Just because the crash of 2008 did not usher exactly the kind of depression experienced after the market crash of 1929 does not necessarily mean that we may not be heading that way anyway. How come? In essence, a depression is nothing more than a prolonged recession. How do you know you are in a depression? Simply, when economic growth remains minimal, when interest rates hit rock bottom, and when consumer spending all but disappears along with the credit supply. It is also quite depressing to know U.S. banks have about $1.3 trillion in cash, but are super reluctant to lend to the private sector, entrapped by a liquidity conundrum of their own making.
What causes a depression? Typically, a depression happens after one or more asset bubble explodes, while the credit supply implodes and dries out. In contrast, most recessions are the result of heightened inflationary pressures and overstocked manufacturing inventories. So, what do you think: are we repressed in a recession or depressed in a depression?
Consider one more argument that it may be the latter. Central banks all over the world, not just in the U.S., have dumped trillions of dollars into the global economy. With that much money in the global financial systems, world economic output should be tremendous. Yet it is not, far from it, which only proves that this is not just another recession and that it resembles more and more a bona fide depression.
All that is growing these days are the unemployment lines. True, there are no soup kitchens for the poor yet, but I suspect there wouldn’t be any just yet, as long as the government is mailing the checks each week for 99 weeks to the currently estimated over 10 million unemployed Americans. Whichever way you look at it, there is nothing simple or ordinary about this economic downturn.
How do things look in a depression? Things change. People change. How they perceive debt changes. How they behave in malls changes. Depressions leave much deeper scars than recessions. They leave people traumatized and take years to recover from, to forget foreclosures on beloved homes, to forget collection agencies’ calls, to forget the humiliation of not being able to provide for one’s family.
Perhaps this is why we are seeing home sales sliding to 15-year lows. Perhaps this is why bond markets are sounding every warning bell they have in their arsenal. Perhaps this is why yields on U.S. Treasuries have gone Japanese on us.
Here are some disturbing facts. The 1930s depression did not create declining economic output every quarter. In fact, during the first impact from 1929 to 1933, no more and no less than six quarters had produced increasing GDP data. On average, during these upturn quarters, the economic output growth rates were known to achieve eight percent on an annualized basis. However, since any growth, let alone an eight-percent GDP, was virtually unsustainable, no one in their right mind could declare the recession as over. Incidentally, stock markets flew into the stratosphere in the early 1930s, gaining 50% in the aftermath of the Great Crash simply because the confusing GDP data had lulled everyone into a beautiful illusion that the worst was over.
I’m tired of this emotional rollercoaster, too, of all the ups and downs, hopes inflating, hopes deflating. But if emotions are taken out of the equation and the equation viewed realistically, some harsh truths are undeniable. The Federal Reserve has cut the funds rate to zero, like Japan, and its balance sheet is in tatters. The U.S. budget deficit has swelled to nearly 10% expressed in relation to GDP, which is actually double the deficit vs. GDP ratio created during the 1930s, when Franklyn Delano Roosevelt was running the show. Finally, decades of easy money have left U.S. households, businesses and the government with $6.0 trillion of debt that has to be retired one way or another.
I’m risking the dubious honor of being called a “permabear.” But it is not as if I want to be über-pessimistic. Actually, on my off days, I’m quite an optimist, as well as a realist. Instead of looking for someone else to tell me if it’s raining outside right now, I prefer to open the window and see for myself. And the view from the window is telling me that there is no quick and easy way out and that I should read the market better within the still dismal macroeconomic context, not while blinded by short-lived stock market rallies.