Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.

In addition to when it will happen, there’s also the question of how deep the next recession will be. A shallow downturn wouldn’t be fun, but compared to the last one might feel relatively refreshing.

Alas, I don’t think we will be that lucky. I think the opposite: The next recession will be deeper, longer and far more painful to many more people than your average recession, and could persist as long as the last one. That is because the next recession in all likelihood will be truly global. If you sailed through 2007–2009 without your lifestyle changing, I wouldn’t assume it will happen that way again.

Ironically, but not surprisingly, it will be the response to the last recession that makes the next one so much worse. Part of the reason is that investors once again “learned” that if you simply stay the course, the market will get you back to where you were and more. The massive move into low-fee index investing instead of active management will make the next recession more painful.

You must understand that 75% of today’s wealth is in the hands of retirees and pre-retirees. Most have a significant portion of their money in index funds, and they’re going to see significant erosion of their retirement assets. I’m thinking especially of those depending on public pensions, which are heavily weighted to a form of index investing. Public pensions are already significantly underfunded (in general) and a bear market will make them even more so. It will be painful and I can assure you it will cause a lot of political angst. Today I’ll tell you why I think this. It may be one of the more important letters I’ve written in the recent past, so read carefully.

Unwise Investment

Central bankers have a well-worn playbook for handling recessions. Cut interest rates, increase liquidity, and otherwise make more capital available to the private sector. This helps businesses hire more workers and raise wages. Then gradually remove all the stimulus as growth recovers. (Usually, at least. Greenspan waited too long to tighten after the 2001 recession and begin raising rates, creating the dynamics for the subprime crisis.)

The playbook truly fell apart in 2008. The system had so much debt that adding yet more of it didn’t have the desired effect. As noted, easy money from the last crisis had created the situation. Even dropping short-term rates to effectively zero didn’t help because it was creditworthiness, not interest costs, that kept people and businesses from borrowing.

The Bernanke Fed’s answer was quantitative easing—essentially a way to stimulate lending at longer maturities. It had an effect but not the intended one. Instead of going to productive use, the new stimulus helped banks deleverage and public companies leverage up and repurchase their own shares, or as we will discuss below, simply buy their competition and short-circuit the “creative destruction” cycle. This pushed asset prices, i.e. the stock market, higher and made it appear recovery was underway. Unfortunately, the “recovery” was the slowest recovery on record.

All that cash eventually trickled through the economy, not to people who would spend it on useful goods and services, but to yield-starved investors. Why were they starving? Because the Fed was keeping rates low. They had little choice but to take more risk, which is what the Fed wanted them to do in the first place. So they plunged money into venture capital, private equity, IPOs, emerging markets, and everything else they could find with potentially decent capital gains and/or yields.

The result was a massive wave of investment, some good and some, well, let’s just say based on hope and little else. And as we know, hope is not a solid investment strategy. Some businesses that had good stories (the so-called unicorns) found themselves covered with cash by investors for whom hope sprang eternal. Eager to show they could turn the cash into gold, the companies sought to emulate the Amazon model, using money to buy growth without profit. In the hopes of going public at some point and cashing in, they kept the game alive. Think Lyft. (Note: I like Lyft and wish them nothing but success. But still…) Investors, because they wanted to believe the story they were investing in was true, watched and waited.

They’re still waiting. And here we are.