Five more years

Getting into a debt hole is easy; climbing out is hard. Historically, academic research shows that it takes an economy five years to return to pre-crisis growth rates after a financial shock. But given the global scope of our problems, the weak demographics of aging populations, structural deficit problems in the developed economies, the eurozone crisis and tighter bank oversight (good in the long run, but tighter credit for the short term), the Société Générale team believes it will take a decade to heal this time around.

By its count, we're just five years in.

There are only a few ways out: strong economic growth, difficult when consumers as well as governments are focused on deleveraging; austerity, which is only making things worse in Greece and Britain; widespread debt defaults, which would require Spanish-style bank recapitalizations; and high inflation, which tends to pinch consumer spending and deepen the divide between the 1% and the 99%. None of them is easy. The right solution is a careful mix of all four.

Get the mix of policy wrong, say by overemphasizing short-term budget austerity, and the debt burden only grows as recession returns. It's fiscal quicksand.

Société Générale economists note that policymakers in the advanced economies are fumbling through the fix -- a "muddle-through" path that instills neither confidence nor optimism and leaves economies vulnerable to downside shocks.

Here at home, the result has been a 1.5% GDP growth rate that just isn't going to cut it. Republicans and Democrats can't seem to have a meaningful conversation about how to get this higher; and a lack of bipartisan cooperation means the "fiscal cliff" of tax hikes and spending cuts worth nearly 5% of GDP still looms large in 2013.

Should this continue, the Société Générale team worries that the muddle-through will mutate into something much worse: rising tensions, an angry populace, social unrest and political tension. I explored that outcome late last year in "Why all signs point to chaos."

Eventually, we'll simply run out of money. According to Credit Suisse's Soss, based on current trajectories, in 2024 all federal tax revenue will go to entitlement spending and interest payments. Nothing else.

We need job creation

They key will be to tap the one segment of the economy that isn't focused on deleveraging and isn't burdened by debt: Non-financial corporations. Big business is holding more than $1.7 trillion in cash, according to Federal Reserve data. These guys aren't spending on things like inventory or investing in new capital assets.

In fact, even as the economy returned to growth in 2009, U.S. manufacturing capacity declined. In other words, CEOs decided to let their equipment and assets rust away rather than pay for maintenance, let alone replacement.

To escape this malaise, we need to persuade those in corner offices to spend, build and hire. There is also a case to be made for the government, which can borrow at negative inflation-adjusted interest rates right now, to raise capital to remedy the nation's deficient infrastructure, its underperforming educational system and its inefficient health care system.

I'll cover these issues in my column next week.

SIL Chart

For now, with growth unacceptably slow and joblessness rising again, global central banks are adopting a more aggressive easing bias as they seek to keep inflation high to ease the pain of deleveraging. That means low interest rates and other economic stimulus.

For weeks, I've been recommending to my newsletter subscribers and readers to focus on precious metals and the related mining stocks in preparation, because inflation tends to move them higher.

This means stocks like First Majestic Silver (AG), which is up nearly 9% since I added it to my Edge Letter Sample Portfolio on July 25. Or the VelocityShares 3x Long Silver (USLV), which is also up nearly 9%.

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If we're headed for five more years of this mess, these types of positions are poised for another dramatic upswing.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column. He has recommended First Majestic Silver and VelocityShares 3x Long Silver to his newsletter subscribers.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.