Are Conditions Ripe for a Great Depression in 2015?
It’s hard to imagine the world’s biggest economy could fall into a depression in 2015, let alone a recession. But the fact of the matter is that it’s a real possibility, no matter what the stock markets are saying.
Normally, you can look at the stock market and see it as a barometer for how well the U.S. economy is doing. After all, the stock market is a forward-looking indicator. But there is a disconnect between Wall Street and Main Street.
Since the U.S. stock market bottomed in March 2009, the New York Stock Exchange has climbed 165%, while the NASDAQ is up 275%. The major indices, as can be expected, are climbing in step: the S&P 500 has climbed more than 210% (and closed above 2,000 for the first time ever in August 2014) and the Dow Jones Industrial Average is up approximately 175%.
However, many economists believe the stock market rally has been fuelled almost exclusively by the Federal Reserve’s bond-buying program (quantitative easing), not by strong revenue and earnings growth. Hence, the fears of an economic depression in 2015.
For example, 2013 was a phenomenal year for the stock market, one that saw the S&P 500 soar almost 30%. Unfortunately, the increase didn’t come as a result of strong quarterly results; the markets climbed because quarterly results were “better,” for lack of a better term, than the worst-case scenario. And income-starved investors rewarded them for it.
In each successive quarter of 2013, a larger percentage of companies revised their earnings guidance lower. During the first quarter of 2013, 78% of S&P 500 companies that provided preannouncements issued negative earnings guidance. That number climbed to 81% in the second quarter, 83% in the third quarter, and a new record of 88% in the fourth quarter.
Because interest rates have been kept artificially low (near zero) since 2008, the Federal Reserve has effectively removed the “income” from fixed-income assets like Treasuries, bonds, and CDs. That’s terrible news for anyone who was looking for their fixed-income investments to help see them through retirement.
Instead of investing in financial products that provided reliable income, the low-interest-rate environment has made borrowing money both easy and cheap—and it almost forced investors looking for growth into the stock market.
Where else can you go to make money with interest rates near zero? And as long as the Federal Reserve keeps interest rates low, the stock market will be the only game in town.
That’s good news for those who are liquid enough to borrow money from the bank and take advantage of the bull market. But it’s not good news for everyone else—which is the case for the vast majority of Americans.
For better or worse, the Federal Reserve stepped into uncharted territory back in 2008, when it initiated its first round of quantitative easing. The Great Recession started in December 2007 and lasted for 18 months.
The Federal Reserve’s artificially low-interest, easy-money strategy was designed to prevent a full-out economic depression and kick-start the economy.
Before the financial crisis, the Federal Reserve had a balance sheet of $898 million. Today, it sits at $4.5 trillion. The U.S. government has seen its national debt climb 80%, from $10.0 trillion before the financial crisis to an eye-watering $18.0 trillion.(1)
The future looks increasingly bleak. Interest rates are expected to rise in 2015. This could put the brakes on the current bull market and take a huge bite out of the earnings of the average American.
Widening Gap Creates Conditions for Financial Crisis
Did the Federal Reserve’s quantitative easing experiment work?
On paper, the U.S. economy looks pretty good. The unemployment rate is at 5.9%—essentially back to its pre-financial crisis, pre-recession levels; inflation is in check; and the stock market is in record territory.
Unfortunately, those three economic indicators do not tell you what’s really going on in America. The unemployment rate may be under six percent, but the official U6 unemployment rate (which includes people who have given up looking for work and people who want full-time jobs, but are stuck with only part-time jobs) remains unacceptably high, near 12%.(2) And the unofficial shadow statistic unemployment rate, which includes the long-term unemployed, is near 23%!(3)
To make matters worse, wages are flat, personal debt levels remain high, and 15% of the population receives food stamps. Plus, most of us aren’t prepared for when the U.S. slips back into another recession—or gets devastated by a depression. More than a third (36%) of Americans have less than $1,000 in savings and investments, and 76% of Americans are living paycheck-to-paycheck.(4),(5)
Many Americans have only been able to financially tread water because interest rates and inflation are low. But that will change in 2015, when it is widely expected that the Federal Reserve will begin to raise interest rates. When that happens, the cost of living will rise, making it more difficult for Americans to just get by.
The Recovery Hasn’t Been Hard on Everyone
The widening gap in wealth that different American households have accumulated since the so-called recovery is worse than at any time since the Great Depression. Since the Great Recession began (2007), the top one percent of earners have seen their incomes rise more than 30%. The bottom 99% have seen their earnings rise a paltry 0.4%. During the recovery, the top one percent captured 95% of the total growth in the U.S.(6)
The vast majority of Americans can be forgiven for not knowing we are in the midst of an economic recovery. In fact, for many, it feels like an economic depression. And Washington will have to figure out how the world’s biggest economy—one that gets 70% of its gross domestic product (GDP) from consumer spending—can blaze the way to prosperity.
This widening gulf might explain why U.S. economic growth has been anemic over the last six years. In 2008, the U.S. reported negative GDP of -0.03%; in 2009, U.S. GDP retraced to -2.8%. Since then, growth has been a seesaw of unpredictability. In 2010, GDP climbed to a more respectable 2.5%, but fell to 1.8% in 2011. It climbed again in 2012 to 2.8%, but slipped to an underwhelming 1.9% in 2013.(7)
The uneven trend continues into 2014, with U.S. GDP growth forecasted to be just 2.2%. Expected GDP growth in 2015 of 3.1% sounds better, but when you take everything into consideration, the International Monetary Fund (IMF) may be a little bit optimistic.
2015: The Year of the Great Depression?
Is the notion that 2015 could be the year of the next great depression all that far fetched? Not when you realize the U.S. is not an economic island. Almost 50% of the public companies that make up the S&P 500 get sales from Europe.(8) And it doesn’t look like 2015 is going to be a good year for the global economy. The IMF revised its outlook for global growth downward from an even four percent to 3.8%.(9)
And the IMF said there is a 38% chance the eurozone, the world’s biggest economic region, will fall back into a recession in early 2015.(10) That would be the third time the eurozone has slipped into a recession since the financial crisis of 2008–2009.
That’s because Italy, the third-largest economy in the eurozone, fell back into a recession in August 2014; France, the second-biggest economy in the region, is in serious trouble; and Germany, the region’s economic powerhouse, could be dragged down into a recession.
To make matters worse, the global markets are being hit by a series of geopolitical tensions (Middle East, Russia, Ukraine) and the uncertainty of a possible pandemic of the Ebola virus. On top of that, economic growth in emerging markets, such as Brazil, Russia, and China, is stagnating.
Should the U.S., the world’s biggest economy, and the eurozone, the world’s biggest economic region, fall back into a recession in 2015, it could very well topple the world into an economic depression.
The U.S. economy isn’t nearly as strong as we’re being told it is, and the global economy is teetering on disaster. This has created the perfect conditions for a new financial crisis, one that could send the economies of the world careening into the Great Depression of 2015.