Your Economic Textbook Will Do you No Good

Steve Saretsky -

According to a report this past week from the National Bureau of Economic Research, the pandemic recession only lasted two months, from February 2020 to April 2020. This makes it the shortest recession in the history of the United States. The Bureau defines a recession usually as “a decline in economic activity that lasts more than a few months.”

It was the sharpest and shortest recession in living memory. Pretty incredible stuff, considering there were some pundits calling for a second coming of the great depression. The policy response from governments and central bankers was unbelievable. Helicopter money, mortgage payment deferrals, wage subsidies, you name it. The biggest takeaway, however, is the extent policy makers were willing to go to maintain the exiting financial system, and creating a playbook for the next crisis.

Why is this important?

Because, as Raoul Pal of Global Macro Investors alluded to recently, global debts of all forms total between $400 trillion net and $1.2 quadrillion gross (yes, Quadrillion), therefor the collateral (assets) can NOT be allowed to fall or the system is wiped out.

So we now have a game of whack-a-mole. Every time asset prices start to decline central banks must intervene with more stimulus, and this time they have a new partner, the government. Fiscal stimulus will play an increasing role in our lives moving forward, there is simply no escaping it. There is no politician who will be able to campaign, and successfully win on fiscal austerity.

Where we’re going your economic textbook will do you no good.

Canada, of course, is leading the charge in this department. Remember back in Q2 2020, labour income declined $20B nationally. At the same time, government transfers to households grew by $70B. In other words, government income support programs paid out nearly $4 for every $1 in lost income.

The result, as highlighted by my good friend Ben Rabidoux, suggests Canadian households are doing much better, at least on paper:

-Debt/income ratio at 6-yr low
-Debt service ratio near 15-yr low
-Debt/asset ratio near 20-yr low
-Average owner equity at 30-yr highs
-Savings rate 13%, ~$200B in excess savings
-Record increase in net worth


This might sound morally wrong to you, and you might feel the government is being irresponsible. These feelings are warranted, but they certainly won’t change the outlook. Government spending is just getting warmed up, because once you start it is too hard to stop. The only constraint on spending will be inflation, and for now, that inflation has been deemed “transitory”.

If you think things are crazy now, just you wait.

Three Things I’m Watching:

1. CPI index over time. While prices may ebb and flow each year, over time they always rise. (Source: Raoul Pal)

2. Major central bank balance sheets topping $30T. (Source: Haver Analytics)

3. Canadian consumers are flush with cash. Checking account balances continue to surge. (Source: Edge Analytics)

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The Saretsky Report. December 2022