Here are four reasons the West is headed for a ‘very drastic crisis,’ according to a veteran economist

My Comments: If you cry “wolf” often and long enough, you might actually see a wolf. My chances here in north central Florida are slim to none compared with someone in Alaska, but that ignores the metaphor associated with crying “wolf”. It simply means something bad is likely to happen.

I sit and write this today, realizing that storm Elsa is turning out to be less than predicted in terms of “bad”, where I live. Yesterday, we were all crying “wolf” and planning for chaos. Now consider the 150 people killed over the recent holiday weekend from gunfire. We can all agree with their surviving family members that something bad DID happen, despite millions of us crying “wolf” about unregulated firearms.

I frequently post ideas and articles about the potential for something bad happening that will influence your financial ability to pay your bills as you live out the rest of your life. But I’ve been around long enough, to recall when bad things did happen. They happened to me and to my clients and will likely happen again, always assuming we live long enough.

So here are some words from a credible source that I think you should pay attention to. Good luck in the coming months and years. I’m unsure about the “four reasons” in the headline as I don’t see four reasons described.

by Steve Goldstein \ July 7, 2021 \ https://tinyurl.com/yjeflkel

Markets seem to be in cruise-control mode, at least until the Jackson Hole gathering of central bankers at which the Federal Reserve may finally announce it will slow the rate of bond purchases. The S&P 500 SPX, -0.20% ended Tuesday at its second highest closing level on record, after a slight decline ended a seven-session winning run.

Patrick Artus, a senior economics adviser at French bank Natixis and a professor at the Paris School of Economics, isn’t sharing in the joy. In a very blunt memo to clients, Artus says a crisis is “inevitable.”

The total outstanding debt of the U.S., the U.K., the Eurozone and Japan relative to gross domestic product has come off the highest levels of the pandemic as economies have reopened but still is at elevated levels. “Borrower solvency cannot be ensured if debt-to-income ratios increase continuously,” he says.

The money supply also is at records. “The money supply cannot be increased continuously relative to income, as soon or later demand for money, which is linked to savings and income, can no longer increase,” said Artus, whose résumé includes stints at the Organization for Economic Cooperation and Development and the Banque de France.

Also zooming higher is wealth, with both stock and housing prices surging. “Rising relative asset prices cannot be extrapolated: If they become too high, the savings of asset buyers will no longer suffice to buy them, leading inevitably to a downward correction in prices,” he says. Finally, he notes a skewing of income distribution against wage earners: “If wage earnings do not receive productivity gains over a long period, demand for goods and services will become too weak to absorb production, which grows rapidly when earnings are invested.”

So how will this unwind? Artus says a correction in income distribution will lead to faster wage growth and higher inflation. That, in turn, will need to more restrictive monetary policy and higher inflation-adjusted interest rates. The more restrictive monetary policy will then stabilize asset prices and wealth, forcing deleveraging. And that deleveraging will lead to a recession due to the necessary fall in demand among households, companies and governments.

“The stabilization of these variables will lead to a very drastic crisis, due to faster growth in wages and inflation, a restrictive monetary policy, a fall in wealth and asset prices, and a recession caused by a fall in domestic demand,” he concludes.

One thought on “Here are four reasons the West is headed for a ‘very drastic crisis,’ according to a veteran economist

  1. Tony B

    Here’s a newsflash….we’ve had a crisis every five years, on average, since WW2. We’ve had 3 of the largest crashes since 1929 in the last two decades. Guess what? The SP 500 was at 1442 in March of 2000, and is now over 4000….and dividends have risen from 16 to 57. Fear pornographers like this author don’t care, though, as mouse clicks are his stock in trade.
    How dare he scare people out of the market……for all we know, Covid was 1987 redux, and are about to have the roaring 20s.

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