{"id":745,"date":"2020-04-16T12:09:33","date_gmt":"2020-04-16T12:09:33","guid":{"rendered":"https:\/\/www.pbmv.com\/blog\/?p=745"},"modified":"2020-04-16T17:45:06","modified_gmt":"2020-04-16T17:45:06","slug":"worst-recession-in-150-years","status":"publish","type":"post","link":"https:\/\/www.pbmv.com\/blog\/?p=745","title":{"rendered":"Worst Recession in 150 Years"},"content":{"rendered":"

By James Rickards, The Daily Reckoning<\/a><\/p>\n

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The stock market had another big day today, spurred by the Fed\u2019s massive recent liquidity injections.<\/p>\n

But you really shouldn\u2019t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.<\/p>\n

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let\u2019s unpack this\u2026<\/p>\n

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.<\/p>\n

The problem is not that they\u2019re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I\u2019ve met many of them and I can tell you they\u2019re not idiots.<\/p>\n

The problem is that they\u2019re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.<\/p>\n

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.<\/p>\n

Other ideas such as \u201ccomparative advantage\u201d have appeal in the faculty lounge but don\u2019t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.<\/p>\n

Not the Early 19th Century Anymore<\/b>
\nIt\u2019s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).<\/p>\n

If you let England produce sweaters and Italy make shoes, everybody was better off at the end of the day. It\u2019s a simple example, but you get the point.<\/p>\n

But in today\u2019s highly integrated and globalized world, where you can simply relocate a factory from one country to the next, comparative advantage has much less meaning. You can produce both sweaters and shoes in China as easily as you can produce them in England and Italy (and much more cheaply besides).<\/p>\n

There are many other examples of lazy, dogmatic analysis among mainstream economists, too many to list. Yet there are some exceptions to the rule.<\/p>\n

A few economists have developed theories that are supported by hard evidence and do a great job of explaining real-world behavior. One of those economists is Ken Rogoff of Harvard.<\/p>\n

The Worst Recession in 150 Years<\/b>
\nWith his collaborator, Carmen Reinhart and others, he has shown that debt-to-GDP ratios greater than 90% negate the Keynesian multiplier through behavioral response functions.<\/p>\n

At low debt ratios, a dollar borrowed and a dollar spent can produce $1.20 of GDP. But at high ratios, a dollar borrowed and a dollar spent will produce only $0.90 of GDP.<\/p>\n

This is the reality behind the phrase \u201cYou can\u2019t borrow your way out of a debt crisis.\u201d It\u2019s true.<\/p>\n

Meanwhile, the U.S. debt-to-GDP ratio was about 105% even before the crisis. It\u2019s only going higher. We\u2019re just digging a deeper hole for ourselves.<\/p>\n

So when Ken Rogoff talks (or writes), I listen. In his latest article, Rogoff offers a dire forecast for the recovery from the New Depression resulting from the COVID-19 pandemic.<\/p>\n

He writes, \u201cThe short-term collapse\u2026 now underway already seems likely to rival or exceed that of any recession in the last 150 years.\u201d<\/p>\n

That obviously includes the Great Depression and many other economic crises.<\/p>\n

This is something you should really consider before you decide the coast is clear and it\u2019s time to jump back into stocks.<\/p>\n

Complex Systems Collide<\/b>
\nZooming out a bit, and as I\u2019ve argued before, the pandemic is a prime example of complex systems colliding into one another\u2026<\/p>\n

Investors and everyday citizens are focused on how the COVID-19 pandemic (one complex dynamic system) is crashing into the economy (another complex dynamic system) and influencing the political process and the upcoming U.S. presidential election (still another complex dynamic system).<\/p>\n

Analyzing the operations of one complex dynamic system is difficult enough; most analysts can\u2019t do it because they\u2019re using the wrong paradigms.<\/p>\n

Analysis becomes far more challenging when multiple complex systems interact with each other and produce feedback loops. That\u2019s where the real so-called \u201cBlack Swans\u201d reside.<\/p>\n

And this crisis is the blackest swan most people alive today have ever seen, especially if Rogoff\u2019s insight is correct \u2014 150 years is a very long time.<\/p>\n

That\u2019s not to minimize in any way recent events like 9\/11 or the 2008 financial crisis. Both were devastating. But neither led to a virtual lockdown of the entire economy like we\u2019re seeing now. The current crisis simply has no precedent.<\/p>\n

What we\u2019re seeing is a full-fledged global contagion.<\/p>\n

Biological and Financial Contagions<\/b>
\nLet\u2019s discuss the word \u201ccontagion\u201d for a minute because it applies to both human populations and financial markets \u2014 and in more ways than you may expect.<\/p>\n

There\u2019s a reason why financial experts and risk managers use the word \u201ccontagion\u201d to describe a financial panic.<\/p>\n

Obviously, the word contagion refers to an epidemic or pandemic. In the public health field, a disease can be transmitted from human to human through coughing, shared needles, shared food or contact involving bodily fluids.<\/p>\n

An initial carrier of a disease (\u201cpatient zero\u201d) may have many contacts before the disease even appears.<\/p>\n

Some diseases have a latency period of weeks or longer, which means patient zero can infect hundreds before health professionals are even aware of the disease. Then those hundreds can infect thousands or even millions before they are identified as carriers.<\/p>\n

In extreme cases, such as the \u201cSpanish flu\u201d pandemic of 1918\u201320 involving the H1N1 influenza virus, the number infected can reach 500 million and the death toll can run over 100 million.<\/p>\n

A similar dynamic applies in financial panics.<\/p>\n

It can begin with one bank or broker going bankrupt as the result of a market collapse (a \u201cfinancial patient zero\u201d).<\/p>\n

But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008.<\/p>\n

Still, the comparison between medical pandemics and financial panics is more than a metaphor.<\/p>\n

Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the \u201cvirus\u201d is financial distress rather than a biological virus.<\/p>\n

But what happens when these two dynamic functions interact? What happens when a biological virus turns into a financial virus?<\/p>\n

We\u2019re seeing those effects now.<\/p>\n

Get Ready for Social Disorder<\/b>
\nYet even this three-system analysis I just described (pandemic > economy > politics) does not go far enough. The next phase has been little noticed and less discussed.<\/p>\n

It involves social disorder. An economic breakdown is more than just economic. It leads quickly to a social breakdown that involves looting, random violence, fraud and decadent behavior.<\/p>\n

The Roaring \u201920s in the U.S. (with Al Capone and Champagne baths) and Weimar Germany (with riots and cabaret) are good examples.<\/p>\n

Looting, burglary and violence in the midst of a state of emergency are the shape of things to come.<\/p>\n

The veneer of civilization is paper-thin and easily torn. Most people don\u2019t realize how fragile it is. But they\u2019re going to learn that lesson, I\u2019m afraid.<\/p>\n

Expect social disorder to get worse long before it gets better.<\/p>\n","protected":false},"excerpt":{"rendered":"

By James Rickards, The Daily Reckoning The stock market had another big day today, spurred by the Fed\u2019s massive recent liquidity injections. But you really shouldn\u2019t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-745","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/745","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=745"}],"version-history":[{"count":2,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/745\/revisions"}],"predecessor-version":[{"id":748,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/745\/revisions\/748"}],"wp:attachment":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=745"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=745"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=745"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}