The basic idea of a balance sheet recession (attributed to Richard Koo) has been well-publicized: when the liability (debt) side of household and business ledgers reach danger heights, stakeholders respond by reducing debt and increasing savings rather than increasing spending and debt.

The result is a slowdown, a balance sheet recession.

What do we call a recession triggered by a collapse in profits? Corporate profits have soared to unprecedented heights in the “recovery” of 2009-2015: it’s certainly been more than a recovery in terms of corporate profits:

What’s left to push profits even higher? The mainstream answer is: just more of the same: more global growth, more expansion in emerging markets (EM), renewed monetary and fiscal stimulus in the developed markets (DM), and the tailwind of lower energy costs.

The possibility that the era of unprecedented profits might have been an aberration and is now drawing to a close does not register in the mainstream financial media. If we look at the red line I drew on the chart, it’s easy to see the incredibly abnormal rise in corporate profits in the era of rapid globalization and financialization, both driven by cheap-money policies of central banks.

Note that profits literally exploded once central banks opened the credit spigots, and lending standards were loosened to the point there were no real standards (2002 onward).

This globalized flood of nearly-free money pushed asset valuations to absurd heights everywhere. These insanely high asset valuations supported additional debt, which then fueled higher asset prices, a virtuous cycle of expanding debt pushing asset prices higher, when then enabled more debt, and so on.

The problem with bubble valuations is revealed when participants must sell to pay down debt. When the debt-monkey can’t be dislodged from the debtor’s back, assets must be sold. And in the thin, rarefied air of most markets, any real selling quickly crashes valuations, which were predicated on more buyers, not more sellers.