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Death Spiral? Make That Plural

Last week Citi made headlines by publishing a report claiming the global economy is trapped in a “Death Spiral”. The timing of the report was perfect. Financial markets were in full PANIC! Oil fell to $26 per barrel, 10-year US government bond yields dropped to 1.52%, the MSCI World Equity Index fell into a bear market down 20% from its peak and bank shares in Europe and the US crashed as investors began to question the banking industry’s solvency in a negative interest rate world.

The new Macro Watch video, uploaded today, argues that there is not just a single Death Spiral, but, instead, a number of overlapping and mutually reinforcing Death Spirals now dragging the global economy down toward depression. Four are discussed:

  1. The Strong Dollar Death Spiral (Citi’s)
  2. The China Hard Landing Death Spiral
  3. The Deflating Asset Price Bubble Death Spiral, and
  4. The Credit Death Spiral

The reality is that the global economy is being sucked down in a whirlpool of interlocking Death Spirals; and there are only three ways out: Death, Quantitative Easing on a very large scale or Fiscal Stimulus on a very large scale. Each of these options is explored.

Death would not provide a lasting solution because Death would be followed by Hell – misery, poverty and probably war. QE has been overused and is now beginning to have undesirable side effects such as negative interest rates. So, at this stage of the global economic crisis, only Fiscal Stimulus offers hope of a permanent solution.

Therefore, we next consider what form of Fiscal Stimulus would be most effective: war, tax cuts or Investment.

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  1. Richard-

    Pre 2008, I was skeptical that substantial QE would not cause inflation. I now think both Japan’s long-term experience and the U.S.’s more recent experience proves that it can work in the current economic environment.

    Since Japan has implemented QE for longer than we have, it would be very interesting to analyze their time line and the % of GDP the BOJ has purchased and currently holds. Then take a look at the same for the U.S. Looks like the Fed currently owns about 20% of GDP in securities (mostly US Treasuries). Clearly it hasn’t been inflationary for either the U.S.or Japan.

    As you have pointed out many times, the U.S. has a unique opportunity in history to borrow and invest. And to calm the austerity people……”we can’t pass on our debt to future generations”……point out that we can cancel a good chunk of the debt thru QE and pass on world class infrastructure, advanced technology and health care to our children.

    Might be a good blog topic.

    1. Dear Richard I always read your writings when ever I see them although I am not a member of macro watch . They are concise and so logical and well thought, I love them and you demystify economic concepts for non economic professional like me. You write like an angel and I thank God for creating a writer like you. I thank you so much for your excellent work

  2. Absolutely agree with you Richard.

    Huge government investment in deflationary innovation such as cheaper and cleaner energy sources, healthy diets (aka education) that reduce the size of the medical profession and the big pharma rip-off (The cholesterol issue is largely a myth and drugs such as statins are not only not needed but cause disease). The new message about diet (attenuated due to lack of my time and perhaps yours) is that a high fat (of “good” fats) green and organic diet is good for you and your weight will optimize if you do not eat sugar or grains. Plus no diabetes, obesity, almost no cancer in the 6 billion humans and much healthier and happier lives.

    That will do from me for now.

    You are absolutely right Richard. You are an economic/sociological diamond.

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