There Will Be No 25-Year Depression

Today, we have bad news and good news. The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes. The bad news: It will be much worse than that.

Brooklyn Daily Eagle Front Page

“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

Newspaper from October 24 1929, a.k.a. “Black Thursday” – at this point, the panic had just begun with the market losing 11% in one day. On the next two trading days (Friday and Saturday – at the time, the market was open on Saturdays) the market rebounded slightly, then came “Black Monday” and “Black Tuesday”, which erased all doubt about the seriousness of the situation.

Old People Are Dead Wood

First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US. As we’ve described many times, as people get older, they change. They stop producing and begin consuming.

They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.

Nor are they the green and growing timber of a healthy economy; instead, they become dead wood. There’s nothing wrong with growing old.

There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.



Mr. Hislop is looking forward to booming business

Photo credit: State Library of Queensland

The Cure for Debt? More Debt!

Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.

By 2007, US consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.

The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.

Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending.

Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.


Fed assets

In order to revive the credit creation machinery, the Fed has monetized incredible amounts of debt, via Saint Louis Federal Reserve Research. With the end of QE 3, its balance sheet has begun to subtly decline … click to enlarge.

The Cronies Are in Control

Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.



How to get ahead in the world of today….

Cartoon by Stahler


Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.

Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.

Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.



                              How it all works in crony heaven – until it doesn’t anymore – via

The Solution Begins When Markets Crack

Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.

Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:


“When does our credit-based financial system sputter/break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.”


When that happens, problems begin to take care of themselves, in one of two ways…

A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.

Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade. Either way, the slate is wiped clean and a new cycle can begin. But what rag will clean the slate now? Stay tuned…



You knew there would eventually be a picture of the living dead.

Via, author unknown


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Showing 7 reactions

commented 2015-05-08 14:03:34 -0400 · Flag
A.A. commented

Chris, your analysis is superb and pungent in allegory. I only hope that those that Thomas so wisely calls “our self-anointed Masters” will live long enough to see the cataclysm and be hung by their toes in public squares as the plebes throw stones into their faces and kill them slowly.
commented 2015-05-08 13:58:32 -0400 · Flag
Thomas S. commented


appreciate the Truth Treatise that you offered below, it is insightful, accurate, and based on Empirical Reality vs. the self-serving ‘elite mediocrity’ served up by our self-anointed Masters, take your pick: Summers, Krugman, little Timmy, Jaimie, Warren, Lloyd, Ben, Mr. Yellen, or the Italian clown Draghi, they all habit a world of ZERO accountability, mundane Mediocrity & capability, and most importantly a completely ahistorical, emotionally stunted world devoid of Reality: READ: REALITY is Whatever I Say It Is !!
commented 2015-05-08 13:56:39 -0400 · Flag
Ben S. commented

If you are right about liquidity, they are sealing their own fate. Let’s hope so.
commented 2015-05-08 13:55:51 -0400 · Flag
Chris R. commented

Ben — you’re correct up until your conclusion. The industry’s blanket complicity has sealed its dismal fate. THERE IS NO LIQUIDITY IN THIS MARKET, just hft firms spamming infinite orders with little intention of making markets, and central banks fully monetizing national debts and levitating financial indices (with no real economic support).

But if you look at market structure. There’s no breadth, no actual liquidity… The rank-and-file investor left this kabuki casino in ~2008, and never came back.

The ‘market’ is now a herd of 900lb. central bank and hft rhinos engaged in the same one-way moral hazard trades, they’re squeezed into a room in which ‘the exit’ is a shoe box hole in the wall. NOTHING (apple, exxon, microsoft, the banks…) I MEAN NOTHING will be ‘liquid enough’ to allow these supposed traders blessed with canine auditory nerves, to exit the market fast enough. When the fiat currency confidence game is up (and that’s all these ‘markets’ are) most assets will experience precedent-setting downdrafts. When every algo is tripping stops and selling into negative momentum, and john q.public isn’t there to serve as the assclown to accept the steaming bag of dung (ie. ‘buy the dip’), who’s going to buy?

Capital controls anyone? Cyprus was the dry-run.
commented 2015-05-08 13:54:17 -0400 · Flag
Ben S. commented

Does not seem to me that investors/money managers have a choice. They either invest by fronting the Fed or they lose money and their jobs. Isn’t it just that simple? The smart ones will have stops et all to get out before the thing crashes.
commented 2015-05-08 13:53:32 -0400 · Flag
Chris R. commented

This is a monetary world so deformed, that I suffer cognitive dissidence.

The biggest buyers of assets today? CENTRAL BANKS (?!?! WTF) and companies buying back their own equity via ‘free money’ central bank incontinence.

Aren’t central banks supposed to (a) safeguard against the paralysis of short-term money markets and (b) act as a short-term liquidity backstop by accepting ONLYAAA’ collateral in exchange for credit offered at punitive discount rates… AND NOTHING MORE?

The wholesale perversion of capitalism into crony coat-tail trading is complete. Everyday I speak with institutional investors who KNOW this is an absurd and arithmetic-repealing ‘markette’ that will be found incapable of repealing the laws of math — with world-historically ruinous consequences — but they contort their (il)logic in meandering ways to ‘explain’ how they ‘trade’ this market ‘for performance’. They are ALL just front-running QE word clouds.

It’s all a load of puerile, infantile horseshit… Not a one of them has the candor to just admit to me ‘career risk’ as the reason they ‘trade’ this grade-d hologram of market (ie. they’d rather be wrong and in the company of a pack of capital-destroying mediocrities, than be seen as the one-eyed man in a room of blind men).

No other reason. Cowardice. Compliance. The career risk of principles and discipline.
commented 2015-05-08 13:50:29 -0400 · Flag
Thomas S. commented

Our Entire World is a Farce, Central Banks were meant to be Regulators, who keep the highways Open andcleared of road hazards, the fact that these Apparchiks now figure regularly in Equity Markets really underscores how Incredibly CORRUPT and OUT OF CONTROL the entire clap trap is !!

Note to Central Banks: Your stated role is to facilitate the smooth functioning
of Sovereign debt, provide liquidity where necessary, exercise Supervision & Regulation
over the Money Changing Operators that you oversee, and stay the hell out of the
capital markets.