An economic catastrophe is looming

OPINION: As we focus on one crisis, another looms off the stage, patiently waiting for it to have a chance to shine.

How long we will have to wait for the final aria I cannot and will not predict, but to put our current peril in perspective, I would like to take you on a trip down memory lane. Return to December 5, 1996. For reference, the Nasdaq on this day was 1287.

Alan Greenspan, then chairman of the US Federal Reserve, delivered his now famous speech, asking the question, “How do we know when irrational exuberance has unduly increased asset values?”

It was an odd question, given that the exuberance was fueled by the Fed chairman himself. For several years, Greenspan was posting interest rates around 4%, while inflation was just below 3. This was well below the historical norm and was pushing punters to invest more and more. speculative.

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Pets.com has come to symbolize this era: a poorly run business with a history of losses that spent far more on branding than it ever earned in revenue, but the market embraced it with the my lab’s enthusiasm for leftover bacon.

Anything tangentially connected to the internet attracted money, and in March 2000 the Nasdaq was just a few kilobytes over 5,000. Then, pop, the dot-com bubble burst, the Nasdaq fell and the global economy has collapsed. This was more than three years after Greenspan warned the market, and the Nasdaq had nearly tripled during that time.

The fact that the Federal Reserve hiked interest rates at the end of 1999 is relevant to our current economic situation, and some economists believe that was the trigger that precipitated the crash.

Looking back, Pets.com and many other storytelling rather than profit-oriented businesses were still doomed to collapse, but something had to be the slap in the face to end the mass hysteria.

The dotcom recession was not unexpected. Contemporary and highly regarded economics writer James Grant wrote in his 1996 book The problem with prosperity: “Predictably, the risks to savings are greatest when they appear to be smallest. By suppressing crises, the modern financial welfare state has inadvertently encouraged speculation. Never before has a boom ended, except in a crisis.

The problem with permabears like Grant is that they predict more recessions than there are. I am in this category. By nature and inclination, I constantly seek and find evidence of the coming economic collapse.

Today the Nasdaq has over 15,000. It sounds absurd to me, but I would have said that to 9,000. A savvy speculator could have made a lot of money ignoring my opinions.

So keep that in mind as I describe why I think we are heading headlong into an economic catastrophe that will make this pandemic look like a runny nose.

Let’s start with cheap money. For over 12 years we have had interest rates at a fraction above inflation, as Americans did for just five years before the dotcom crash.

Currently, rates are lower than inflation; a dangerous inflection point. The shares exploded. The NXZ50 has exploded from its post-GFC collapse of 2,500 to over 13,000 today.

During these 13 economically banal years, our GDP has not even doubled. We have seen an even more extreme acceleration in house prices as baby boomers facing retirement throw their savings into anything that promises a return.

If you think there is a connection between the current financial market and reality, may I remind you that Dogecoin has a market cap of $ 38 billion. We have entered the tulip phase of the cycle.

The destruction of a safe haven for savers not only fuels reckless investments, it also stimulates reckless borrowing. The most terrifying data kept by the Reserve Bank, other than the transcripts of Adrian Orr’s speeches, is our level of household debt relative to disposable income and the cost of servicing that debt.

Right before the GFC, our average level of household debt, including mortgages, credit cards, and student loans, was 158% of average household income. It was only 100% in 2000. It has dropped slightly in the following years, but is now skyrocketing north.

According to our central bank, this rate is now at 167%, and this level of debt is increasing at an alarming rate, jumping 2.6% in the March quarter. We are becoming more and more indebted thanks to the massive borrowing required to enter the housing market.

The reason this all continues to work is that the cost of maintaining these levels of freight is dropping. We take on more debt and, at least in interest, it costs less to do so thanks to interest rates close to zero.

When rates go up, there is going to be serious economic heartburn, as maintenance costs quickly drain household budgets. Even respectable households will have a choice between paying the mortgage payments and keeping Ethan and Jemima in their private schools.

A 1% increase in a million dollar mortgage equals $ 200 per week, and interest rates could rise much more than that. They were 10 percent in 2007 and inflation was not much higher than it is today.

The inevitable rate hike will cause asset and stock prices to fall, causing panic and fear. The investment will decrease because higher rates will make projects less profitable and many highly leveraged businesses will fail.

We have had loose monetary policies for over a decade, printed one sixth of our GDP in new cash, and are currently forcing most of the workforce to be unproductive while borrowing money to give to companies for prevent them from collapsing.

It cannot continue. It will not continue. The only way forward is a massive economic crash, decades of stagnation, or a surge in economic growth – and we don’t grow our economy sitting at home eating the last bread weeks before it expires.

* Damien Grant is an Auckland based business owner. He writes from a libertarian perspective and is a member of the Taxpayers Union but not of a political party.