Jeremy Grantham, a well-known market commentator, has stated that we are near the end — not just the end of the current bull market in stocks, but the end of social and economic ascendancy as a nation. Stock and bond markets are carrying too much leverage, too much stock issuance is entering the market, society is deeply divided, debt of all kinds is at all-time high levels, and resources are running low.
What happens when the bubble bursts? According to Grantham and others, society descends into something like anarchy as groups and individuals struggle to meet their needs, with too few goods available for too many people. Elevated prices collapse, and with them the retirement savings of millions of Americans. America enters into an economic depression that reminds one of the 1930s or the period after the housing crisis of 2007.
What Grantham is describing is not just a market crash, however. He is describing the end of an eighty-year cycle going back to WWII, during which America has been the dominant economic and military power in the world and in which endless opportunities existed for individual advancement and wealth creation. As that cycle comes to an end and reverses, we may face long-term contraction rather than expansion. Immense quantities of wealth will evaporate, and we will enter what will seem like a permanent state of decline.
Grantham is a wise observer with a half-century of experience tracking markets. It is possible that what he is describing will come true. It is also possible that we will face a decline, but one not as horrendous as he suggests. And it is possible that we will continue to advance, not just in stock market valuations, but in the power and influence of our nation in the world.
What are the odds that Grantham is right? Historically, a bear market decline of at least 20 percent takes place every four to six years. We had one, though only briefly, in 2022, so we are due for another, but no one can accurately predict just when it will begin. What is certain is that there will be another bear market.
In the past century, there have been only two economic depressions — periods of prolonged, severe downturn: the Great Depression of 1929–1941and the Great Recession of 2007–2009. (Some see the mid-1970s as a third.) Between 1929 and 1933, U.S. GDP declined by close to 30 percent. Nothing like that has happened since, but what Grantham and others seem to be predicting is a decline of that magnitude or worse.
Between 2007 and mid-2009, U.S. GDP fell by 4.3%, the greatest decline since the 1930s. Many safeguards are now in place that did not exist in the 1930s, limits on investor leverage and income streams like Social Security among them, but even these could be overwhelmed by the amount of government and corporate debt we now face.
As for America's place in the world and Grantham's thesis of an eighty-year period of ascendancy now coming to a close, it's obvious that our dominance is not what it was just after World War II and that China and the "axis of evil" pose a serious threat. Some predict that China will overtake the U.S. as a global power by the late 2030s or even earlier, while others point to China's aging and declining population and failed government investments as reasons why it may not. Again, no one can predict the outcome, especially this far out, but clearly, China's current leadership aspires to overtake the U.S.
As for the social anarchy that might accompany another economic depression in the U.S., it would seem likely, based on what happened during the Great Depression, with rising radical parties here and overseas and violent protests everywhere. What happens when Social Security "runs out of money," as predicted in just six years, after which benefits would have to be reduced barring legislative action? Those who are now living only on Social Security cannot easily survive on 78 percent of what they now receive. What happens if there is a major market collapse and economic recession with millions out of work and few jobs for new graduates? What happens to programs like the Medicare Part A and Medicaid Trust Funds, both scheduled to run out of money sometime in the 2030s?
At the very least, these crises, just six or seven years away, would cause political unrest and possibly the election of radical socialists promising solutions based on the seizure of wealth from individuals and corporations. Already, such radicals are beginning to appear on the political landscape, and they may be a harbinger of things to come.
The future I describe is frightening, to say the least. But there is also evidence that America is moving toward what President Trump calls a new "Golden Age." At present, there is full employment, rising wage growth, and record profits for companies in the S&P 500 and NASDAQ indices. The levels of debt and stock valuation and issuance are extremely troubling, and a bear market may or may not be close at hand, but America has survived eleven bear markets since 1925.
It is impossible for anyone, even Bill Gates or Warren Buffett, to predict the future of markets or economies with complete accuracy, though the so-called Buffett Indicator (stock market cap divided by GDP) is near a record high. I will not make a prediction, but as I see it, caution is warranted, both for the market and for American society in general.
We are not helpless. Individuals and governments both can reduce spending and eliminate deficit spending entirely. Individuals can maintain healthy cash reserves. The U.S. can and should maintain its lead militarily over our adversaries. There should be adjustments to Social Security and Medicare/Medicaid so that these programs remain viable. None of this is easy, but the alternative is more or less what Jeremy Grantham describes: chaos, anarchy, and want on a grand scale.
Image via Pixabay.
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