Years of Pain Ahead

“The next two years are just going to be plain difficult,” Nobel laureate Michael Spence says. Tough economic times are likely to linger, he says, because, from financial hiccups to severe weather, wars or pandemics, he says the crises keep “coming at higher frequency and greater severity.”

“The longer we wait to right the ship, the harder it is to fix it,” he told me this week at the Greenwich Economic Forum in Connecticut.

Enter the Permacrisis . Spence, along with former UK Prime Minister Gordon Brown and Mohamed El-Erian , chief economic adviser to financial giant Allianz SE and a Bloomberg Opinion columnist, recently released a book that’s a game plan for fixing what they call a fractured world. The world’s problems may seem disparate, but these renowned financial thinkers argue that permanent changes in the global economy are leading to such calamities. And they explain why they think things could get worse before they start to get better.

The book comes just as recession alarms are sounding again. Bloomberg Economics this week built a case on why a downturn is more likely than a soft landing. And consider that since Monday alone:

• Mutiny in Congress led to an historic ouster of the House speaker, leaving the door open for a government shutdown within weeks.
• More than 75,000 health-care workers walked off the job in the largest strike the industry has ever seen, following autoworkers, actors and writers, and port staff who have all done the same. And hospitality workers may be next.
• The presumably safest types of bonds in the world, US Treasuries, faced some severe pains, with 30-year yields soaring through 5% for the first time since 2007.

And it’s all interconnected, with the selloff in short term Treasuries the most pronounced while the turmoil was roiling Congress.

Those sharp moves in bond markets signal real worries. As bond investing veteran Jeff Gundlach said this week on X, the platform formerly known as Twitter, the sharp distortions in the Treasury markets “should put everyone on recession warning, not just recession watch.” Deutsche Bank strategist Jim Reid told Bloomberg News: “I struggle to see how the recent yield moves don’t increase the risk of an accident somewhere in the financial system.”

El-Erian’s team argues that many of these recent events are the product of something much more structural in the economy. Without fixes, such problems just build on each other.

“Things are going to get worse, and a lot worse, if we don’t change our mindset,” El-Erian told me at the forum in Greenwich. “The next two years are going to be hard.” Beyond that, he continued, “they don’t need to be hard if we understand what has changed about the global economy.”

El-Erian and Spence describe a stark imbalance: Supply isn’t sufficient enough to meet demand. When they talk about supply issues, they mean everything from labor dwindling because of aging populations to geopolitical tensions abroad making the supply chains that feed corporate America more expensive. Spence explained that such supply constraints are going to keep inflation high, which also means interest rates are going to stay high, too.

The productive forces of the economy that have driven decades of prosperity are now fading, Spence says. In fact, he thinks the world will be coping with inflation for many years to come. “You’ve got these powerful secular forces” that are stunting the supply-side growth in the economy, he says. “We’ve got these powerful tools” like generative AI that “have the power to reverse them.” But if we don’t start reversing the trajectory of the economy, a tough few years could turn into a longer-term problem.

El-Erian adds: “If you don’t get growth, you cannot solve the inequality issue, you cannot solve the debt issue, and the climate issue becomes also quite difficult because we need resources to help on the climate side.”

So brace yourself. If these big thinkers are right, look for the light at the end of the tunnel—but only in a few years, if policymakers start to get it right.

Things Break

With a surge in interest rates, things start to break. Things like regional banks, a few of which failed. Things like the UK bond market, which faced a meltdown late last year, or even the stock market that’s seen the S&P 500 on a roller coaster ride that had it down nearly 20% at one point.

As Bloomberg reporters led by Chris Anstey put it: The 5% bond market means pain is headed everyone’s way .

The hurt is obvious in the bankruptcy world. In a Bloomberg Originals mini-documentary, America’s Distressed-Debt Problem , my colleague Amelia Pollard and I explore all the industries that have fallen prey to mounting borrowing costs. Chapter 11 filings are hitting the market at the fastest pace since the pandemic, and experts say there's just more to come.

Our thanks to Holly Etlin of AlixPartners, Brendan Hayes of Guggenheim Securities and our amazing editors including Bloomberg's Scarlet Fu and Christine Li Edwards .

Lastly, don't miss this interview with KKR's Peter Stavros , who speaks of the broken social contract in labor markets and some of what can be done to fix it. Plus, his take on the dealmaking environment, which you can read more about for the Bloomberg Deals newsletter.

More to come. You can find this newsletter online , or sign up for Bw Daily , for which I write every Friday. Next Friday marks the start of bank earnings -- buckle up everyone. It's the final stretch of the year. Tips and opinions are welcome at [email protected] .