Chief Economist Eugenio J. Alemán discusses current economic conditions.
We have received several e-mails regarding a report written by a consultancy explaining the “causes of the 2030s great depression.” Since the number of e-mails regarding the same topic has been atypical outside of concerns about the “imminent collapse of the US dollar,” which we have addressed many times over the last several years, we thought it was important that we address this issue.
First of all, this consultancy is trying to sell their services, and the headline is “eye catching.” However, it does not mean that they have any insight or ability to forecast anything better than anybody else. Of course, they are using the 2030s to relate people to the Depression of the 1930s, but this does not mean that there is any similarity between these two periods.
Second, recessions are recurrent events but do not have an occurrence pattern. So no, there is nothing that points to a depression in the 2030s just because there was a depression in the 1930s. Could the world end during the 2030s? Sure. Can anybody predict its occurrence? No.
Recessions are less common today than they were before the 1980s. Some argue that the reason is that we have become better at conducting fiscal and monetary policy to reduce the ebbs and flows of economic cycles. Recessions are a necessary adjustment mechanism when sectors of the economy get out of whack, and recessions bring those sectors back into equilibrium. It is true, recessions have serious economic, social, and psychological consequences on individuals, and governments typically try to do what they can to try to reduce those consequences. With this out of the way, let’s take each one of this consultancy’s arguments and see what they may mean for the US economy going forward.
Demographics: Population growth continues to slow down, but AI is coming to the rescue by increasing productivity, so yes, population (i.e., labor force growth) is an issue, but why would that take us into an economic depression? By the way, they started on the wrong foot. Back in the 1930s, population growth was very high due to natural births as well as strong immigration flows. However, there was a depression in the 1930s, so it occurred even as population growth was strong.
Healthcare costs: Yes, healthcare costs are very high compared to income and are increasing above the rate of inflation. Yes, taxes will have to increase and/or we will have to collect more taxes, fix the healthcare system, reduce expenditures, etc. But why is this going to contribute to an economic depression? See our Debt white paper following this link. We guess that healthcare costs back in the 1930s were also very high compared to income, while government subsidies were nonexistent. Furthermore, fewer people were covered by health insurance.
Entitlements: Yes, entitlements are an issue, but we will probably have to fix those issues. It is the responsibility of our politicians to solve these problems and of voters to vote them out if they don’t. We understand that nobody trusts politicians, but, as Winston Churchill said, “You can always count on Americans to do the right thing – after they have tried everything else.”
Inflation: Inflation has been high since the end of the COVID pandemic. Yes, we spent too much, which created a fertile ground for higher inflation. However, as long as the Federal Reserve remains independent from the political process, inflation will continue to go down. If there is a depression, inflation will not be a problem.
US national debt: We wrote a Debt white paper, so we will not delve into this issue further. If you want to see our view on the debt, please follow the above link. Just note that the debt after the Second World War was higher as a percentage of the economy than it is today. This means that we can solve the debt problem.
Thus, the publication doesn’t give any reason why there will be depression during the 2030s.
The 1930s depression was triggered by specific characteristics of the economies of the time. A big contributor, at least in the US, was a highly unequal distribution of income. Although we are not at those levels of income inequality today, income inequality has increased considerably. However, today’s income inequality is nothing compared to back then. At the time of the stock market crash in the US, the ensuing recession generated over production because of the immense losses in stock market wealth, bank runs and bank failures, a serious crisis in the US agricultural sector, losses in housing wealth, as well as losses in incomes due to immense job losses that took the rate of unemployment to 25% by 1933. All these created a scenario where very few could spend, and thus translated into overproduction. Since the world economy was on a gold standard and the US capital account was open, the crisis in the US spilled over to the rest of the global economy. The Smoot-Hawley Tariff Act of 1930 worsened the economic malaise across the global economy.
What ended the Great Depression? The New Deal helped to start the recovery process but, in the end, the involvement of the US in the Second World War in the 1940s finally ended the Great Depression as the US government borrowed to support the war effort, and everybody went back to work.
Thus, many of the things we do today when the economy is facing a potential recession were lessons learned during the Great Depression. This is probably one of the most important reasons why we have not had another Great Depression. However, this does not mean that another Great Depression is not possible; what it means is that we know better.
Perhaps the biggest issue today is the very high deficits and debt, which could potentially limit the ability of the US government to conduct policies that help prevent a Great Depression. However, this issue is not only a problem in case we face a potential Great Depression, but it is also an issue if there is a major war, or a large and costly disaster, etc. The current fiscal/debt situation in the US is something we must start fixing to be prepared for what the future has in store for us.
In summary, nobody knows what the future will bring, but we do know how to get out of an economic depression. To prepare for such an event, we need to fix our fiscal and debt situation because today we have very little leeway to conduct policies to minimize such an eventuality.
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
