Harry S. Dent | Thursday, November 14, 2013 >>
In late 2011, the head of the European Central Bank (ECB), President Mario Draghi, single-handedly drove a two-day surge in stock markets around the world with his simple statement: “The ECB will do everything possible to preserve the euro and, believe me, it will be enough.”
Markets were sliding on lower growth forecasts and rising short-term interest rates in southern Europe when Draghi’s statement changed the game.
But this is not a new tale. This story has in fact repeated itself over and over again since late 2008…
The plot line goes like this: The economy slows due to falling demographic trends, excessive debt burdens, and debt deleveraging.
Governments step in with increasingly aggressive monetary and fiscal stimulus.
The stimulus works for up to a year, after which it wears off, and the economy slumps again.
Then governments stimulate again, upping the ante.
With each reiteration of the story, someone throws a different dress on the 800-pound gorilla, changes its wig and bling, and adds more lipstick before pushing it back out in front of the people like it’s the next best thing since sliced bread.
But none of them bother to ask the question: How long can this go on?
That’s why I’ve been asking it… over and over again.
And my answer is always this: Given slowing demographic trends and ever higher debt burdens, governments will have to continue upping stimulus programs for another 10 years!
And that is simply not sustainable.
We’re talking about the government growing its debt to $30 trillion by 2023… a Fed balance sheet of $15 trillion versus $4 trillion today.
The thing is that stimulus is Americans’ drug of choice, and like any drug, the more you use, the less effective it is.
Here’s the proof…
As you can see in this chart, since around 1966 each additional stimulus plan has had less and less effect on our economy. (The red line is the gain in GDP per dollar of debt added and the grey line is total debt.)
Clearly we’ve already reached the near zero point of diminishing returns.
Governments can’t do this forever. There is a point where stimulus just won’t work at all and the economy will die from the side effects and withdrawal, just like any other drug abuser.
Economies and markets have been addicted to quantitative easing since 2008. After first setting short-term rates as close to zero as possible, central banks began injecting new money into the banking system to stop it imploding… bolstering their reserves to cover losses and reserve-ratio deficits. Then they invested the rest of the money, often at high leverage, to replace the profits from past lending. In effect, our financial institutions have become gambling casinos.
The government, and the major banks, like Goldman Sachs, advising it, are simply trying to avoid the consequences of past excesses.
And endless stimulus has kept the bubble from bursting.
But heed my warning: The system will continue to get more stretched as we add more debt and capacity until some major event triggers an out-of-control meltdown.
That’s what happened with the U.S. subprime crisis in late 2008. Now I see something like that happening again in the first half of 2014.
The trigger may be a bank run in Spain or the final exit of Greece or Portugal from the euro.
Or we could see the China real-estate bubble start to burst, torpedoing its most affluent consumers.
Or the U.S. real-estate rebound ends with the combination of rising mortgage rates and speculators backing off.
Regardless of the trigger, things are going to get nasty in 2014.
Start preparing now.
P.S. An easy way to start preparing is to be sure to hear the presentation I’ll be giving at the St Kitts Liberty Forum on December 6th at 9:20 a.m. Afterward, I’ll debate with Peter Schiff – it’s being hailed as the world’s most important debate – and finally there will be a debate follow up panel that includes guys like Doug Casey, Paul Rosenburg and Karim Rahemtulla. For details on how to hear all this, click here.
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