By John Mauldin
I’m slowly losing confidence in the economy.
I still think the economy is okay for now. But I also see recession odds rising considerably in 2020. Maybe it will get pushed back another year or two, but at some point, this growth phase will end.
It will be either recession or an extended flat period (even flatter than the last decade, which says a lot). On top of that, we are headed toward a global credit crisis I’ve dubbed The Great Reset.
Let me give you the CliffsNotes version of how I think the next decade will play out.
6 trillion $10 Trillion Federal Reserve Balance Sheet
We already see the major developed economies beginning to slow and likely to enter a global recession by the end of the year.
That will drag the US into a recession soon after unless the Fed quickly loosens policy to prolong the current growth cycle.
Other central banks will respond with lower rates and ever-larger rounds of quantitative easing.
If that sounds crazy to you, think about it…
Before 2008, no one expected zero rates in the US, negative rates for $11 trillion worth of government bonds globally, negative rates out of the ECB and the Swiss National Bank, etc.
Things like TARP, QE, and ZIRP were nowhere on the radar just months before they happened. Numerous times, markets closed on Friday only to open in a whole new world on Monday.
In the next crisis, central banks and governments will again resort to unprecedented balance sheet expansions. And it will have less effect than they want.
Those reserves will simply pile up on the balance sheets of commercial banks, which will put them right back into reserves at their respective central banks.
I will admit the Fed’s $4 trillion balance sheet expansion surprised me at the time. Fool me once, shame on you. We’ve now seen the new playbook.
At a minimum, they will keep the balance sheet at its present, barely-diminished size and eventually add a lot more when we go into recession.
I think $10 trillion is almost a sure thing by the mid-2020s for a couple of reasons.
The US government debt will be north of $30 trillion. On top of that, in the next five years, the credit markets have to fund $5 trillion of corporate debt rollovers, plus new debt, plus state and local debt.
It won’t be coming from outside the US and there is only so much that banks and big pension funds and individuals can do.
Unless the Federal Reserve steps in, interest rates will soar and the crisis will become much worse. It will have little choice but to step in and buy US government debt.
The Second Recession Will Bring Unprecedented Policies
In the 2020s, we’ll see a new government at some point that raises taxes enough to actually send a still-weak economy into another recession. That’s pure speculation on my part but is what I foresee.
What assets will the Fed buy? Under current law, that’s pretty predictable: Treasury securities and a few other government-backed issues like certain mortgage bonds.
That’s all the law allows. But laws can change and I think there is a real chance they will—regardless of which party holds the White House and Congress.
In a crisis, people act in previously unthinkable ways. Think 2008–2009. When there is a true crisis, politicians will be looking for action, and “do nothing” will not be an option.
Maybe it should be, but that is a metaphysical argument for another day. They will do something. Quantitative easing is now on the table and I think will be almost a reflexive move during the next recession/crisis.
So, will we have Japan-like flat markets and low growth for years on end? Will we create a demographic crisis by limiting immigration?
Public pensions and insurers are already struggling to meet obligations after years of low rates. Those betting on 7% returns (and many are) won’t make anything close to that.
This will make government debt and state/local pension fund obligations a massive problem that the Federal Reserve and the US government right now are not politically or legally capable of handling.
Will we change the rules in the future? Tell me who’s going to be in charge during that crisis… and then let’s ask the question.
But will it play out over a longer period of time than we might think now? Almost surely. Yet the world will not end and, for those paying attention, it will be a better world.
The Great Reset: The Collapse of the Biggest Bubble in History
New York Times best seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could be triggered in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.