2023, will break out the global financial crisis?

With the US long and short term Treasury spreads entering deep negative territory, especially the “10-year-2-year Treasury yield”, which has come to its most extreme level in more than 30 years, many people are worried that the US and global economy will enter a new round of deep recession.

If the U.S. economy is in a deep recession, many people can’t help but worry that in 2023, a global financial crisis will erupt as it did in 2008?

The table below shows the 34 recessions the U.S. economy has experienced in the past 170 years (since 1854), as determined by the National Bureau of Economic Research (NBER).

Because of the vast differences in technological advances, economic models and government regulation, the recessions of long ago are not very indicative of whether a global financial crisis will erupt today, so we will focus on the recessions in the U.S. since 1952.

 

As you can see from the chart, over the past 70 years of recessions, the average length of the recession was 10.3 months, and the average U.S. real GDP growth rate at the beginning of the recession was 1.8%, while the U.S. real GDP growth rate at the end of the recession was 1.3%.

We can clearly see that neither the extent of the slowdown in growth nor the duration of the downturn is a criterion for the NBER to judge recessions.

What is the criterion for judging a U.S. recession, if not GDP growth?

The answer is: the unemployment rate and the Purchasing Managers’ Index (PMI).

The period in which the PMI drops significantly below 50, while the unemployment rate rises significantly, is inevitably a recessionary period, and the unemployment rate may be weighted more heavily than the PMI. Whenever the unemployment rate stabilizes and begins to fall, the recessionary period ends, and the unemployment rate rises by close to or more than four.

Against the U.S. recession, there have been four truly global financial crises in the past 70 years of history.

November 1973 – March 1975.

July 1981-November 1982

December 2007-June 2009

February 2020 – April 2020.

Let’s take a look at how each of these four severe U.S. recessions and global financial crises occurred.

In October 1973, the fourth Middle East war broke out, due to the U.S. support for Israel, OPEC oil-producing countries raised the global price of crude oil, within a few months, three times, while the U.S. crude oil production happened to be in decay, especially, after the end of the Middle East war, the price of crude oil did not come down soon, thus leading to a large number of enterprises in a very short period of time, the cost of a sharp increase in the adjustment of untimely enterprises, had to choose bankruptcy.

In addition, the complete bankruptcy of the Bretton Woods system in 1973, the abolition of the link between the U.S. dollar and gold, the massive over-issuance of the U.S. dollar over the years made people doubt the value of paper money, the lack of a stable anchor for international trade, and the Federal Reserve was also rapidly raising interest rates, which was the fundamental reason why the U.S. and even the global economy fell into a deep recession in 1973.

The economic recession of 1981-1982 was caused by the soaring price of crude oil, the value of the U.S. dollar was questioned by the world, and the Federal Reserve raised the benchmark interest rate to a historical high of 20% in order to suppress inflation and show the “credit of the U.S. dollar”, which led to a “price spike + ultra-high Interest rates” under the influence of the deep economic recession.

More importantly, the ultra-high interest rate of the US dollar has since triggered a series of debt crises in developing countries around the world, becoming the source of a truly global financial crisis.

The global financial crisis of 2007-2009 was caused by the deleveraging of global economies triggered by the “subprime mortgage crisis” in the U.S. The fundamental reason was that the debt leverage of the U.S. residential sector was too high and beyond its affordable level. Because it was a general reckoning of global leveraging over the past decades, the recession became the longest-lasting post-war recession in the United States and the most influential global financial crisis of the past 30 years.

The deep recession in 2020 was a global epidemic outbreak under the high leverage of U.S. corporate debt, which is not much to say.

To summarize the causes of the past four deep recessions and global financial crises in the United States

1) A short-term spike in crude oil prices.

2) The raising of the dollar interest rate to a higher level.

3) High debt leverage in the U.S. residential or corporate sector.

4) A global epidemic not seen for a century.

The above 4 reasons, at least two of them must be satisfied before the U.S. economy will produce a deep recession.

The Federal Reserve is continuing to raise interest rates, the benchmark interest rate has risen to a “higher level”, this condition has been basically met, the epidemic this matter for the time being, we mainly look at crude oil prices and debt leverage levels.

At present, the U.S. crude oil production is close to the highest level in history, and there is no shortage of oil, but also a large number of exports to Europe, as long as there is no world war in the short term, even for other reasons (such as the Russian-Ukrainian war, etc.), the U.S. crude oil prices will not rise particularly outrageous, because the deep recession brought about by the surge in crude oil prices can basically be ruled out.

The next step is to look at the debt leverage of the residential and corporate sectors.

The chart below shows the debt/net wealth (net market-denominated assets excluding debt) of the U.S. non-financial corporations, households and the non-profit sector, as well as the debt leverage of the U.S. private sector (non-financial corporations + residential sector).

Clearly, both the residential and corporate sectors are at the low end of their debt leverage ratios in recent years compared to their own net wealth, and there are no signs of a sharp increase.

Further, using the 10-year Treasury yield, which de-weights the debt of the U.S. corporate and residential sectors (the debt burden of the private sector is closely related to the Treasury yield), to judge the debt burden of the U.S. private sector, we can still find that the debt burden of the U.S. private sector, although rising rapidly (because the Treasury yield is rising rapidly), is, however, far from the level of the past half century. Repeated recessions, it is still quite a distance from the levels seen during the past half century.

Simply put, the debt burden of the U.S. residential and corporate sectors is not heavy, and the likelihood of a large-scale debt crisis breaking out in the short term is unlikely, and without a large-scale debt crisis breaking out, there will naturally be no global financial crisis.

Here, I might as well give a probability of recession in the United States in 2023.

Probability of a soft economic landing, 10%

Probability of a mild recession, 70 percent

Probability of a severe recession, 20 percent

Some may wonder –

I am only talking about corporate debt and residential debt here, why not government debt?

You know, now the U.S. government debt, are going to break the sky, this will not trigger the global financial crisis?

This question, in fact, is to distinguish between the long-term credit decay of the dollar and the outbreak of short-term economic crisis.

Objectively speaking, the credit money era, the government debt denominated in local currency, generally will not trigger a short-term debt crisis, and really cannot, on the print well!

Although I owe a lot of debt, but the debt is denominated, I can print their currency, you say what can be a problem?

Over the past 30 years, Japan has continued to set a new record high in human history of government debt, has given us a vivid demonstration of this logic.

So, although the U.S. government owes a lot of debt, but all dollar debt!

 

 

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