

He threw in a few quick comments as their time was running out, alluding to the potential for the end of the world reserve system and the collapse of fiat monetary regimes. Maybe it was in his rush to finish as their time is drawing to a close, but it certainly sounded a more challenging tone than I have seen in his writings.

Here's the linked video-
https://finance.yahoo.com/video/greenwich-economic-forum-184135910.html?utm_campaign=JM-305&utm_medium=ED&utm_source=for

[Mike 03]

1. Frightening article.

A little more:

But imagine a recession that brings the US deficit to $2 trillion, possibly followed by a governmental change that raises taxes and spending.

This could bring about a second “echo” recession with even higher deficits. This would force the Federal Reserve to monetize debt in order to keep interest rates from skyrocketing, thereby weakening the dollar.

Couple this with a concurrent crisis in Europe, potentially even a eurozone breakup, resulting in countries all over the world trying to weaken their currencies with the potential for higher inflation in many places.

In such a scenario, is it hard to imagine a desperate president and Congress, toward the latter part of the next decade, regardless of which party is in control, instructing the US Treasury to use its tools to weaken the dollar?

Can you say beggar thy neighbor? Can you see other countries following that path? All as debt is increasing with no realistic exit strategy except to monetize it?

[Snarkoleptic]

3. Federal officals know it's getting rough, as evidenced by-

Liquidity issues on Wall St.
https://finance.yahoo.com/news/repo-fretting-shifts-treasuries-market-100035647.html

Mid-December will see a recurrence of the same circumstances that apparently led to the September eruption -- quarterly corporate tax payments that drained cash from the banking system, coupled with Treasury settlements that prompted a rush for scarce reserves. Also, many analysts believe banks, particularly those based in Europe, will retreat around New Year’s Eve from the repo market, driving up rates by pulling cash from the system as others try to secure financing. European banks face slightly different capital rules, encouraging them to reduce their end-of-year footprint and the amount of equity financing they need to back up their assets.

At the Fed’s term repo auction on Monday, demand for funds that would tie over financing through the end of the year came in about twice the amount the central bank was offering to lend, showing the thirst for cash during the period.

While the Fed has taken steps to bring order back to repo, adding liquidity by buying Treasury bills and doing overnight repo operations, many fret that won’t be enough to keep rates under control. For those still scarred by the financial crisis a decade ago, the spike in repo rates in September triggered painful memories of the credit contagion in 2008 that took down some of the largest U.S. banks. The risk has since shifted to hedge funds and independent broker-dealers, the primary users of short-term repos used to finance positions in U.S. government debt.

Trump's pressuring the Federal Reserve to move toward negative interest rates, during a supposedly strong economy-
https://www.reuters.com/article/us-usa-fed-powell/fed-chief-powell-pushes-back-on-negative-interest-rates-idUSKBN1XN1VC

WASHINGTON (Reuters) - U.S. Federal Reserve Chair Jerome Powell on Wednesday pushed back against a favorite talking point of President Donald Trump’s, telling Congress that the negative interest rates sought by Trump aren’t appropriate for a U.S. economy with ongoing growth, a strong labor market and steady inflation.

[Mike 03]

14. Thanks. His meddling with the Fed is extremely unnerving.

Things seem so tenuous at this point. Yet, the markets continue like everything is fine, despite small bumps. I can't count the number of guests on Bloomberg Radio last night who chirped, "The consumer is so strong." Could it be that the consumer is paying more for less, and putting it on a credit card?

[aggiesal]

25. And if a 2nd depression does happen ...

Pendejo45 will just blame it on the FED, because they didn't do what he asked.
His Trumpettes will believe him.

[Sherman A1]

2. Thanks for posting

I will check this out later today.

[Goodheart]

4. No, we're not.

[USALiberal]

10. Thanks for the detailed response! Nt

[PatrickforO]

21. Well, I'm pretty concerned because the debt has reached unsustainable levels,

and is not backed by anything but the 'full faith and power of.' That is a problem because the Fed has no room for Quantitative Easing right now, and we might not be able to do a large enough stimulus should the economy go into recession because of that debt already incurred.

The giant tax cut for billionaires and corporations didn't help much either, because the economy did not need to be stimulated. Basically, the Republicans, for the sake of short-term greed, poured gas on an already robust bonfire. It was the ultimate in fiscal irresponsibility.

As to us having no monetary policy to speak of, the Republicans in power now are generally know-nothings. They haven't a clue about how to run either monetary or fiscal policy at a national level. Witness the horrifying effort to rewrite the Constitution with a balanced budget amendment. If the government cannot be the spender of last resort during a recession, then that recession will rapidly go south and turn into a depression that takes years to claw out of.

When they talk about 'monetizing the debt,' that makes sense, but it will cause inflation. Right now people don't think much about our currency, but it isn't backed by anything. Nothing. It is fiat currency. If people lose faith in the dollar because they lose faith in the 'full faith and power of the United States,' we're fucked in more ways than you can count.

I just had a conversation last night with my cousin who is a hard-core conservative. Sales, commission only, so he repeatedly alluded to waking up in the morning, working hard and growing wealth based on that effort. He could not see the need to level the playing field, nor did he believe an anything but that the market is all powerful and we'd be better off without a big central government. I ended up shaking my head because in his world the weak are weak and poor because they have made poor choices, and if they had a greater sense of responsibility, blah, blah, blah.

I mean, we are POLARIZED. He didn't even acknowledge climate change. He's a salesman, but thinks he's a capitalist.

So, yeah, we're like a bunch of greed-lemmings running headlong for the cliff, only this time the cliff is the habitability of our very planet. At the least we will all suffer prodigiously. Because of Republican economic policies. Trickle down - the Chicago School - did not work in the past, does not work now, and will never work in the future for anything but the transfer of wealth into fewer and fewer hands.

[c-rational]

27. Well said! nt

[Ferrets are Cool]

26. That was so thought provoking and added

so much to the conversation.

[global1]

5. So If The Repugs Know This Wouldn't They Want To....

throw the 2020 election and let the Dems win so they can blame it on the Dems?

Is this what Trump is setting up?

[Snarkoleptic]

6. Trump needs to stay in office to avoid presecution.

The rest of the GOP must go along as they're power hungry and afraid of Trump's tweets.

[usaf-vet]

9. AGAIN he makes all decision based on what is good for himself. Never We the People. Always.....

me, me, me!

[StarfishSaver]

7. If so, a Democrat will have to clean up the mess

But, of course, when they do, they'll get no credit for it.

[mopinko]

11. same as it every was. also following the elephants w the brooms and shovels.

[bucolic_frolic]

8. Their arguments have merit

but these Washington insider types have been cranking out catastrophic predictions for 50 years to sell books, newsletters, and advisory services. I know because I saved all the junk mail and sold a few on eBay. Howard Ruff, Mark Skousen, and many many others, all trying to tease out the exact scenario because calling a catastrophe in advance will help sell more newsletters! Subscribers at $99-999 a year! I think it began with the well-respected Kiplinger Letter in the 1950s. I don't ignore the more hyped voices, but I try to balance them with mainstream sources. Crossing Wall Street and its ETF (CWS) is one, as is some of the Main Street type broker newsletters to clients which you can often get for free on Twitter or a mailing list at a local office.

Could we have financial collapse from currency wars and devaluations? Sure. I'm more worried about the resulting chaos in civil society though. And other than gold, none of these gurus knows where to park their money.

[Snarkoleptic]

17. One caution is that lots of these analysts are 'goldbugs' who

want a return to gold-backed currency, which will never happen.

[Johnny2X2X]

12. This is their goal

Trump, Bannon, Putin, and a host of Right Wingers have always had a goal of a destabilized world. The thought is that they can use the instability to consolidate power and eradicate democracy. This is what we're seeing right now. Bannon has described his goals in detail and they start with a catastrophic event like a world war or a great depression.

These are evil men who see free people as a threat to the world they want.

[extvbroadcaster]

13. Wow great video

Kind of says it all. The general idea I get is the economy is on a sugar high with Trump handing out the candy. If a Democrat wins, expect the stock market to go down. But if we keep going the way we are things will hit the wall badly. So true about the wealth gap. I was watching some videos on the news about people living in their cars, and they worked but could not afford an apartment in places like Seattle. A real mess, and it will take forward thinking people in government to solve which we don't have now. The video is about 40 minutes and worth watching - and it's scary too.

[ProfessorGAC]

15. Even Within The Snip, I See Questionable Premises

First, monetary policy has been designed to keep inflation low. Since it has been quite low, it has been effective. One can argue the merits of that strategy, and could make a case that real GDP growth under this strategy is tough to maintain. But, on its face, that premise is false.
Second point of concern is the 3rd above.
What is described there is not really applicable to the Great Depression. The shift in the world order was the ascent of the US to economic dominance. But, that had been occurring for nearly 50 years by 1929.
Also, changes in technology cannot be reasonably correlated to depressive impact, because the tech explosion from 1985-2000 actually propelled the economy and standard of living, particularly in the 90s.
So, it appears 2 of the 3 basic foundational items for the prediction are, at best arguable, and at worst, provably incorrect.

[mahina]

19. Thank you for writing this

[Kitchari]

20. Thank you for these salient points n/t

[uponit7771]

29. +1, doesn't look like banks are locking up money flow ... quite the opposite.

[UpInArms]

16. Add to that this alarming statistic

US corporate debt nears $10 trillion, now at record 47% of economy

US corporations are sitting on nearly $10 trillion in debt. That's equivalent to roughly 47% of the overall economy, which is a record, according to date first cited by the Washington Post.

Since the financial crisis in 2008, corporations have splurged on debt amid historically cheap borrowing costs. In recent months, experts have warning that ballooning corporate debt could worsen a future economic downturn.

... snip ...

"Corporate leverage can also amplify shocks, as corporate deleveraging could lead to depressed investment and higher unemployment, and corporate defaults could trigger losses and curb lending by banks," the IMF wrote.

In a recession half as severe as the 2008 financial crisis corporate debt-at-risk - which is owned by firms that can't cover interest expenses with their profits - could increased to $19 trillion, or almost 40% of total corporate debt in major economies, the IMF said.

... more at link

[bucolic_frolic]

18. What we have here is productive overcapacity from QE1-2-3 and it's still continuing

Every investment project looks like a great idea with almost infinite profitability when borrowing money at less than 1% or even 3%. Every bonehead went out and borrowed for the biggest house, a side business for the wife as a tax write-off, another chain store location, more factories. We can outproduce anyone, but so can the whole world. This is the housing glut crisis applied to every aspect of the economy. Demand for products is not infinite. Consumers are squeezed. So unless we invest in more and more capacity, and at some point what would be the sense, it's going to be a recessionary scenario, and a big one.

[Hortensis]

22. Part of a Russian plot to destroy us? I'd once have laughed at that.

Before I learned that Russia had been exporting corruption to destroy nations for decades, helped enormously by the enormous runup on internatonal wealth, which has shifted balances of power in favor of the greedy, and moved many criminals into the ruling classes, in many more nations than just our own.

[sandensea]

23. Second Great Recession, anyway.

The Fed will bail Wall Street out, and they'll release the hostage (the economy).

The recovery will be slow and frustrating - and of course a Democratic president will have to oversee it.

Some fascist fast-talker will come in after 8 years, and it'll happen all over again.

[SansACause]

24. BUY GOLD!

While this article is interesting, the reality is that all of our debt is in US dollars, and we own the printing press. See also trillion-dollar coins. We've been dumping a near infinite amount of money into Wall Street banks since the 2008 financial crisis (see "quantitative easing.&quot We could pay off the debt tomorrow if we wanted to. Yes, that would cause financial chaos, but we would no longer have to worry about servicing the debt and using the debt as an excuse why we can't afford universal healthcare or pay off student loans.

[roamer65]

28. We are in different times than the first GD.

The Federal Reserve from 1929-1933 was shackled by a gold standard. Federal Reserve Notes were redeemable in gold until 1933. We came off the gold standard to thwart a run on gold coin in 1933.
We are a true fiat currency system now. The Federal Reserve now has outright currency creation as a weapon, and they will use it if needed. Thus if a large collapse happens, it will be an inflationary depression and not a deflationary one. The Fed will literally drop money from helicopters to stop a deflationary depression.

[quid amateur quo]

30. And if the wingnuts get their way,,,

we're on the brink of Civil War II.

[tritsofme]

31. When gold bugs start gnashing their teeth about fiat currency

You know it is time to stop paying attention to their nonsense.