“The Ongoing Depression,” Introduction
by Brian Maher
"The Fed’s remedies are likely to lead straight to the kind of depression the Fed set out to avoid in the first place." So warned Jim Rickards in his 2011 runaway best-seller, "Currency Wars." In fact, Jim argued the “new Depression” had already begun. The official commentariat ridiculed Jim at the time. After all, the economy had just recovered from a technical recession in 2009. And it was in technical expansion by 2011, courtesy of the Fed’s heroic fling at the printing press.
But Jim maintained mainstream analysts failed to understand the meaning of "depression." They changed the goalposts in the 1960s. Under the new rules, depressions were bugaboos of the past. Monetary "fine-tuning" and other modern refinements carried the day
But was Jim right all along? Is the American economy locked in a depression... with no end in sight? And is the U.S. now like Japan - down with a chronic wasting disease? These are the questions we ponder this delightful spring afternoon...
John Maynard Keynes defined depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either toward recovery or toward complete collapse.” Not year upon year of negative GDP. Or mass unemployment. Or soup lines or dust bowls... But a “chronic condition of subnormal activity for a considerable period without any marked tendency either toward recovery or toward complete collapse.” *
The historic long-term growth trend for U.S. GDP - 1947–2017 - is just over 3%. Last year U.S. GDP grew less than 3%... for the 11th straight year. “That is the meaning of depression exactly as Keynes defined it,” says Jim. “It is not negative growth,” Jim clarifies. “But it is below-trend growth.” It’s also a record case of the blues...
Each year since 1930, the Bureau of Economic Analysis has calculated the change in inflation-adjusted (real) GDP. For 86 years going, these United States have only one 11-year stretch - 2006–2016 - when annual GDP failed to grow 3%. The second-longest stretch? Four years… 1930–1933. The locust years of the Great Depression.
With the displeasure of repeating ourself… The U.S. economy is currently on year 11 of sub-3% growth. And gunning hard for number 12. First quarter GDP came out today. Numbers show the U.S. economy grew just 0.07% in the first quarter - the slowest rate in three years. The remaining three quarters will have to come in Bunyanesque for GDP to crack 3% on the year. And so the record 11th year under 3% will likely become the 12th record year under 3%.
How did we come to this pass? The Federal Reserve has taken its balance sheet from about $800 billion to $4.5 trillion since 2008. The stock market trades at record highs. So, why has the U.S. economy been so down in the mouth these 11 years? “Growth is the key,” argues Jim Rickards. And the money quote: “The problem is we can’t do it by printing money.” “The current economic slump is not cyclical,” Jim continues. “It’s structural. This is a new depression that will last indefinitely until structural changes are made to the economy.” Structural changes? Overhauling the tax code... gutting useless regulation... reforming entitlements… bringing the Keystone pipeline online. For starters.
Jim says Japan’s been in a depression for 25 years because it hasn’t made the required structural changes to its economy. And he laments, “The U.S. is now like Japan.” Here we have a portrait not so much of collapse but of grayish twilight... of a long, drizzle-flogged November... of a cold that never ends.
After 11 years of subtrend growth going on 12, can Trump jump-start the American growth machine?Based on his first 100 days and the forces aligned against him we can only say we’re unconvinced. “It’s never paid to bet against America,” counters Warren Buffett in cheery Midwestern optimism. “It’s not always a smooth ride,” he says, but “we come through things.” We sure hope he’s right. And he is called the “Sage” of Omaha for a reason… right? Right?
Below, Jim Rickards delves into the “ongoing depression” and how America can claw its way back. Read on."
"The Ongoing Depression"
By Jim Rickards
"The United States is living through a new depression that began in 2007. It’s part of a larger global depression, the first since the 1930s. This New Depression will continue indefinitely unless policy changes are made in the years ahead. The present path and future course of this depression have profound implications for you as an investor. If you don’t grasp this once-in-a-lifetime dynamic you are at risk of seeing all of your wealth wiped out.
Calling the current economic malaise a depression comes as surprise to most investors I speak to. They have been told that the economy is in a recovery that started 2009. Mainstream economists and TV talking heads never refer to a depression. Economists don’t like the word depression because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist. This view is one of the many failings of modern economics. But no one under the age of 90 has ever experienced a depression until now. Most investors like you have no working knowledge of what a depression is or how it affects asset values. And economists and policymakers are engaged in a conspiracy of silence on the subject. It’s no wonder investors are confused.
You might not feel like you’re living in a depression. Where are the soup lines, after all? Where’s the 20% unemployment most people associate with a depression? If those are your your criteria for a depression, then I agree, we’re not in a depression. But the starting place for understanding depression is to get the definition right.
You may think of depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment. Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline. But that is not the definition of depression.
The best definition ever offered came from John Maynard Keynes in his 1936 classic, "The General Theory of Employment, Interest and Money." Keynes said a depression is, “a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”
Keynes did not refer to declining GDP; he talked about “subnormal” activity. In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt. That is exactly what the U.S. is experiencing today.
The long-term growth trend for U.S. GDP is about 3%. Higher growth is possible for short periods of time. It could be caused by new technology that improves worker productivity. Or, it could be due to new entrants into the workforce. From 1994 to 2000, the heart of the Clinton boom, growth in the U.S. economy averaged over 4% per year.
For a three-year stretch from 1983 to 1985 during the heart of the Reagan boom, growth in the U.S. economy averaged over 5.5% per year. These two periods were unusually strong, but they show what the U.S. economy can do with the right policies. By contrast, growth in the U.S. from 2007 through 2017 has averaged about 2% per year. Growth in the first quarter of 2017 was worse.
That is the meaning of depression. It is not negative growth, but it is below-trend growth. The past seven-years of 1% growth when the historical growth is 3% is a depression exactly as Keynes defined it. Talk of a new depression seems confusing at best and disconcerting at worst. But we are not seeing the type of growth that will sustain an economic recovery.
Other observers point to declining unemployment and rising stock prices as evidence that we are not in a depression. They miss the fact that unemployment can fall and stocks can go up during a depression. The Great Depression lasted from 1929 to 1940. It consisted of two technical recessions from 1929–1932 and again from 1937–1938.
The periods 1933–1936 and 1939–1940 were technically economic expansions. Unemployment fell and stock prices rose. But the depression continued because the U.S. did not return to its potential growth rate until 1941. Stock and real estate prices did not fully recover their 1929 highs until 1954, a quarter century after the depression started.
Growth today isn’t strong because the problem in the economy is not monetary, it is structural. The point is that GDP growth; rising stock prices and falling unemployment can all occur during depressions, as they do today. What makes it a depression is ongoing below trend growth that never gets back to its potential. That is exactly what the U.S. economy is experiencing. The New Depression is here.
Investors are also confused about depression dynamics because they are continually told the U.S. is in a “recovery.” Year after year forecasters at the Federal Reserve, the International Monetary Fund and on Wall Street crank out forecasts of robust growth. And year after year they are disappointed. The recovery never seems to get traction. First there are some signs of growth, then the economy quickly slips back into low-growth or no-growth mode.
The reason is simple. Typically, a recovery is driven by the Federal Reserve expanding credit and rising wages. When inflation gets too high or labor markets get too tight, the Fed raises rates. That results in tightening credit and increasing unemployment. This normal expansion-contraction dynamic has happened repeatedly since World War II.
It’s usually engineered by the Federal Reserve in order to avoid inflation during expansions and alleviate unemployment during contractions. The result is a predictable wave of expansion and contraction driven by monetary conditions. Investors and the Fed have been expecting another strong expansion since 2009, but it’s barely materialized.
Growth today isn’t strong because the problem in the economy is not monetary, it is structural. That’s the real difference between a recession and a depression. Recessions are cyclical and monetary in nature. Depressions are persistent and structural in nature. Structural problems cannot be solved with cyclical solutions. This is why the Fed has not ended the depression. The Fed has no power to make structural changes.
What do I mean by structural changes? Shifts in fiscal and regulatory policies. The list is long but would include things like lower taxes, repeal of Obamacare, approval of the Keystone Pipeline, expanded oil and gas production, fewer government regulations and an improved business climate in areas such as labor laws, litigation reform and the environment.
Power to make structural changes lies with the Congress and the White House. Those two branches of government are barely on speaking terms, and especially so under Trump. Until structural changes are made by law, this new depression will continue and the Fed is powerless to change that.”
* Freely download "The General Theory of Employment, Interest, and Money"
by John Maynard Keynes, here: