Brian Beaulieu has served as CEO and Chief Economist of ITR Economics™ since 1987, where he researches the use of business cycle analysis and economic forecasting as tools for improving profitability.
- The projected period of the depression is not six consecutive years of data trend decline. We are forecasting that the duration will be comprised of three consecutive cycles where the subsequent data trend low is below the prior low. The interim periods of rise will not be sufficient to sustain the economy’s efforts at a recovery.
- We are assuming that the US government will not be able to engage in “monetary expansion” and increasing deficit spending to the extent necessary to counter the decline. Underlying this assumption is that some of the factors contributing to the decline are circumstances that are unusual and related to this point in history. We think this will make the situation especially difficult for the US government to contend with.
- Global demographics are something the world has not encountered before and will eventually lead to global deflation. Once that occurs, aggressive efforts to reinvigorate the economy become more politically and economically palatable, contributing to the end of the depression.
A normal response to our 2030s outlook is that the government comes riding in like a knight in shining armor and engages in either massive deficit spending (which is more popular than ever if you look at the extent of government spending to “solve” our problems), or the government will revert to austerity by cutting spending and raising taxes. It is important to understand that austerity is economically painful in the short-to-intermediate term, albeit virtuous in the long term. We will focus on the politically easier path: deficit spending and loose monetary policies.
Deficit spending and “monetary expansion” to the rescue: This is the tried-and-true solution based on the last 50 years, with the amounts involved becoming increasingly staggering. While we cannot know for sure, our thinking on why this is not a viable “solution set” in the 2030s includes:
- Inflation will continue after the depression starts, meaning the cost of money continues to rise for years following the onset of the depression. That means years of interest payments consuming more and more of the nondiscretionary federal budget at a time when the aging population is demanding more and more in the form of transfer payments (social security and health care to name but two sources of demand). Will the authorities really make inflation worse in an attempt to cure a decline in the economy? History suggests they likely will not.
- The point of view of a “knight in shining armor” assumes the world is willing to lend us that increasing amount of money. If there is another inverse yield curve heading into the 2030s, we will find that incremental debt to be appreciably more expensive than today, and it will be short-term debt, which must be rolled over in 90 days to 2 years. This becomes an unvirtuous cost cycle.
- Imagine that financial scenario against an increasingly belligerent China or China/Russia pact while the US becomes more isolationist in its policies. The defense spending implications are staggering vis-à-vis domestic spending alternatives.
- Nationalism is replacing globalization. Inevitably, that worldwide trend means we have less of a stake in each other’s economies and it is increasingly “every country for itself,” including as it pertains to liquidity, capital flows (governments can restrict those), trade barriers, and/or (worst-case scenario) the US government no longer can convince the world of its “full faith and credit” pledge (which is arguably the least-likely scenario as other countries weaken considerably more than the US).
A shift in priorities and some measure of fiscal responsibility on the part of Congress and the White House is a political and economic environment we have not experienced on a sustained basis for over 50 years, the last time being a brief period under President Clinton when he cut the welfare state.
- Fifty years is a long time, and the Clinton cuts were quickly unwound by the second President Bush. It is difficult for us to foresee a period of statesmanship necessary to pull this off, at least not in the first four years or so of the downturn, since Democrats and Republicans have used deficit spending in the name of the greater good. The current political rancor does not bode well for centrist thinking or compromise.
- Assuming spending is cut to balance the budget … that only stops the hemorrhaging when it comes to the costs associated with the national debt. The other driving factors pointed out in Prosperity in the Age of Decline and selected ITR Economics presentations do not go away under austerity.
- Real spending reduction to bring about a reduction in our national debt will require a reprioritization of transfer payments and/or increasing taxes on the wealthy, because the middle class cannot take a tax increase in a recession/depression (history shows that it is a myth that decreasing taxes leads to general and equitable prosperity).
- True austerity is a viable long-term path forward, but it will drag out the downturn so that the eventual, subsequent rising trend can be more enduring. The pain must be had. It is a question of which generation will pay the tab.
ITR Economics readily admits that stranger things than a shorter depression have happened, but given modern constraints in a democracy, we cannot envision the mechanism to pull off the radically unexpected. But we have heard “this time it is different” too many times to believe that the body politic and the voters will change that rapidly within 10 years to avert a prolonged downturn. The duration is what makes the 2030s a depression and not a severe recession.
The humanitarians within us at ITR Economics hope it is a shorter downturn. The pragmatic economists in us make us reluctant to think it will be that “easy.” The economic excesses and imbalances must be rebalanced.