The Five Horsemen

Sunday, May 31, 2009

Executive Summary

• What can we expect next, and how will we recognize it?
• A series of sharp, interrupted shocks is more likely than a major sudden collapse.
• Five game-changing events, what I call The Five Horsemen, will indicate that the rules have changed and a new reality is about to take over:
  • The First Horseman: New credit growth falls below interest payments
  • The Second Horseman: The Fed monetizes debt
  • The Third Horseman: Government deficit spending exceeds 10% of GDP
  • The Fourth Horseman: The dollar goes down, while interest rates go up
  • The Fifth (and final) Horseman: US debt becomes denominated in foreign currencies

Severe structural damage has already been inflicted on our economy. As I wrote two weeks ago in It Has Hit the Fan:

If you have been waiting for further confirmation about the direction of the economy, or waiting for a sign that it’s now time to get serious about preparing for a future filled with less, this report is written for you.

You are living in the midst of the collapse of western economies, which are moving from a more complicated state to a less complicated one. This is it.  Keep a journal, because it’s happening right now.

After the Great Depression, many people remarked that it was only obvious in retrospect. While it was unfolding, things steadily eroded. But 75% of the workforce remained employed, while hopeful signs of progress were constantly trotted out by various politicians, private economists, and official-sounding government agencies. It is often quite difficult to appreciate the true magnitude of sweeping change while it is occurring.

The most pressing question now is this:  What can we expect next, and when? 

In this report, I give you the precise combination of macro-events that will cause me to issue an alert and kick my thinking and actions into new orbits.

The Path

I do not expect a major sudden collapse to be the most likely path, although it is a possibility. Instead, I anticipate a series of sharp shocks, followed by periods of relative tranquility. 

Here’s how I described the various paths in May of 2008, in a report entitled Charting a Course Through the Recession:

While it is possible, I do not anticipate a one-way slide to the bottom, wherever and whenever that may be.