Economic growth or decline is the result of factors that are larger than any one administration or any one set of policies. Of course, specific policies such as tax changes or regulatory initiatives can help or hurt the economy depending on how they are designed, but they will generally not change the macro-momentum.
A tax increase may be a headwind for growth, but it will not stop a strong economy in its tracks. Likewise, a tax cut or extended unemployment benefits may be a boost for a weak economy, but they will not end a recession single-handedly. Growth and recession are driven by larger events such as demographics, globalization, war, inflation, deflation, and, yes, pandemic. Large changes in fiscal or monetary policy are the only policies that may or may not move the needle.
The recession that began in February 2020 most likely ended in July according to the Wall Street talking heads, but the new depression is not. So, what’s the outlook for 2021? A new recession will occur in the first quarter of 2021. In fact, the economy is likely headed into another technical recession right now, which would present the first double-dip recession since 1980-1981 when a second recession began (July 1981) almost exactly one year after the prior recession ended (July 1980).
The reason is the imposition of new lockdown requirements by governors in most major states. Investors may be encouraged by new all-time highs in the stock market, but the stock market indices are cap-weighted or formatted in favor of a small number of tech or digital economy companies such as Amazon, Apple, Netflix, Microsoft, Facebook, Google, and a few others.
These companies are least affected by the pandemic and are not representative of the overall U.S. economy. Over 45% of GDP and 50% of all jobs are produced by small-and-medium-sized businesses. These businesses include restaurants, bars, salons, gyms, dry cleaners, boutique stores, small manufacturers, and many others.
This is the part of the economy affected by the lockdowns. They are being destroyed. Many closings are no longer temporary but have become permanent as businesses fail, equipment is dumped at fire-sale prices, job losses are not recovered, leases are broken and empty storefronts become a sign of the times.
You see this everywhere from Fifth Avenue in New York City to any small town near you. Lower unemployment rates reported in recent months are not quite the cause for cheer that Wall Street analysts make them out to be.
Those rates do not include individuals who have lost jobs but have dropped out of the labor force and are not technically counted as unemployed. This phenomenon shows up in the labor force participation rate, which is dropping sharply and is near the lowest rate since the 1970s when women started to enter the workforce in large numbers.
An able-bodied person without a job has zero productivity whether you’re technically counted as unemployed or not. This is another drag on growth and one more reason not to believe the Wall Street cheerleaders. Biden’s policies will not change this result, but they will make it slightly worse.
Biden supports the lockdowns despite scientific evidence that they don’t work to stop the spread of the virus. Biden’s plans for immediate border reopenings will put downward pressure on wages. His plans for green regulation will raise costs for consumers and cost jobs in the energy sector. His tax increase plans will be another drag on growth.
The Biden plan will not cause the recession; it’s already here. His plans will make things worse and possibly extend the new recession into the second quarter as well. Monetary policy is not a stimulus because the new money is going to the banks and the banks simply deposit it with the Fed as excess reserves on which they receive interest.
If the money is not being loaned by banks and spent by consumers, there is no turnover or “velocity” of money. That means deflation will be a bigger problem than inflation, at least for the next year. Deflation increases the real value of debt, which is another drag on growth.
Fed policy is impotent; Jay Powell and his colleagues are out of the game and can safely be ignored. Fiscal policy is not a stimulus because the U.S. debt-to-GDP ratio is now over 130% and rising quickly. Extensive research shows that at debt-to-GDP ratios above 90%, the multiplier on new debt is less than one. This means we’re in a debt trap in addition to a liquidity trap caused by the Fed.
We cannot print our way out of a liquidity trap. We cannot spend our way out of a debt trap. Neither fiscal nor monetary policy will produce stimulus given current conditions of low velocity, high savings rates, high debt, high unemployment, and new lockdowns.
The Fed and Congress may try to stimulate the economy, but they will fail. The path for investors is clear. Equity exposure should be reduced because the gap between market perception and economic reality will close quickly once the new recession becomes apparent.
Cash allocations should be increased to reduce overall portfolio volatility and to give investors flexibility and options once some of the political and economic uncertainty begins to clear. Allocations to gold, silver and possibly Bitcoin could be at least 10% of investor portfolios both as an inflation hedge and a hedge against declining confidence in central bank currencies.
The end game for this global debt trap is drawing near. Between now and the end of this month we should expect the markets to show us a sign as to how this year will start off officially. I’m anticipating some type of shock to the system followed by a sell-off.
What do you think? Is this the big one coming that we’ve all been waiting for? Share your thoughts in the comment section below.
Original article by James Rickards here…