An Ideal Scenario - When free markets and free economy is allowed to work, there are bound to be excesses in some sector of the economy and that usually translates into a self correction recessionary phase. The period of recession is certainly painful, but allows the system to cleanse off the excesses. When economic growth trends higher again, the growth trajectory is robust.
Current Scenario – In the last two decades, policymakers have stayed away from interfering with the economy when there is a boom (even in cases of excesses). However, policymakers have jumped in to bailout sectors of the economy or the economy as a while during downturns. The result is that the excesses in the system have been allowed to accumulate and the crisis is only delayed to a later date (and towards a bigger crisis).
After The Financial Crisis Of 2008-09 – It is clear that the financial crisis of 2008-09 was a direct result of excess leverage in the financial and economic system. While the household and financial sector deleveraged after the crisis, the government sector leveraged significantly. As a result, the total leverage in the financial system in 2016 is much higher than it was in 2009. In my opinion, we are headed for a bigger crisis (timing unknown).
The chart below shows the recovery after big recessions since 1933. The graph has been indexed to 100 as a starting year of recovery after recession/depression.
It is clear the economic recovery has been the weakest after the 2009 recession even when compared to recovery after the Great Depression of 1929.
The reason for strong recovery post 1933 is the fact that the deflationary spiral after 1929 flushed out all the excesses in the system. Central bankers will argue that lack of action by policymakers resulted in depression. However, the fact is that significant leveraging during the period 1920-29 resulted in depression.
Going Forward – I expect GDP growth to remain sluggish in the coming years and I also expect the government to continue pursuing expansionary monetary policies. In the long-run, all currencies are likely to trend lower against hard assets like gold. I had discussed earlier that the CBO expects $10 trillion in deficits in the next 10 years and $1 trillion in debt servicing cost by 2025. As government debt swells, I also expect GDP growth to be meaningfully impacted by “Crowding Out” effect in the private sector (the dynamic sector of the economy).