Recessions Will Be Far More Frequent Now That The Debt Super Cycle Is Over

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While our recent experience has been that recessions happen about once every decade, the U.S. used to experience recessions far more frequently.The U.S. had a recession every 56 months on average going back to 1854 according to the Economist, but since 1982 the U.S. has only had a recession every 106 months on average. During the last three decades recessions have been have as frequent as during much of U.S. history.

Why?

Economist:

This seems to be down to credit availability; in the absence of a gold standard, the authorities could ease policy and stave off recessions.

But if we have reached the end-game of the debt super-cycle, then recessions will be more frequent. The last recession started in December 2007; if the cycle is 56 months, the next one is thus due in August 2012, less than two years away. Such short, sharp shocks make high-yield bonds look a very bad investment. The asset category changed in character during the great moderation; junk bonds used to be investment grade bonds gone bad, but after the mid-1980s, companies issued primary debt at junk yields. An economic cycle that lasts almost nine years gives investors a chance to earn their yield and get out before the bust; a cycle that lasts less than five years makes that much more difficult. The same principle applies to private equity.

However, even if we’re in for a period of more frequent recessions, it doesn’t mean growth stops. Even when the U.S. economy was experiencing recessions more frequently, it was still growing over the medium and long-term.

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