So, all of the talking heads are saying the US economy is headed for or already in a Recession. The technical definition of a Recession is 2 consecutive months of economic contraction. The 1st Qtr 2022 GDP was reported as -1.5% and the Fed has predicted 0% growth for the 2nd Qtr which has but 6 days left as I write. I think the 2nd Qtr will probably end in another negative growth Qtr so the official Recession would then have arrived.
What Happens during Recessions?
Because economic activity slows during a Recession, the demand for various products and services goes down. This will often cause previously rising prices to drop, maybe not precipitously, but the demand be lower means the supply can gradually become adequate and an equilibrium reached. Recessions tend to increase unemployment because workers added in anticipation of growth are not needed. This is deflationary.
Eventually, if left to work itself out in the real economy, Recessions run their course and growth returns. The time line for a return to growth varies but 15 months is about right. So if we are in a recession as of the 1st Qtr 2022 the return to growth can be expected sometime in 2024. Whoever is President then will get this growth as a gift. By and large, spending policies have been inflationary and we have witnessed this in our gas, food, shelter and other prices. But Inflation is not merely increased prices. It is increased money Supply. Who increases Money Supply? The Federal Reserve. They are vested with the power to issue debt and monetize it thus creating money out of thin air. This is sometimes called the money printing press. Works for me.
A good question to ask is can a Recession be accompanied by Inflation. Yes, to the degree that the money supply or stimulus printing money occurs. The problem here is that the Recession brought on with Inflation as an underlying factor needs tightening money supply to tame Inflation NOT an ever increasing money supply in an attempt to avoid the economic pain. So the Recession if left more or less alone will resolve itself over time. It is considered painful but it has an ending down the road. A Recession interfered with to avoid the pain will again inflate and could worsen even go deep and into a Depression.
The Federal Reserve is trying to stop Inflation by raising Interest Rates. This forces the economy into recession and gradually lowers prices by destroying demand for products and services. However, if the political pressure on the Fed is to make the stock market rise again etc., and they give in to that pressure, they will stop increasing rates and again feed the Inflation monster. This can lead to much higher inflation and even hyper inflation. That is a nasty thing. Read up about the Wiemar Republic's hyper inflation or Zimbabwe's or Argentina's. These and others involve serious debasement (lowering of value) of currencies. The US seems on this path in mho. To re-inflate for political reason is nuts. At first it will seem to be better because the stock market will go up and businesses can more readily borrow cheaply, but when it inflates so high and wages a re well behind, it will crash.
I am watching the Federal Reserve closely. My take on Powell is that he has become a political tool. I think he may do one more rate hike in July then revers course to avoid a deepening recession and start printing money again. This re-inflation will not end well.
Life can surprise at times, and I'd sure like a big surprise right about now. Here's hoping that the Government under Biden gets the balls to cut spending and takes the pressure off the Fed to keep the presses running. If that occurred, the Recession could run its course and the lower spending would help bring on some deflation. Lowering prices would tend to bring wages back into balance and people could get on wit their lives. Too much interference in the money supply as we've had has historically ended societies. Wise up DC.
Best,
Donn Marier
DM-Your Own CFO