Government Spending and Debt Suggest “Calamity” Ahead

In October, the Dow Industrials were still climbing (the senior index later hit a high in January).

That same month (October), Robert Prechter mentioned several indications of an elevated social mood in his Elliott Wave Theorist, including this:

Governments feel rich and are spending like drunken sailors …

All that spending has racked up a lot of debt. And, as noted before in these pages, all major deflationary episodes have been preceded by unsustainable levels of debt.

With that in mind, on May 26, the Committee for a Responsible Federal Budget (a nonpartisan group) said that the federal debt is likely to reach 125% of gross domestic product in the next 10 years unless there’s a dramatic course correction.

On May 31, a Washington Examiner headline addressed the mounting federal debt:

New budget numbers show US careening toward calamity

And a “calamity” may be the only thing which will force governments to curtail spending in any meaningful way.

As Robert Prechter’s must-read Last Chance to Conquer the Crash says:

Cutting government spending is a good thing, but politics will prevent its happening prior to a crisis.

That crisis will likely be accompanied by a big bear market in stocks.

Think about the 2007-2009 bear market. The financial crisis which unfolded in conjunction with that stock market downturn was the worst since the Great Depression.

Indeed, the Great Depression followed the downturn in stocks which began in 1929.

Be aware that here in 2022, the Elliott wave model suggests that the next bear market may rival that of 1929-1932.

Let’s conclude with this quote from the May 2022 Elliott Wave Theorist:

There has never been a Grand Supercycle-degree top in U.S. stocks, because the last peak of that degree occurred in 1720, when there were no American stocks. Only the record of British stock prices reveals it. So, recent issues of EWT have looked to the Supercycle-degree top of 1929 for guidance on how a Grand Supercycle top might form.