What Would Lead to Another Great Depression? No Fiscal Cliff!

Last week we offered a snippet of an economic forecast presented by the Beaulieu brothers of ITR Economics, suggesting smooth sailing for 2013 with some rough waters in 2014, followed by some good years between 2015- 2017.

But by 2018, the Beaulieu brothers pointed to a “Great Depression” due to several factors, including the end of a normal inflationary trend, continued governmental spending (particularly for Medicare and an aging population), and the fact that the US government will no longer have the ability to borrow or spend — all key points to keep in mind when managing your company’s commodity risk.

And We Think The Fiscal Cliff Looks Bad

Long-term borrowing, according to the Beaulieus, will keep the US solvent for the next 7-12 years – and combined with our own demographics (including a decent birth rate), we will see some support come in the late 2020s. We have to remember, according to Alan Beaulieu, “we win the ugly dog contest,” as Europe stands in a bad place from a demographic perspective and Japan looks worse than Europe.

But the real problem relates to the US budget deficit, which will exceed 10% of GDP by 2018, according to ITR Economics, despite several trends that will help the US economy, including “increased oil production, energy independence and labor productivity and manufacturing coming back to the US.”

Red-flag road signs include when interest rates rise 400-600 sustained basis points, we may find ourselves going down the “real fiscal cliff.” Moreover, real interest rates will likely stay low through 2013, but will likely jump substantially around this same time period (2017/2018).

Other Negative Economic Data

Brian Beaulieu also pointed to a price bubble within the bond market that has him “quite concerned in the post 2017-2019 time-period.”

The message, however, that the brothers repeated throughout their presentation involves their underlying premise – that the US government will lack the ability to “make the hard calls.” Nobody wants to touch entitlement programs and healthcare costs.

The brothers, however, do cite a few scenarios that could change their Great Depression forecast. The first involves a change in Medicare and prescription drug coverage. A second scenario involves some illness that decimates the elderly population (don’t chuckle too hard over this one – we recognize it appears a bit far-fetched). The third scenario references “the greatest generation that ever lived” – e.g. the baby boomers. The Beauleiu brothers suggest that if they “willingly sacrifice their benefits,” they could “save us one more time.”

Somehow, the three scenarios offered didn’t make this webinar attendee feel any more hopeful toward a long-term solution.

Which brings us back to the fiscal cliff.

Ironically, the compromise solution of the 2011 debt ceiling deal with its automatic sequestration and tax increases now starts to look a little brilliant. Perhaps that would serve as a dose of the medicine we ought to have swallowed many years ago.