“Gradually, then Suddenly” – Hemingway’s insight starts to apply to the New Normal’s arrival

Demographics are replacing central banks as the key influence on the economy, as we forecast with John Richardson in ‘Boom, Gloom and the New Normal – How the Western BabyBoomers are Changing Demand Patterns, Again’

Today, the changes we forecast are no longer in the future. They are happening now – as American Nobel-Prizewinning author, Ernest Hemingway, famously described in ‘The Sun also Rises’ :

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

STIMULUS SPENDING HAS BEEN THE MAIN FOCUS OF ECONOMIC POLICY FOR 20 YEARS

The key issue, as the new IMF chart confirms, is the debt created by the past 20 years of central bank stimulus. Its role, as always, was to bring forward demand from the future:

  • This is very useful when you have young populations. It allows, for example, young couples to have the security of owning their own home and to bring up children in a stable neighbourhood etc. As the years go by, they can expect to earn enough to repay the debt
  • It makes no sense at all for today’s ageing populations, as they no longer need to bring forward demand from the future. They already own most of what they need. And their incomes decline as they get older, so they can’t easily repay new debt over time

Back in 2009, US Federal Reserve Chairman, Ben Bernanke, “promised a smooth exit strategy” from the stimulus policy.

But he failed to recognise that the Perennials 55+ cohort are now the main source of global population growth, and in 9 of the 10 major economies.

And so, just as we forecast, the debt is at record levels and continuing to grow. As the IMF warns:

“Demographic pressures are set to increase in most of the major economies.. causing an imbalance in world labor supply and dampening global growth”.

THE USA AND CHINA ARE DEEP IN DEBT

Unfortunately the world’s two largest economies are now deeply in debt, as the charts from the US Congressional Budget Office data and ratings agency Fitch confirm:

  • US Federal interest costs now exceed Defense and Medicare. Only Social Security is a higher Federal Budget cost
  • China’s leverage is at an all-time high, and reached 295% of GDP in Q1 as a result of the growth slowdown

ECONOMIC RISKS CONTINUE TO INCREASE

Essentially, therefore, central banks have lost control of events, as the 4 Horsemen chart shows:

  • Wars are intensifying in Ukraine and the Middle East
  • And wars are always inflationary, as they divert resources to the military
  • Currencies are starting to take the strain, with the 3 major Asian currencies falling versus the US$
  • And debt levels are continuing to increase, with China’s debt now at 295% of its GDP

As Hemingway also noted, everyone is your friend when things are going well.

But as countries and individuals are now starting to discover, the hangover when the party ends can be a painful experience.