‘The problem with financial adrenaline is that every dose reduces the impact of the next dose. At some point, the patient fails to respond. The positive effects of the stimulus become toxic, and attempts to increase dosage will only push the patient into collapse.’
That pretty much sums up the gloomy view that Charles Hugh Smith of the Of Two Minds blog has been espousing for a while now.
In his latest missive, Smith dons his forward-looking goggles to explain why the U.S. economy, while strong by many measures, is nevertheless careening toward a “sell everything” recession.
“Oil costs are relatively low, U.S. banks are relatively well-capitalized, geopolitical issues are on the backburner and stocks, bonds and real estate are all well-bid (i.e. there is no liquidity crisis),” Smith wrote.
Hence, the catalyst this time around, he says, won’t be a spike in energy costs (as in 1973 and 1990), nor will it be a financial crisis triggered by excesses of speculation (like we saw 2000 and 2008) or the kind of inflation that blew up in 1980.
This time, “exhaustion” will be the culprit.
“Exhaustion of the pell-mell expansion of credit, exhaustion in the household and small business sectors as real-world price increases continue exceeding wage and revenue gains, exhaustion of margin expansion in stocks, and exhaustion of Corporate America’s policy of masking inflation by reducing quality and quantity,” Smith wrote.
He explained that conventional economics has no answer for “exhaustion,” so the government attempts to goose borrowing but lowering rates a sluicing limitless liquidity into the financial system.
“But if everyone who is qualified to borrow more has no interest in borrowing more, lenders turn to unqualified borrowers who will soon default,” Smith wrote. “This sets up a destruction of debt, collateral and wealth that also has no policy answer. The credit impulse doesn’t expire, it simply fades away, along with ‘growth,’ rising stock markets, higher tax revenues, etc.”
Therefore, he warns, we are way overdue for a recession that the Fed will only make worse by continually pushing its easy-money policies.
“The banquet of consequences is now being served, but the good seats have all been taken by those with no debt, unimpaired collateral and little dependence on central bank stimulus or central state legerdemain,” Smith wrote. “All that’s left are the bad seats with horrendous consequences for perverse, distorting policies that refused to deal directly with painfully obvious imbalances.”