It’s time to prepare for a deep and global recession. It’s not hard to understand why. In fact, the mystery is why we didn’t have a recession in the first place…
In 2023, the signs were everywhere. Rapidly falling inflation, unaffordable interest rates, miserable economic indicators and plenty more.
The world economy was like Wile E Coyote. It hadn’t realised a recession had begun. But everyone watching on TV knew it’d gone over the edge.
The famous economist David Rosenberg put his reputation on the line in predicting a recession. And just kept repeating his prediction over and over again, for years. But no recession ever occurred…
What happened?
Two deliberate and outrageous political policies pushed up growth.
They’ve kept the world’s economy out of trouble over the past three years. But now they are both about to come to an end at the same time. GDP will take a severe hit as a result.
There aren’t many ways to escape the coming mess. And it may be the shock that pops the Mag 7 AI bubble at last. But first, let me explain what’s about to happen…
Economic growth is bipolar
There are only two ways to grow an economy. Demographics and productivity. How many people are working and how efficiently they work.
Despite my best efforts, it takes a long time to improve a country’s demographics the…internal way.
In the short run, immigration and unemployment are the key economic determinants from the demographic side. They decide how many people work.
Productivity, on the other hand, is driven by trends like technology, regulation, government involvement in the economy and more. It’s not terribly relevant to our story today.
Since 2023, governments managed to grow their GDP by allowing vast amounts of immigration, employing vast amounts of people and spending vast amounts of borrowed money.
In Australia, employment gains have been centred on government jobs. Get a load of this from the Institute of Public Affairs: ‘between August 2022 and August 2024, 82.1 per cent of new persons employed were in the public sector.’
Absurd. But more people working means more GDP…
In Western Europe, immigration got completely out of hand. But more people means more GDP.
In the US, the fiscal deficit is especially noteworthy. Under Biden, the government spent money as though it was already in recession. This boosted GDP to avoid one.
So, we got GDP growth. Job well done?
Maybe.
But political changes suggest the trends that saved us are about to reverse…
Immigration crackdowns
Immigration has become the number one political issue in the developed world. It isn’t necessarily the issue voters care most about in surveys. But it is the issue which voters have actual choice over between political parties.
Voting left or right won’t change much on other issues, such as inflation. But right-wing parties are offering genuine crackdowns on immigration rates. And they’re winning…left, right and centre.
Heck, even the left has been busy trying to stop immigration in parts of Europe. Schengen Zone internal borders are being closed and the EU has proposed immigration curbs.
The trouble is, less immigration means less GDP growth from the demographic half of the equation.
Is this really a powerful factor? In the US, economics consultant Ed Dowd has estimated that the share of economic growth coming from illegal immigration explains how the US economy avoided recession and had jobs growth.
The other explanatory factor?
Booming government spending
The way economic activity statistics are constructed can be misleading depending on what you actually want to know. Government spending and private sector spending are lumped in together when calculating overall GDP.
This makes sense if you’re trying to measure overall activity. But what if you’re trying to measure something else?
For example, we know that the private sector must pay taxes to fund the public sector. One is a parasite living off the other. But if the parasite gets too large, it can kill the host.
GDP figures broadly don’t just miss this distinction. They hide it.
Say, purely hypothetically speaking of course, that the public sector’s size is dangerously large relative to the private sector. What do you do?
If you cut government spending, GDP falls. That’s considered “bad news”. It appears self-defeating. You’re imposing a recession.
But government spending cuts are also necessary in order to get the private sector to grow again as a share of the economy. To ensure we can afford our government. Otherwise, government’s share of the economy grows over time until the parasite does kill the host. Paradoxically, it’ll look like GDP growth all the way as the public sector takes over.
So, overall GDP is the wrong measure when judging whether spending cuts are needed and succeeding. You need to measure the health of the private sector, not the whole economy.
With all this background knowledge, let’s compare Trump and Biden’s policies. Trump is cutting government spending like mad. This will harm GDP, but make the government more affordable and should free up the private sector to grow.
Biden used vast financial crisis sized deficit spending to supercharge the economy when it was still chugging along. This caused a vast increase in government and government debt. But at least GDP grew…
Recession is coming
The ways in which the US, Europe and Australia have been fudging their economic data are coming to an end. Large scale immigration is politically unpalatable. Government spending is incurring too much debt that now costs a lot of money. The absurd boom in public sector jobs won’t continue under the Coalition.
Prepare for economic growth to take a hit as a result.
The strangest part? It may be a good thing. A period of recovery for the private sector at the expense of the public. It’ll be ‘the recession we voted to have’.
But what’s the investment angle?
Well, a recession could be what knocks the wind out of the US stock market’s sails at last. Without the Mag 7 boom, stocks aren’t doing so well.
So, where do you hide?
Well, a recession would allow central banks to cut interest rates at very long last.
That’d be great news for gold. To find out more about the opportunities gold presents, go here.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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