HSBC’s Chief Economist – “The Second Great Depression Only Postponed, Not Avoided”

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– HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA)’s respected Chief Economist Stephen King, sporting spiky hair that would land him in jail or worse in Iran, penned a much discussed economic report that reads like a horror novel but points to important analysis that is hard to ignore.

Stephen King: Economy is like Titanic except without lifeboats

King’s nightmare takes place on a Titanic-like economic ocean liner that is headed for an iceberg except this fragile ship doesn’t have lifeboats.

In his research piece titled “The world economy’s titanic problem: Coping with the next recession without policy lifeboats,” King notes it has been six years since the last recession. Without specifically saying it, those who follow quantitative market probability note that bullish stock market environments last, on average, 67 months. The current bullish economic environment, depending on where you call the low point, is nearly 72 months old.

What is different with this economic recovery is that, unlike most, “the recovery phase has not just marked a return to economic growth,” nor has it ushered in a return to policy “normality.” In a normal environment interest rates have risen, tax revenues have rebounded, welfare payments shrunk, and government deficits have declined – “and, on some occasions, have even turned into surpluses.”

HSBC's Stephen King 5 14 Pitifal growth

Stephen King: In QE-driven economic recovery, policymakers are out of ammunition

From King’s point of view, the normal recovery “typically allows policymakers to rebuild their stocks of ammunition, providing them with room to fight the next economic battle.” Problem is, under the regime of quantitative easing, the central bank central planners are now out of bullets as the economic recovery and the stock bull market is long in the tooth.

HSBC's Stephen King 5 14 deficit

Quantitative easing has not built a a “real” economic foothold other that instilling a four letter word for investors: hope. “The higher value of financial assets have not translated into decent economic growth,” he said, and then documented what many hedge fund managers and economic analysis points out, that quantitative fairy dust isn’t driving sustainable economic growth:

It may be that QE has merely driven a wedge between financial hope and economic reality. Worse, if the next recession simply provokes more QE, are investors already beginning to believe that, once again, they are to be continuous beneficiaries of what was once affectionately known as the “Greenspan put”? This was the belief – held most strongly during the late-1990s tech bubble – that the Fed would stand ready to offer support in the event of economic weakness, inevitably encouraging even more in the way of risk-loving behavior.

HSBC's Stephen King 5 14 normalized

Steven King: We are closer to the next recession with few bullets remaining

King says that “if history is any guide, we are probably now closer to the next one (recession),” as he points out that the QE recovery has not accomplished what previous recoveries have: enabled monetary and fiscal policymakers to replenish their ammunition. In fact, the QE recovery has “been distinguished by a persistent munitions shortage.”

King goes on to outline solutions to a potential forthcoming recession, which is difficult to predict in an environment where debt is literally “out of control” and economic central planners have few bullets available to them. These include 1) reducing the risk of recession; 2) reverting to quantitative easing; 3) moving away from inflation targeting; 4) using fiscal policy to replace monetary policy; (v) using fiscal and monetary policy together in a bid to introduce so-called “helicopter money”; and 5) pushing interest rates higher through structural reforms designed to lower excess savings, most obviously via increases in retirement age.

“We conclude that only the final option is likely to lead to economic success,” he said. “Politically, however, it seems implausible. As a result, we are faced with a serious shortage of effective policy lifeboats.”

Watch a video of King telling the horror story in his own words…

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