The most important question intended for asset prices right now, from stocks to houses to Bitcoin, is whether we’re due for a recession.
Last week all of us got confirmation that based on the traditional definition of a economic downturn – 2 quarters associated with negative growth – we have been already in a recession.
The response with this administration has been denial and word online games rather than in fact trying to stop the glide. At which point the betting shifts to whether it’s going to be a shallow 1991-style recession or a big, 2008-style a single, perhaps with a financial crisis in order to spice things up.
Bigger-picture, what we’re seeing is a concentrated version of the world that paper cash delivers: an endless series of booms, busts, and financial crises, all to sustain a permanent siphon of the peoples’ wealth towards subsidizing federal loss and Wall Street-brokered leverage. Millions are waking up to what fiat money does, which could be bullish for Bitcoin in the long run.
The particular Numbers
First, the GDP numbers. Going by the Bureau associated with Economic Analysis (BEA), real GDP shrank at an annualized rate of 1. 6% within Q1 and then dropped an additional annualized 0. 9% in this most recent Q2. GDP is definitely revised several times through the one fourth, so that could change intended for better or worse. In the meantime, of course , if they’re under-estimating inflation, as many believe, then your real decline could be much worse. Perhaps on the size of a 3% annual drop in GDP.
To put that in perspective, in 2008 real GROSS DOMESTIC PRODUCT shrunk 1 . 6% in the first bad quarter (Q1 ’08), then rebounded in order to plus 2 . 3% within Q2 before falling to -2. 1% in Q3. So , just reading the particular numbers, we’re in a considerably worse spot at the moment than 2008, even if we believe the inflation numbers.
By the way, about all those definitions, the administration properly claims that the private economics outfit NBER has the final say on what’s the recession. The problem is that over the past 75 years the NBER has never failed to call 2 down quarters a economic downturn. Rather, they’ve only used their discretion to call a zig-zag a recession, as in 2008. So NBER only calls it even worse, never better than the two-quarter standard. Why the chicken-little NBER is suddenly disregarding falling boulders is a very valid question, but then you probably already know why.
How Long will the Pain Final?
So how to next? Given the Fed is openly engineering a recession in order to slow inflation, the key question is whether inflation comes down on its own or may the Fed try to professional harder.
Right now, to be fair, inflation can come down to some degree. After all, if you shut down half the economy worldwide, there will be some learning curves along the way. Considering there’s little public appetite for new lockdowns and Ukraine is settling into a slog, barring the still-unlikely Chinese escalation over Taiwan things should keep on ironing out.
Indeed, money printing is usually settling down to more normal rates: Over the past year, money supply in M2 has grown 5. 6% , similar to the Obama and Trump eras. That’s down from 25% in the first season of the pandemic and 11% in the second year.
So the main driver associated with inflation — federal investing — is easing.
Of course , that doesn’t indicate the pain is over; inflation notoriously lags money supply, generally around 18 months. And M2 growth has only recently calmed down. Meaning money could continue driving higher inflation for, going simply by history, another 16-odd several weeks.
At the same time, the slowing economy itself will probably start slowing inflation through “ demand destruction” — fewer people buying less stuff. Indeed, that’s the Fed’s goal in driving higher rates, to choke from the private economy. But the issue is will private need come down a little or a lot? Literally, nobody knows — as so often in economics, we have never had precisely this sequence of economic shock absorbers, so we can only guess through history.
By the way, a few weeks ago I did guess based on history , and the punchline is it will get ugly depending on the comparables, but nobody knows which will occur. Indeed at a recent meeting in Europe, Chairman Powell himself remarked , “ We now understand better just how little we understand regarding inflation. ” Invites problem of why he did not resign on the spot. But underlining that nobody knows exactly how fast inflation will drop – if it falls whatsoever — and how much of the particular economy it takes down from it.
Of course , this particular “ demand destruction” increased against the shrinking economy itself. That is, if the real economy is shrinking because of Biden’s War on Creation or since new climate or race mandates are imposed to the economy, then inflation goes up simply because there’s less stuff being produced.
Finally, I think the biggest unknown upon inflation, hence on GDP’s future path, is what happens to the giant lump associated with fresh money that was driven out during Covid — indeed, nearly $5 trillion . Much of that new money just isn’t showing up in inflation yet because it remains stashed within bank accounts. It’s stashed possibly because people didn’t require the free money and saved it, or simply because they saved up as a cushion throughout the scary times of Covid.
Effectively, all of that money has been buried in the backyard in terms of inflation – it’s not for sale. But as soon as those bank accounts start to vacant, which should happen both since Covid fears recede and as the economy slows, all those frozen trillions are launched into the wild to go run after a now dwindling pile of goods, giving inflation another wind. You can see in the graph below it’s just starting to trickle out, with much more to go.
So , in sum, the main drivers associated with inflation these past two and a half years are falling, but most of that fresh money is still locked up. So we could still have a long period associated with elevated inflation. And, whenever we do, the Fed can continue panic-hiking into a serious recession or even a financial accident.
One interesting Zerohedge chart this week noted that bouts of high inflation often last two and a half years before coming down. Which would place us at another year or so of pain. Of course , that 2 and a half year cycle would not drop from the sky; it can driven by the central bank itself reacting to bad numbers and jacking rates, noting that lag between M2 and inflation.
Having said, the orgy of money printing these past two years has been substantially higher even than the “ Great Inflation” of the 1970’s – it turns out it took a lot of trillions to tranquilize the population into accepting lockdowns. Therefore the magnitudes are likely to be larger, or the timelines longer, than what we’ve seen since the fifties.
Recession: Just how long and How Deep
The shape of recession will be a question of how those four inflation factors (slowing M2, fading Covid, falling production, draining savings) influence Fed rate decisions, which often either crash harder or even soften the blow.
If inflation really does come down a lot due to those people four factors (“ on its own” is how the news will frame it), then the Fed will temporarily stop or reverse hikes, plus we’ll probably limp together like the Obama years. That is, government will continue to remove new economy-hobbling regulations plus taxes, but the economy can handle it, cleaning up the messes as quickly as government causes them to be.
Indeed, which is going bet on Wall structure Street, with current projections for positive but fading GDP growth the rest of this season and 2023, ending next year at 1 . 3% true growth – pathetic, although not a 1970’s-style catastrophe.
So that’s the best case: we coast just like a car that’s run out of gas, slowing gradually till either a new administration reverses course or until sufficient economic deadwood has been cleared that the economy turns to growth.
And if inflation doesn’t come down “ on its own? ” Then the Fed, after its habitual several quarters of denial, gets back to economy-crushing hikes. Ushering in a potentially severe economic downturn.
Of course , there is an out-of-box solution, which is to finish inflation by dramatically lowering federal spending . Simply getting back to pre-Covid could drop federal spending by some $1. five trillion per year, while getting returning to a Bill Clinton-scale government drops more like $4 trillion every year. We’d have the debt paid back in a decade.
Trimming a couple trillion off government spending would indeed tame inflation for decades to come. However you’d have to be pretty naï ve to think this management and Fed will go that will path.
So that leaves the most likely stubborn-inflation scenario: Fed pretends it’s not there for a while, then crashes the economy so We individuals get to, once again, tighten our own belts.
So , bottom line, it’s a recession right now; whether it gets worse depends on inflation, and policymakers goofing around whistling previous graveyards should give anybody pause.