As efforts to contain the coronavirus tip the world economy into recession, lost production will crash a record debt bubble worse than 2008.
Credit rating agency S&P Global said this week that the coronavirus-plagued world economy has succumbed to a recession.
Chief Economist Paul Gruenwald explained that coronavirus hit China’s economy worse than projected. And the losses in the U.S. and Europe are about to get worse:
Europe and the United States are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.
That recovery may never happen if a demand and productivity collapse spills over into a protracted financial crisis.
And with household consumer debt, housing debt, auto debt, corporate debt, government debt, and global debt all at horrific record highs, another 2008-style financial crisis could be right around the corner.
The U.S. stock market was delirious with unchecked optimism at the start of 2020. The Dow and S&P 500 continued to breach new records nearly three weeks after the WHO declared coronavirus a worldwide health emergency.
But even before the outbreak, there were clear signs that the market’s euphoria was unwarranted by the underlying fundamentals of the economy.
For example, a harrowing debt bubble beyond anything that triggered the 2008 financial crisis posed a serious systemic risk. That should have been enough to give investors misgivings about the stock market’s valuations.
David Rosenberg of Gluskin Sheff & Associates warned in January about a $16 trillion household debt bubble. He said:
It amazes me so many economists don’t see a consumer debt bubble.
At the end of December, Fox Business reported that figure as well. A February Federal Reserve report pegged the number at $14 trillion. But it still reported $1.78 trillion more U.S. housing and consumer debt than there was in Q4 2007.
Rosenberg warned there have probably never been “as many characteristics of a top as we are experiencing today.” And he predicted this “turbocharged debt cycle” would “end miserably.”
When Fox Business reported on the record household debt bubble in December, the news anchor and guest commentator, Economist Daniel J. Mitchell, appeared visibly uncomfortable.
The Fox Business anchor drew parallels to the dotcom bubble:
NASDAQ is setting these records not seen since ’97 or ’98. Back then we didn’t know, or not a lot of people knew that the bubbles that were forming were forming.
Mitchell said the record debt is fine… unless something changes:
Right now with the economy strong, these numbers, these ratios are okay. But here’s the thing we always have to worry about… What if our asset values fall? What if our household income falls?
Or what if there’s a worldwide coronavirus pandemic?
And massive voluntary corporate and government-mandated lockdowns of most normal business activity?
The constant refrain of the stock market bulls as benchmarks rallied higher was that GDP is strong and more people are working than ever.
Any concern about the trade war, debt bubbles, manufacturing slowdowns, lagging corporate earnings, or frothy corporate multiples was waved away with the GDP and employment numbers.
The leveraged-to-the-hilt debt situation was only safe as long as recession didn’t strike. The banking system predicated all this debt on the ability of the borrowers to pay it back.
Now that coronavirus has ground the world economy to a crawl, the banking system faces the harrowing prospect of another financial crisis. Only this one could be worse than 2008.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:40 PM