The Economic Collapse of 2020-2025
On the intervall between crashes (free)
It’s now clear that the economic collapse started in early 2020 from the Corona shock saved only by the massive liquidity injections by central banks (a “counterattack”). Yet, financial history is likely to find that the actual date of the onset of a new financial crisis was 17 September 2019, when the repo markets blew up.
But how will the crisis proceed?
Little over a month ago, we published a special report in our Q-Review -series updating the stages of the economic collapse, we first sketched in December 2019. Lately, we also published the second post in our crisis preparation newsletter series. We are working hard to shield our customers from the next, extremely threating stages of the crisis.
Considering this, I think it would be a good idea to go through how we ended up here and take a sneak-peak what we see lays ahead. So here, I provide a short summarizing update on the stages of collapse. I will also keep updating my subscribers on the stages we are on, and currently we are between ‘Crashes’.
To note, we are forecasting that the recession will begin in Europe in Q4 this year and Q1 2023 in the U.S. We are also expecting that the economic situation will keep deteriorating from there on until it bottoms during 2024. We currently expect the recovery to begin in 2025, but there are major uncertainties.
The first stages
In December 2019, we specified that at the Onset –or stresses that had been building in the credit markets since the summer of 2019—would explode, shrinking if not eliminating entirely the exits from many parts of that market. Downgrades of corporate debt in the U.S. and peripheral sovereign debt in the Eurozone would push large fixed-income investors, including pension funds, into higher-rated bonds, which would in turn lead to large-scale selling of lower-rated bonds, forcing wider spreads and even more selling.
This moment came in late February 2020, when a sudden panic gripped investors in both credit and equity markets after a surge in reported Covid-19 cases and deaths in Italy coincided with the collapse of OPEC talks. The market rout started on the 9th of March 2020.
To respond, the Federal Reserve, the European Central Bank (ECB) and other central banks launched several money conjuring operations (asset purchase programs) to halt the ensuing collapse of the financial system. They were able to stop the market rout, but with a heavy cost.
When we warned about an approaching inflation shock in March 2021, there naturally was no premonition of the massive escalation of the Russia-Ukrainian crisis to a hot war a year later. Still, as we iterated in June 2021, inflation was already getting out of hand, before the onset of the war.
Notably, severe crises tend not to occur alone, but in packs. For example, World War I was accompanied (followed) by the “Spanish Flu”, one of the deadliest viral epidemics the world has seen. The Great Depression was accompanied by the ‘Dust Bowl’ causing famine in U.S. Mid-West. The 1970’s inflation crisis was accompanied (set in motion) by wars in the Middle East. In 2008, there were, for example, the Russo-Georgian war, the Gaza-War and the Turkish incursion in the northern Iraq. And, this time will be no different.
Into a global Crash
Thus, what is new compared to the Onset and the end of the Counterattack -stages in our December 2019 report is that we are now close to the point where the combination of energy, food and inflation crises can lead to a collapse of not just the capital and residential markets, but also commercial markets, such as retailers.
In Europe, the utter collapse of the purchasing power of consumers, driven by rapid inflation, very high energy prices and the likely interest rate shock, is likely to lead to depression-like collapse of the commercial markets. This naturally creates a mortal threat to the already ailing banking sector of Europe.
While the situation is less severe, for now at least, in the U.S., it is likely to follow down the same path, as the energy crisis of Europe will continue to reverberate around the globe leading, yet again, to rapidly increasing energy prices in the coming months. And, when in motion, the economic collapse of Europe will naturally spread through global supply and retail chains as well as the banking sector.
A global Crash follows.
The question is, will there be another counterattack accompanying the Crash -stage? We consider it likely, but will it be enough—and will it be done in time?
European governments are already drafting plans to cut energy taxes and provide different subsidies to households and possibly to companies. Germany is issuing a mammoth €200 billion bailout of corporation and consumers. It is important to note that any program increasing or upholding the current level of consumption (consumer demand) will keep inflation pressures elevated.
In December 2019, we envisaged that a Flood of bankruptcies of ‘zombified corporations’ would follow the in the wake of the Counterattack. Currently, some analysts estimate that the share of zombie corporations may have reached as high as 24%, from already high 19% in late 2020.
When the failure of zombie companies begins, it is likely to be ‘on steroids’ due to the effects of the electricity and gas price shocks. Moreover, the flood does not threaten just the corporate sector anymore, but also households due to the ravaging inflation, rapidly rising interest rates and yet another energy price shock.
Alas, the flood is likely to be more widespread and devastating than we anticipated before corona (lockdowns and bailouts) and war (sanctions). This will lead to a cascading losses to banks eventually causing a new banking crisis, if it has not started earlier. What truly worries us, is the possibility of “energy lockdowns”, where governments order pubs, restaurants, recreational activities and public venues to be closed in an effort to save electricity. This would wreak utter havoc among the small- and medium-sized businesses and banks.
Counterattack #2 and to where after?
When the Crash and Flood truly get going, we are likely to see another round of Counterattack with or without energy lockdowns. Still, the question remains, would the bailout be enough?
We are, effectively, approaching a “crunch point”. Multiple uncertainties and stressors are converging in a way which cannot lead to anything else than an outright collapse of our financial and economic systems. The only question is, how long do we have?
Central bankers and other authorities have been postponing the onset of multitude of crises for over five years. Now they are effectively trapped. Central bankers are faced with either collapse of the modern financial order or a run-away inflation. An impossible choice.
And even if central bankers eventually tried to turn the collapse around, which is likely, their ability to quell it is very questionable. This is, because the breadth and scope of the crisis in motion is so massive, especially considering the underlying financial ‘fracture lines’, that anything short of a socialization of “everything” is likely to be enough to stop the crisis.
Would the central bankers really be up for that? I am skeptical.
I and we will return on the updated estimates on the timeline later.
The Stages of the Collapse special report can be obtained from our Store.
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as investment advice. Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk. Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
"When the failure of zombie companies begins, it is likely to be ‘on steroids’ due to the effects of the electricity and gas price shocks."
Steroids mean those zombies are resting above, in astrophysics terms sort of "false vacuum on Mexican hat curve", i.e. market believes zombies somehow cannot go under. In addition to electricity and (natural) gas I'd like to mention raw materials and logistics. BR JKi