From reading and listening to multiple sources I have an understanding of what will happen to the economy in the next few years.
Right now, the recovery from the 2008 Great Recession hasn’t produced any real income growth and true unemployment is much higher than stated when you consider the workforce participation rate is the lowest since the 1970’s.
I believe we are actually in a depression and that the recovery has only benefited the holders of assets (stocks, bonds, real estate etc.) basically the rich have got richer and the middle class and poor have gone down.
This period of economic expansion is the 2nd longest on record and we are due for another recession.
However, the Federal Reserve in the US is not ready for another recession. They have desperately been trying to raise interest rates now, without pricking the bubble doing so, so that they have some ammo to lower rates when the next recession happens.
Normally to spur a recovery from a recession, the Fed will lower interest rates 3-4%, encouraging borrowing to get the credit cycle going again.
But right now they are only at about 1%. They can’t lower 3-4%.
They should have raised interest rates years ago, but Ben Bernanke instead did QE 1, 2 &3 that pumped a bunch of money into the system.
They missed the boat, their chance to raise rates to normal is basically gone.
Now the economic indicators are showing declining growth, getting ready for a recession.
Raising rates into economic weakness will trigger the next recession.
All that money Helicopter Ben printed didn’t go into the real economy, instead it went into blowing bubbles in stocks, bonds, real estate, fine art, etc.
The real economy is doing quite poorly.
My time frame for the next recession is late 2018 to early 2019, give or take.
I expect the trigger for the next recession to come from corporate bonds. More specifically, US Shale oil debt. The US shale oil industry hasn’t made a dime in profit and is actually losing billions of dollars to maintain. They have hundreds of billions in debt coming due in the next few years, with no way to pay it back. I doubt investors will want to roll-over the debt, when the industry hasn’t made any profit. Basically, the industry is running a Ponzi scheme of corporate debt.
There could be other triggers, the worst being a war with North Korea.
But if nothing catastrophic happens, I see shale oil bonds as the first domino.
When the recession happens the central banks of the world will not have the resources to fight it this time and will need to be bailed out themselves.
This will be done by the International Monetary Fund (IMF) with printing trillions of world money, SDRs (Special Drawing Rights).
SDRs are given to each country by the IMF in proportion to the size of their economies. Their value is determined by a formula including the US dollar, Euro, Yen and now the Chinese Yuan. Countries can trade SDRs for other currencies, eg. China can trade US dollars for other countries SDRs.
This flood of money will have a huge inflationary effect on the world and especially the US dollar.
Most Americans have no idea how privileged they are being able to just print money to buy real stuff and the world just accepts it. The rest of the world needs to make stuff to trade for US dollars so they can buy other stuff.
Once the SDR replaces the US dollar as world reserve currency, all those US dollars will go back to America, causing a tsunami of inflation. Americans will have to actually sell things to be able to buy things from other countries. But the US factories left years ago and aren’ t coming back.
Unfortunately, most US citizens will be in for a terrible financial shock. 2008 will look like a trip to Disneyland in comparison.
You can prepare by buying gold and silver in private storage.
At home and in the bank are not safe.
Do not trust the banks, the banks will be closed possibly for months and you will not be able to access safety deposit boxes.
Bank machines will limit how much money you can withdraw at a time.
All western countries have now passed bail-in laws. Your bank account will be used to bail out the banks.
You should have emergency rations and some cash on hand from now on.
If you are someone who has cash when the banks are closed, you will be able to buy things at insanely low prices as people sell everything to be able to raise cash.
At first, all the money printing will not cause inflation. After seeing their retirement account shrink to nothing, baby boomers are going to save everything and the real economy will continue to contract.
It won’t be until the psychology of the masses changes and they feel they have enough money saved to be safe again that they will begin to spend again.
And once that spending starts to expand the economy (2020-2025?) inflation will be a raging beast and uncontrollable at that point. Central banks will have to raise interest rates like crazy.
People who have jobs won’t be able to borrow nearly as much for mortgages, the supply of money chasing houses will go far down.
And at the same time, way more people will be foreclosed on because they will not be able to afford mortgages when their rates reset. Sellers will far outnumber buyers and demand for housing will go way down.
This will be a perfect storm to buy rental real estate cheaply.
Just as demand for rental real estate will be skyrocketing.
I believe that the stock market will not be as safe and people will not trust it for a while. It may take decades for a recovery to nominal values.