from Birch Gold Group:
From Peter Reagan at Birch Gold Group
By the time you read this, the U.S. economy will likely be officially mired in what could be a long and deep recession.
Ark Invest CEO Cathie Wood said Tuesday we’re already there:
We think we are in a recession. We were wrong on one thing and that was inflation being as sustained as it has been.
Well, she’s far from the only one who was wrong about inflation. And she’s just one of many CEOs issuing stark warnings about the U.S. economy.
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Let me explain why I think we’re already in recession. Here’s what a recession is:
The working definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP)
Technically, the National Bureau of Economic Research (NBER) can declare a recession at any time (that’s why the pandemic panic recession only lasted two months). However, we’ll stick with the more traditional working definition: two consecutive quarters of GDP decline.
The first quarter of 2022 saw a sharp economic contraction measured in “real GDP” (adjusted for inflation – if we don’t adjust for inflation, it’s way too easy to fudge the numbers). This is the first contraction since the pandemic panic, and a strong indicator that the economy was slowing.
Initial Q1 estimates placed GDP growth at -1.4%, which was revised to -1.5%, and most recently revised down again to -1.6%.
So what about the second quarter of the year?
The Atlanta Fed’s GDPNow report forecasts changes in real GDP ahead of the Bureau of Economic Analysis (BEA)’s official reports. (Yes, our nation has an absolutely absurd number of bureaus, commissions and departments all monitoring the same data – your tax dollars at work!) Over the past two months, GDPNow second-quarter estimates have steadily declined from +2.5% to, as of this morning, -1.0%. (Just four days ago, the number was +0.3%!)
Short of a miracle, the forecast isn’t likely to improve much.
There you have it: two consecutive quarters of economic contraction. By my calculations, we’re officially in a recession.
I’ve excerpted from the BEA’s explanations of why this slowdown is happening right now:
record trade deficits, supply constraints, worker shortages and high inflation
consumer spending growth was revised lower… decrease in spending on goods, namely groceries and gasoline
housing investment was subdued
With politics removed from the analysis, notice how the BEA’s analysts don’t blame Putin as a factor in the slowdown?
Pretty much everything on the list lines up with what we’d expect to see, historically, during a recession.
Keep in mind, recessions are a fact of life. They’re cyclical. So the real question is, will this one be typical?
Recession virtually guaranteed – but recovery is not
I expect this recession to be unlike anything we’ve seen for decades.
We’re too close to the line. After decades of near-zero interest rates, there’s just not much the Fed can do to stimulate the economy. As Jim Rickards put it:
Monetary policy won’t get us out because the Fed is basically out of “dry powder,” despite its recent rate hikes. There’s just not enough room to cut rates before being back to zero.
That’s pretty straight-forward. The current Effective Federal Funds Rate (EFFR), despite the “shock and awe” talk, despite the reeling markets and collapsing bubble, only 1.58%. It’s still far too close to zero, especially considering that the Fed’s own Taylor Rule says rates should be somewhere between 5.4%-9.3%.
We’ve got a long way to go – and we’ve already seen the damage a paltry 1.5% increase in rates did to the economy.
Does Fed Chair Jerome Powell have the steely nerves and the steady hand necessary to keep increasing rates despite this ongoing economic slowdown?
Honestly, I doubt it. At some point later this year, I fully expect recession to become a bigger political liability than inflation, at which point the Biden administration and the Fed will fire up the old printing presses once again and flood the economy with dollars.
That’s the approach they used in the past – after the dot-com bust, during the Great Recession, and spectacularly during the pandemic panic.
Here’s the thing that makes this time different: as the number of dollars increases, their impact on the economy decreases. In other words, dollars spent to dig the U.S. economy out of this hole will actually make matters worse.
The shrinking Keynesian multiplier
Famous economist John Maynard Keynes, in his classic 1936 work The General Theory of Employment, Interest and Money, developed the notion that deficit spending can boost economic growth.
It works like this:
- The government gives away $20 to you
- You use that $20 to buy a few gallons of gas
- The gas station owner uses that $20 to pay his fuel supplier
- The fuel supplier uses that $20 to repair their fleet of tanker trucks
- And so on.
Basically, by handing you $20, in this example the government has created at least $60 of economic activity. This is called the “Keynesian multiplier.”
How many times every dollar gets passed from hand-to-hand is called “the velocity of money.” Higher velocities mean more economic activity, greater confidence, and robust growth.
The velocity of money decreases during times of economic pessimism or uncertainty. When we talk about “emptying your bank account and hiding the money under your mattress,” that’s just an evocative way of saying, the velocity of money is slowing.
Makes sense, right?