Tuesday, October 13, 2015

The Eye Of The Hurricane.....

The Eye Of The Hurricane

In the early 2000's, there were those economists and investors who believed that the U.S. was headed for an economic fall - that the repeal of the Glass-Steagall Act in 1999 would allow the financial institutions to enter into widespread reckless loan practices that would lead to a housing crash. And that that crash would lead to a stock market crash that would herald in The Great Unravelling - The Greater Depression.

Most who made these predictions hypothesized that the initial collapse would be significant, but not severe - that the governments of the world would come to the rescue with bailout programs that would stave off the symptoms of the problem, but would do nothing to cure the disease itself - that of massive debt.

suggested that there would be a false recovery, resulting in the easing of symptoms. There would be repeated claims by both governments and the media that "recovery is nigh." However, underneath all the folderol, the disease would worsen considerably, eventually reaching the point at which the patient (the economy) could not be saved. At some point, public confidence in the leaders' abilities to resuscitate the body would fade. This would be triggered by some event or events, such as a crash in the stock or bond market, a dumping of debt back into the U.S. by creditor nations, debt default by Greece or some other nation, commodity price spikes, backlash from sanctioned nations, the imposition of protective tariffs - any one of a dozen possible triggers would do the trick. From that point on, each of the other triggers would eventually occur, as toppling dominoes, fulfilling the prediction of Depression.

Only in this latter period would the dreaded "D-word" be acknowledged by the governments and media.

Most prognosticators went on the general assumption that the initial collapse would last two to three years and that the following "suspension" period of bailouts and other attempts to paper over the problem might last another three years or so. During this period, conditions would not be good, but they would be better than the conditions during the initial crash and far better than the conditions that would follow the suspension period. Not surprisingly, many came to refer to this period as "the eye of the hurricane," an apt term, as the eye of a hurricane is a period of relative calm after the first onslaught of the storm and just prior to the inevitable and often more devastating second half.

The second half of the economic storm will prove to be far more devastating than the first,since the fact that its onset will mean that the governments of the world have already thrown everything they have at the problem and will be out of ammunition in the second half.

In a sense, we could suggest that governments have done a good job in staving off the inevitable, since the eye of the hurricane has lasted more than five years (longer than most expected). 
Unfortunately, the level of debt created in the attempt to postpone the inevitable assured that every month of postponement meant that the eventual crash would be that much worse, and that the recovery would be that much more prolonged.

But, if the assumption is correct that there will be a second, more devastating, half of the storm, when will it be? Well, an actual date would be impossible to predict with accuracy, but we can look at the possible triggers and ask ourselves if we're getting closer. Recently, we've observed a very 
near miss on debt default by Greece. We've witnessed a crash in the Chinese stock market, coupled with several downgradings of the yuan, causing a significant drop in the U.S. stock market. Further, although it hasn't received the media attention it should receive, China has been dumping U.S. Treasuries back into the U.S. in a significant way. One prominent candidate in the U.S. presidential elections is calling for the imposition of protective tariffs and has received cheers from voters for his "courageous" position. (The reader might study the Smoot-Hawley Tariff Act of 1930 if he is uncertain of just how disastrous protective tariffs can prove to be.)

Readers should already be aware of what may be heading their way, economically, politically, and socially, as we once again enter the hurricane. 

It's really beginning to 'feel' close. The first major event could happen anytime now.

The magicians who run the world's governments may yet come up with another delay or two. The question for the reader is whether he wishes to put off dealing with the coming hurricane until it's on his doorstep or whether he'd rather be prepared when the time comes. 

The coming storm promises to be the largest of our lifetime. We shall all be affected by it. 

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