Are We Trapped in a Silent Depression? With Jeffrey Snider

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0:24Are we trapped in a silent depression? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jeff Snyder, host of the Eurodollar University. Hey, Jeff. It's great to have you back on. Hi, Maggie. How are you? I'm doing okay. I finished a very long conversation with Peter Zayon today. So anybody who knows him, I'm doing as best as can be expected after covering every problem in the geopolitical landscape. But we've got some other issues that are market related that I want to talk about. And the idea of a silent depression is one that you've been discussing on YouTube, but it seems very contrary what the market's been focused on this week.

1:02When you think about the stronger than expected retail sales, the potential for sticky inflation, the 10-year yield, which hit a 16-year high today. So walk us through your thinking a little bit right now. How is your view, what's your view, and how does it square up with some of these market narratives that are out there? And let's start with bonds, maybe. Well, it's the idea that we've left the 2010s behind, and we've never really settled what the 2010s were. It was kind of lackluster. But by the time we got to 2018 and 2019, we heard stories about the low unemployment rate and labor shortages and the emergence of all sorts of inflationary pressures.

1:43And then we got the pandemic, which sort of interrupted everything. And then the post-pandemic period has been characterized, at least by most people, as red-hot economies everywhere, a massive inflationary breakout. And so you go back of the 2010s, and it looks like that's been left completely behind. But when you examine all the statistics and the evidence, what you see is that we're still living in the shadow of the 2008 crisis. Whether retail sales in September 2023 were good or not, it doesn't change the long-run shape of the underlying economic condition or the background that we're trying to navigate in.

2:19Just to be clear, this is not a US-only phenomenon nor a Western phenomenon, And it explains much of maybe the geopolitics that we were talking about with Peter, where we have this prolonged period of economic stagnation that really has never been accounted for, nor has anybody answered the question about where it came from or why it's still there. There have been some commentators who have offered some suggestions. Larry Summers back in 2014, he said secular stagnation. Some people started to pay attention. Then again, the unemployment rate went down and everybody just forgot all about it. But when you look around the global economy, especially some of the emerging markets, China, for example, what you see is that 2008 continues to be that major inflection point where the rate of change didn't fall off a cliff like the 1930s.

3:10It just it fell down and then it completely changed thereafter. So even though output is growing, it's not growing in the same way nor the same sustainable fashion as it did before 2008. So while we have variable short run conditions here and there along the way, we still when you step back and look at it from a wider angle and from a larger perspective, you still see that silent depression in the background. And the longer it goes, the tougher it gets for geopolitics on top of everything else. So why? So the data you look at tell you that we are in this silent depression, or at least it's a prolonged period of subpar growth.

3:53So two things. Why is it? What happened around the great financial crisis that cast this enormous shadow? I mean, you just mentioned that we never really got to the bottom of it. Do you have a sense of sort of what the root or the roots of the problem, where that lies? Actually, you know who had the answer? It was a fellow by the name of Ben Bernanke. And he wasn't talking about the 2008 crisis when he gave us the answer. He actually wrote a paper in 1983 where he said, look, we explained the Great Depression, its prolonged nature by the fact that the early collapse after 1929, essentially you had a monetary deflationary panic like we had had previously throughout industrial history.

4:35But that particular monetary collapse impaired the banking system. So that credit creation redistribution throughout the 1930s remained impaired to the point where we didn't have a recovery where one should have happened by the mid-1930s at the latest. So what Bernanke said was, look, if you have a broken banking system, you shouldn't expect a recovery. I'm oversimplifying quite a bit here, but that was the general gist of it. So we had another major monetary breakdown in 2008. It wasn't about subprime mortgages. It wasn't a financial crisis. It was a dollar shortage, a euro dollar shortage specifically.

5:11And in the euro dollar method of money, it's the banks who create and redistribute this euro dollars. And so by having that crisis to begin with, we already impaired the banking system and the ability of the banking system to supply and distribute money and credit throughout the economy to have a recovery. It was, in essence, a repeat of the 1930s. And it was never fixed. It was never solved. And all the statistics you see, and that's not just, I mean, macroeconomic accounts like GDP all over the world, they fell off trend and never gone back. We have monetary indications that continue to point toward repeated dollar shortages.

5:46Every couple of years, we go through one. And every time we go through one. It short circuits the economy that might have a plausible path to recovery. And it just, we're stuck in this rut, this 16, almost 17 year rut, where it's all of these things combined in the big picture sense have changed the way the global economy operates. We have less globalization, less cooperation, less trade, less financial flows. Everything is more inefficient and rigid. With less economic cooperation, of course, you have less political cooperation, because if we're not benefiting in the same way, we don't have the same incentives to get along.

6:24We don't have the same incentives to ignore each other's, you know, whatever bothered me about you yesterday that I ignored when the economy was great. I'm going to focus on that today because there's not the same incentive to do so. So it's a monetary breakdown. But more than that, it's a complete change in the banking system, which, I mean, regulations that came along afterwards didn't help because they made credit and risk-taking that much more expensive and capital-intensive. So it's a whole bunch of stuff that combined that when you look at them in isolation, you think it doesn't seem all that bad until you put all of these together in one big comprehensive picture.

7:00You see 2008 comes back, it shows up literally everywhere. That's amazing. You have a chart you sent over, and I want to go through some of them, but But this is worrying on so many levels because there's no apparent remedy, or you can't solve the problem if you're not even defining it. So it sounds like we've been saying all along with this Fed aggressively hiking interest rates, something's going to break, something's going to break. It sounds like you're saying it was already broken. It was already broken, and it's not fixed, and no one's talking about how to fix it. And that is the banking system.

7:35That's where it starts. And it's really, I mean, you talk about what's really defining the last several years. It's fragility, right? And, you know, we can see it everywhere. It's not just in U.S. banks or U.S. regional banks, global banks. I mean, we can't forget about Credit Suisse earlier this year. And so we have this immense fragility in the monetary system. But again, everybody just kind of forgot about it because, number one, it's so long in the past. You don't think that something like this could last for 16 years. And number two, I mean, authorities have said, don't worry, but we've got this covered.

8:11We'll just do QEs forever until we fix the problem. When you have to sit back and realize the reason they continue to do QEs is because it isn't fixing the problem. And that may be the point of QE in all of the monetary programs that were done up until recently was simply to get people to stop paying attention to the way the economy and the system has changed and transformed over the years since. So after all of that happened, we have this incredibly fragile system that doesn't perform in robust and resilient fashion. So, of course, we should expect things to go wrong and break down. So did the actions taken by monetary authorities during the great financial crisis cause these problems?

8:53or were they already in root? Because you said it wasn't subprime. Were they already happening and it just caused a breakdown and that was the response mechanism? Is it the cause or was it a symptom of what was broken even before the great financial crisis? Central bank policies are always reactive. They're never proactive. So something happens, they react to it. Usually something happens and then a long time later, they react to it when it becomes clear and obvious. So we can never say for sure about counterfactuals, but the system was heading toward that direction anyway because it had been inherently unstable, especially during the later years of the real estate bubble.

9:35Obviously, it was no longer moderate. It was quite immoderate. And there were a number of inherent contradictions and inherent flaws in the methodology anyway. So it was likely it was heading for a breakdown. And when it actually finally showed up, I mean, authorities downplayed it for as long as they possibly could because that's what they do until it became clear that you could no longer do so. And then afterward, it was what do we do to fix it? Well, if they don't really know what the problem is, the solution they offered was let's just kind of hope it all goes back to the way it was. If we buy enough time, we get enough people to believe that we're doing something helpful, then maybe the thing will just fix itself and we won't have to worry about it.

10:14But, you know, it's more of a hope than it is an actual solution or strategy. And they've been following that same strategy repeatedly all throughout the last 15, 16, now 17 years. It's basically the same situation that the Japanese found themselves in a few decades before. We're just following along the Japanese path, except now on a global scale rather than just the one particular economy. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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11:51So Nick asking, when it comes to the euro dollar issue, it sounds like the Fed can't control or fix the issue. How can it be fixed? So are we right in thinking this goes to your sort of larger theory that everyone's lost control of the euro dollar, sort of that big shadow money system that's out there that no one can really control. Is it related to that? Is Nick following along the right line of thinking there? Yeah, the question is, what do you do about it? Now, once you realize that's an issue and that's the problem, how do you fix a banking system that largely operates outside of pretty much any jurisdiction?

12:31I mean, that's what euro dollar actually means, means lying. It's a system that's offshore, not just offshore of the US, it's offshore everywhere. And it's one of those situations, once the horses are out of the barn, you can't really get them back in. Once the banking system realized the risks that were inherent in undertaking the activities that the Eurodollar system needed in order for it to function, in order for the economy to function the same way, you can't go back. And the way that banks operate these days, whether good or bad, they completely change the way in which they operate, which means they literally cannot operate the way they did before.

13:08And of course, there's a whole set of questions about whether we want them to. But in the grander scheme of the monetary system and continue to operate it the way it needs to be operated, we would need them to go back to that old way in order for it to be able to perform in the same sort of capacity. So we're kind of stuck between a rock and a hard place because we don't want banks to go back where they were doing subprime mortgages and a lot of other really stupid, insane stuff, too. Like they all had hedge funds basically built in under the roof, right? And we're prop trading all over the place.

13:38They were hedge funds. They weren't banks. I mean, that's another discussion that we need to have, too. Do we even need these banks at all? Because all they are really is either money creators and, like you said, hedge funds or glorified bookkeepers. And if they're not going to be money creators and hedge funds, then what do we need them for? Because we can do bookkeeping in a different way. But you're exactly right that the entire nature of banking changed. And it had to change in order to operate this Eurodollar system, which was, I mean, there was a lot of positives that went along with that for a long period of time.

14:08We had a period of unparalleled global prosperity leading up to 2007 and 2008. It would have been nice to take off some of the stupid stuff and maintain some level of sanity. But in many ways, that's just human nature. When we get into these periods of prolonged good times, we just kind of lose track of sense and we think there is no risk. Greed? Didn't you just define greed? Yeah, exactly. I think so. It's greed with no downside. We make all the money we can and there'll be no risk or no consequences, right? We don't need any guardrails. But if we think that there is no consequence to being greedy, then the greed really takes over.

14:43And it took over the entire banking system that had become detached from what a bank actually is supposed to be. It's from any social utility anyway, probably. So that's the big question here is we can't go back to 2007, but we got to go forward to something else. But here we are. We're not doing either. We're not going back to 2007, nor are we moving forward to another system, at least officially. Governments aren't doing it. I mean, that's what digital projects and cryptocurrency is. I was going to say, someone's listening to this and their brain's going crazy because when we're talking about that system, and we don't have a replacement, they're thinking digital assets, I know, certainly in our audience.

15:24And that is a high-level connection. But I don't want to go down that today because we won't have enough time. But I think what you're saying is so important, and you're not hearing this in very many places, because we keep thinking, like, what's going on? Like, things don't make sense. And we hear correlations are breaking down. Traditional models aren't working. Forecasts aren't working. And I think you just really eloquently explained that that's going to continue to be true unless you get to the root of what's going on and sort of address and shine a light on all these tentacles, which carry all the way back from that blow up.

16:02So I want to talk about, let's pull up some of your charts so people can see why you're not just sort of thinking about this in your head, but you're looking at, because I just said to you, oh, you think there's a silent depression right as we were coming on air. And you said, I don't think there is one. The data is telling me there's one. So let's look at some of this data. And maybe let's start with the economic ones, Brian. And I think it's interesting. This is such an interesting conversation to have paired up with the conversation I had with Peter Zions. This was accidental booking, but it's an amazing side-by-side conversation because you're talking about the financial back end of it.

16:42And he's very much talking about the implications. So we know what's been happening in the US. Let's pull up China. You sent some charts over on China. So, Brian, it's sort of under, I don't know which one you're looking at, but there's China real GDP. and there's China, PBOC, total social financing. What one do you want to pull up, Jeff, to sort of highlight why you, maybe the export one, that's really ugly, why you see this as weakness that's just not limited to the US and that dates back to some of what happened in the great financial crisis. Just tell Brian to pull up whatever one you want.

17:19Yeah, that's a good, I mean, the trade statistics are good, GDP statistics. You can see any of them where you just look, 2008 shows up as the inflection point in all of them. And just, again, unlike maybe the impression that we have about the 1930s where you have this massive collapse and then it's just a disaster from there, what you have is a inflection point where you have a contraction, a severe one in 2008. But then the growth after it is severely constrained. It's not the same level of growth. And so you see this continuous ratcheting down of economic activity following 2008. It's a little bit at a time, and it's almost like the proverbial boiling frog.

18:00Because on a multi-year scale, you're not necessarily going to notice how things are slowing and slowing and slowing and occasionally contracting and not coming back in the same way after those contractions. You just don't notice that over a lot of – a long period of time, things have really changed. When you sit back, you look at it from 16 years ago, and you look at some of these charts, and you see, oh, my God, I mean, this is a prolonged period where the operation of pretty much every part of the global economy has just incrementally fallen off and fallen off and fallen off. And over that much time, it creates enormous accumulating consequences, not just in terms of monetary systems like we're talking about or banking operations, but again, in the social and political spheres, too.

18:47And China is such a huge part of it because the Chinese built their entire economy, and so much of the world economy was built on what the Chinese were doing, on this euro-dollar growth period. They were going to transform China from a backward subsistence agricultural economy into a modern industrial powerhouse and then further into the socialist paradise that Marxists and Leninists have been dreaming of for however many decades. and they got interrupted in 2008. And ever since 2008, in the middle of this transformation, they realized it's not the same anymore. So the Chinese have to deal with both the economic, financial, as well as the political fallout of not being able to finish that transformation, which spills over into all of these other spheres.

19:35In pure economic terms, China has less demand for its goods. it doesn't build as much in China, which means it's not demanding other raw materials and other pieces of assembly from the rest of the world. So in just a direct economic circumstances, there's a slowdown there, but there's also monetary and financial flows that get disrupted too. China was the centerpiece of the globalized euro dollar world, and they're the ones that are bearing the biggest brunt of it currently, because after 16 years of being unable to restart at their growth engine, not for lack of trying. It really places enormous strain on everything that they do, including the political structure there.

20:17Yeah, absolutely. And we dove into that today in that conversation. So what about treasuries? If we're in this silent depression and we can't really get growth going, why do we see treasury yields moving higher? Everyone thinks it's because the economy is so hot, Fed's going to have to keep raising rates. I shouldn't say everyone, but a common narrative. Fed's going to have to keep raising rates. Maybe inflation stays hot. So bond yields, after artificially being held low, are going to skyrocket. We see them today at 16-year highs. What's happening there? How are you looking at this? Well, first of all, it's not that bond yields were artificially held low.

21:00That's a misconception, too. Bond yields were low, consistent with a silent depression. Throughout history, you look at the behavior of interest rates, this is what Milton Friedman called the interest rate fallacy. Low rates are associated with tight money and depressions. You think about the 1930s, you think about Japan in the 1990s, rates went down and they stayed down, not because central banks wanted them to, but because demand for safety and liquidity was always high. And in a depressionary circumstance where growth is always at best questionable, you want to own safe and liquid assets. So there was other reasons like collateral shortages too, But there was a number of reasons why interest rates were low, and none of them had anything to do with central banks.

21:39But now central banks have been confronted by the aftermath of the supply shock where consumer prices have surged on a transitory basis. Yes, I'll use that term. And so they have decided they need to do something about it. And so the only reason that rates are going up is because central banks are trying to force them up. And in various parts over the last, what has it been, 18 months now that central banks have been raising rates, the bond market continues to resist those rate hikes. We saw that after October and November of last year, where rates kind of skyrocketed in August and September as they do seasonally.

22:14And then despite continued rate hikes from the Fed and ECB, rates kind of went sideways to lower for, what, six, seven months there pretty solidly. And then they started to tickle back up in the middle of this year. And then we get to August and September again. And what happens? Rates go up just like they do every September. And we're into the period where as we get out of the September effect, what is the market going to look? Is the market going to continue to go higher? Are the rates going to continue to go higher? Or are they going to go back to what they've been doing over the last year and a half and fight against the Fed increases?

22:46That's what yield curve inversion means. Rates want to go lower because they don't think that anything has substantially changed except that one factor. And that one factor is Jay Powell and Christine Lagarde. Not the economy, not the monetary situation. Certainly, when you look along some of the monetary indications, bond yields and bond curves have to factor in short-term interest rates and the trajectory that everybody expects them to be. But that doesn't mean that those are the only determination for yields. And that's why you see inverted yield curves. We're going to take another quick break to hear a word from our partners.

23:20We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:28Yeah, so the short end is responding to what they're hearing from the Fed, but the long end is fighting that with the consistent narrative that this is I mean, the name could not be more perfect. what we're talking about, anti-fragile from YouTube asks, where do you stand on rate hikes? One more and we're done. I mean, it sounds like you think it's only a matter of time before yields start moving lower because we're stuck in this quicksand of an economic situation. Yeah. So what part of the problem is, to answer the question, is we're trying to game plan what a bunch of politicians are going to do with short-term monetary policy rates.

24:04And And that's not always an economic or a series of economic considerations. That's about other factors, right? I mean, how is the Fed going to react to incoming data? I mean, we might as well be pop psychologists. So yeah, I mean, it's likely the Fed is going to raise rates maybe one or two times. It's hard to know for sure. And it's not really sure about when they might actually start to turn around because they have made it very clear they don't want to. They want to leave short-term rates as high as they possibly can because they believe that there's this psychological component to inflation.

24:36And if people get normalized to high consumer prices, suddenly that will become inflation. It's a misreading of the 1970s. So the Federal Reserve is going to do what the Federal Reserve is going to do. But the question is, what is the economy actually doing? What is really happening that maybe the Fed doesn't see? And that's what we'll see, I think, over the weeks ahead that are really important. When you look at this September pattern, and again, this happens every single year going back to 2017, rates go up in September, and they sometimes continue into October and maybe even November. And then you get toward the end of the year, and more of the fundamental assertions in the market start to come back out to the forefront again.