via John Mauldin
I recently wrote about a looming credit crisis that’s stemming from high-yield junk bonds. The crisis itself will have massive consequences for investors. But that’s not the worst part.
The crisis will create a domino effect and trigger global financial contagion, which I usually refer to as “The Great Reset.”
The collapse of high-yield bonds will hit stocks and bonds. Rising defaults will force banks to reduce their lending exposure, drying up capital for previously creditworthy businesses.
This will put pressure on earnings and reduce economic activity. A recession will follow.
This will not be just a U.S. headache, either. It will surely spill over into Europe (and may even start there) and then into the rest of the world. The U.S. and/or European recession will become a global recession, as happened in 2008.
Europe has its own set of economic woes and multiple potential triggers. It is quite possible Europe will be in recession before the ECB finishes this tightening cycle.
As always, a U.S. recession will spark higher federal spending and reduce tax revenue. So I expect the on-budget deficit to quickly reach $2 trillion or more. Within four years of the recession’s onset, total government debt will be at least $30 trillion.
This will further constrain the private capital markets and likely raise tax burdens for everyone—not just the rich.
Meanwhile, job automation will intensify, with businesses desperate to cut costs. The effect we already see on labor markets will double or triple. Worse, it will start reaching deep into the service sector. The technology is improving fast.
The working-class population will not like this and it has the power to vote. “Safety net” programs and unemployment benefit expenditures will skyrocket.
Studies show that the ratio of workers covered by unemployment insurance is at its lowest level in 45 years. What happens when millions of freelancers lose their incomes?
The likely outcome is a populist backlash that installs a Democratic Congress and president. They will then raise taxes on the “rich” and roll back some of the corporate tax cuts and increase regulatory burdens.
At a minimum, this will create a slowdown but more likely a second recession. Recall (if you’re old enough) the back-to-back recessions of 1980 and 1982. That was an ugly time for those of us who lived through it.
Of course, that presumes a recession before the 2020 election. It may not happen—I put the odds at about 60%–70%.
The Great Reset
Unemployment may approach the high teens by the end of the decade and GDP growth will be minimal at best.
What do you call that condition? Certainly not business as usual.
Long before that happens, the Federal Reserve will have engaged in massive quantitative easing.
As this recession unfolds, we will see the Fed and other developed world central banks abandon their plans to reverse QE programs. I think the Federal Reserve’s balance sheet assets could approach $20 trillion later in the next decade.
Not a typo—I really mean $20 trillion, roughly five times as much as what we had after 2008.
The world simply has too much debt, much of it (perhaps most) unpayable. At some point, the major central banks of the world and their governments will do the unthinkable and agree to “reset” the debt.
It doesn’t matter how, they just will. They’ll make the debt disappear via something like an Old Testament Jubilee.
I know that’s stunning, but it’s really the only possible solution to the global debt problem. Pundits and economists will insist “it can’t be done” right up to the moment it happens—probably planned in secret and announced suddenly.
Jaws will drop, and net lenders will lose.
While all that is brewing, technology will keep killing jobs. As we get into the 2020s, the presidency and Congress will again be whipsawed, and we will begin to discuss Bernie Sanders’ “crazy” universal basic employment idea, or others like it.
By then, the idea will not be considered crazy, but the only feasible choice. Even conservative politicians can see the light when they feel the heat.
All of this is going to lead to the most tumultuous decade in U.S. history, even if we somehow (hopefully) avoid throwing a war into the mix, as is typical of a Fourth Turning.
Typically, the end of a Fourth Turning (which started in 2007, according to Neil Howe), has been accompanied by wars. This one could, too, though I think we will more likely see multiple low-grade skirmishes.
If we somehow get through all that, and particularly the Great Reset, the 2030s should be pretty good. In fact, think incredible boom and future. No one in 2039 will want to go back to the good old days of 2019. Our kids will think it was the Stone Age. But we have to get there first.