Levy Releases New Special Report: Bubble or Nothing

New Paper Details How Private Sector’s Swelling Balance Sheets Compel Increasingly Risky Financial Behavior

Mount Kisco, New York, UNITED STATES

MOUNT KISCO, N.Y., Sept. 19, 2019 (GLOBE NEWSWIRE) -- The Jerome Levy Forecasting Center LLC today released to the public a new white paper titled Bubble or Nothing: How the Long-Term Swelling of Household and Business Sector Balance Sheets Has Increasingly Forced Lenders, Investors, and Borrowers to Sacrifice Prudence, Financial Rewards, or Both.

According to the paper, available for download at https://www.levyforecast.com/bubble-or-nothing/, “The initial, underlying reason for increasingly risky behavior is not primarily sociological, ‘animal spirits’ as some argue, but economic.”

The paper presents two facts that help explain economic and financial performance in recent decades and offers insights into the current business cycle, the 2020s, and beyond. First, private sector balance sheets grew faster than income over many decades. Second, this disproportionate balance sheet expansion changed financial parameters in the economy, mathematically making financial activity increasingly hazardous and compelling riskier behavior.

David A. Levy, the chairman of the independent Jerome Levy Forecasting Center LLC and author of the paper, argues that because of these developments, the U.S. economy continues to face a bubble-or-nothing outlook: “These two facts imply that the private economy will either move to a more extreme financial position or turn down. The Big Balance Sheet Economy cannot power itself for long without the continued swelling of private balance sheets relative to income, making it more extreme and distorted.

Said Levy, “This white paper aims to help fill a gaping hole in public discussions of some of the economy’s most critical and least understood challenges of the age—chronic economic underperformance, disinflation, diminishing interest rates, more prevalent asset bubbles, and so forth. It presents, in the interest of better public policy discussions, insights gained through decades of research undertaken in support of my firm’s macro forecasting and analysis services. These insights largely stem from a perspective that integrates much more of the economy’s financial dimension than is common in macroeconomic analysis.

Among the insights offered by Levy in Bubble or Nothing are the following:

  • Too much private sector debt relative to income has adverse consequences, of course, but so does an excessive total value of private sector assets relative to income—it means meager yields and operating rates of return, distorted financial decisions, and an economy vulnerable to asset price deflation.
  • The swelling of private balance-sheet-to-income ratios over many decades has been the underlying cause of the nearly four-decade decline in interest rates.
  • Running out of room to cut interest rates will ultimately mean asset deflation and deleveraging.
  • Each successive business cycle in the Big Balance Sheet Economy era has started with proportionately larger balance sheets and has involved more reckless balance sheet expansion, leading to even bigger balance sheets and a worse financial crisis.
  • During the 2000s, either the housing bubble or some other set of highly speculative, excessively risky, and destabilizing activities was virtually inevitable.
  • Increasingly unsound risk taking has been occurring again in the 2010s, this time in less obvious ways than during the housing bubble.

The full paper is available to the public at https://www.levyforecast.com/bubble-or-nothing/. Visitors to the site can also register for free to view samples of written reports exclusively available to consulting clients of The Jerome Levy Forecasting Center LLC.

About The Jerome Levy Forecasting Center LLC
The Jerome Levy Forecasting Center LLC is an independent economic research and consulting firm that has been specializing in using the macroeconomic Profits Perspective in economic analysis and forecasting for seven decades. The goal of the Levy Forecasting Center is to improve its clients’ business and investment performance by providing them with powerful insights into economic risks and opportunities – insights that are difficult or even impossible to achieve with conventional approaches to macroeconomic analysis. Additional information may be found at www.levyforecast.com.

For press inquiries contact Robert King at The Jerome Levy Forecasting Center – rking@levyforecast.com.