I'll see your 'no recession' and raise you seven good years

One paragraph from Wells Fargo, February 2016:

Focusing on the next six months, our predictive model says there is a 12% probability of a recession occurring. For perspective, what the model is showing looks no worse than what was predicted from 1983 to 1988, or in the late 1990s. This justifies why we view the recent market corrections as being driven more by fear than reality. In 1984, there was a fear that inflation would rear its ugly head again, but it didn’t. The fear was real, but reality didn’t live up to the fears. We’re probably going through something similar now.

Interesting.

The source of the 12 percent chance? "Policy errors—like the Federal Reserve being too eager to hike interest rates".


Me, I don't have a predictor for recession. What I do have is an eye on credit use.

Note: The following graphs all show total credit to the private non-financial sector, from the Bank for International Settlements. Copyright, 2016, Bank for International Settlements (BIS).

Total credit to the private non-financial sector is going up again:

Graph #1

That's a sign of growth. Good growth for some years, because debt is below what we can bear.

Private credit use still has room to grow:

Graph #2

Still has room to grow, even if debt stays below the 10% growth rate.


Relative to Base, private credit use is starting to climb:

Graph #3

Couple thoughts on this one:

The ratio is low largely because of all the quantitative easing that took place. It's not like we paid off so much debt. Private sector deleveraging (as Steve Keen says) has been trivial.

However, the ratio is as low now as it was in 1955. This means our financial system is ready for another period of growth and inflation comparable to what we had between 1955 and 2007. Put that in your pipe and smoke it. Our financial system is ready for another period of growth and inflation comparable to what we had between 1955 and 2007.

We are much better now than we were in the 1950s at multiplying base money into credit money. So it need not take anywhere near 52 years to reach the next peak. If we expand base into credit rapidly, be prepared for some double-digit inflation. But hey, that would just reduce the burden of existing debt. Which was probably the point all along, come to think of it.

Remember, though, that turning base money into credit money generates more debt. We really do need policy to accelerate the repayment of private sector debt, in order to keep private debt from accumulating. It would fight inflation, too, that policy.


Relative to Federal debt, private debt is starting to climb:

Graph #4

That's a very good sign.

Right now, we're at about the same place on the curve that we were in 1995, when our economy was starting to give us good years. We'll get those again, the good years. But we have to prevent debt from going up as fast as it did in the late 1990s.

If only we had some kind of policy to accelerate the repayment of debt.


Last graph today. Just for you, because you think debt-to-income is important:

Graph #5

Right now, we're right on trend with the mid-1990s, where we were before debt got us into trouble. Right on trend. And the trend line goes up, so debt can go up and that will be okay. For a few years, anyhow.

If we get those accelerated repayment incentives in place, we can keep getting good growth while private debt goes down.


// Related post: An Arthurian Future