Inflation is still lacking despite the desperate policy attempt to “achieve 2%”. But the bottlenecks and real capital destruction this crisis has created, together with infinite spending and grants to make everyone whole will see inflation returning again with a vengeance, sometime in the next two years. Unemployment is hitting 20% or worse in the US, and it will eventually fall, but 100-million plus American families have been impacted for this “inconvenience” here and now, and the UBI-type programs will act a bit like old trade unions did by requiring companies to bid up labor costs to get people to work any job. In short, welcome back to the 1970s.
What however concerns me more than the resonance with the setup in the 1970’s is that other aspects of our current situation remind me of the Post World War One time-frame. This was the last time we saw truly massive sovereign debt failures. This time around, Ecuador has already declared bankruptcy, African nations have received an eight month moratorium and Argentina has declared its own moratorium and told creditors to get lost. In the Middle East Oman and Bahrain are effectively shut out of the bond market and are seeing their CDS prices (default insurance) rise and rise.
To understand the true impact of debt and potentially failed debt, read this article on how the UK only a few years ago repaid the last debt from that era, with Germany doing so in 2010 and the US still “making everyone whole” (Though I am sure Fed is ready to print some more money to help out.)
On December 18th of 2019, our team at Global Gold shared their thoughts on the most probable outlook for the global economy and titled that post “STUCKFLATION – the New Normal”. The article was written with the mindset of warning our clients and readers of the pitfalls, as well as the opportunities, to expect in 2020. While we did not expect the economic speed at which the damage was done by the pandemic, there was enough reason to consider the potential of a very sluggish economy in the least, combined with the growing danger of inflation in the years ahead. At this point, that scenario appears almost certain!
Now, for the fact checkers: you will hardly find the term “stuckflation” in Wikipedia, and certainly you will not find it in your dusty econ 101 textbook. We came across the term in a comic (see below), which we found amusing and, unfortunately, also quite applicable to the period we expect to witness ahead.
The bad news: this time is not just different, it’s much worse!
The IMF just released its April 2020 World Economic Outlook and it’s not pretty. They describe this crisis as the worst since the Great Depression.
For the Advanced Economies, the IMF’s projections for economic growth in 2020 are –6.1%. According to the IMF, the economic contraction will be much worse than in 2008: “The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity. As a result of the pandemic, the global economy is projected to contract sharply by – 3.0% in 2020, much worse than during the 2008–09 financial crisis.”
On the brighter side, the IMF also expects a sharp rebound in 2021 – the much-discussed “V-shape” recovery. They project growth in Advanced Economies for 2021 at 4.5%. Globally, they project 5.8%. Now, anyone familiar with these projections knows that, so far, over the past 20 years or so, they’ve always proven to be too optimistic, often by a considerable margin. I expect this time to be no different. To be fair, however, they do discuss the “severe risks of a worse outcome” in their report.
Source: IMF, World Economic Outlook, April 2020
Here’s what we wrote back in December: “The New Normal: STUCKFLATION. No, this is not a spelling error and we’re not referring to “stagflation”. The new kid on the block, causing a stir among traders and economists, is “Stuckflation”. It describes the current monetary policy stalemate, where central bankers continue to flood the market with liquidity, STUCK in a mode of ultra-loose monetary policy, well aware of the ultimate risk of INFLATION, which itself also appears to be STUCK in its lows despite all the money printing and the lower-than-low interest rates.”
Monetary and Fiscal Stimulus, 2009 – 2010 vs. 2020
Source: Brookings, IMF and BCA Calculations
Inflate or Die! That has been the motto of central bankers for some time now. And, if our warning was true in December, you can be assured it is even more true today.
As of now, we are only halfway through the COVID-19 crisis and the (arguably) radical lockdown policies that came with it. Yet, the aggregate amount of fiscal and monetary stimulus (see chart above), and the accompanying debt, has already surpassed the aggregates pumped into the global economy during the last crisis of 2008 and 2010 in their entirety. It is equally noteworthy that running into this latest crisis, the levels of debt were already much higher than they had been prior to the 2008 crisis.
According to IMF statistics, the global debt to GDP ratio stood at precisely 200% at the end of 2007. At the end of 2019, the same ratio stood at 287%. Moreover, the global debt had more than doubled, from US$ 116 trillion in 2007 to US$ 244 trillion in 2019!!!
If you think this debt does not matter, you need to think again. We are reaching record highs in public and private debt levels at a moment when interest rates are at historic lows, suppressed to that level by increasingly drastic artificial measures. They will start to rise. That change of direction can be sudden and sharp. When that happens, we will have an insolvency and foreclosure horror show on our hands.
“When the government is called upon to protect you on the downside, they have every right to regulate you on the upside,” Cooperman said. “So capitalism is changed.”