Investing Pioneer – 4:16 EST – 11/16/2022
You might be wondering why.
Why must “the bubble” pop? (If there even is one.)
Why must a recession start?
Fair questions. There is one great, yet simple answer: too much debt.
The opposite side of debt is credit. Indeed, standard economics apply. You’ve probably heard about, or are well-versed even, with the cycle of credit. Booms and busts.
With a strong central bank, these busts can be diminished (if conditions are right) by providing liquidity and intervention when a bust starts (a recession), and reducing liquidity when markets get too hot (too much currency supply = inflation).
This is where the Federal Reserve’s dual mandate comes in. Ensure inflation stays at the 2% target (presumably the ideal amount) while fostering stable economic growth and employment rates to the best of their ability.
There’s a problem. Consistent central bank intervention over time can lead to a build of problems. Under normal conditions, you’d think this results in a recession, and you’d be correct. A recession clears out the problems. Namely, bad debt, companies, and other things that are a drag on the economy.
Remember when I said, “under normal conditions”? In technical terms, central bank intervention is not necessarily a reflection of what would occur under normal conditions. Meaning, the effectiveness of recessions in clearing out problems can be reduced. These problems are a drag on the economy, diminishing growth, or fostering great recessions.
Instead under unwise (long-term) central bank intervention, the build-up of problems may continue. In more understandable terms, a dissociation or extreme bifurcation between the extent to which there is credit, and the truly sustainable growth of the economy. Take CAPEX. There have been low levels of expansion, maintenance, or exploration for energy and other crucial commodities, in part attributable to excess credit. This eventually leads to energy shortages in tandem with excess credit, causing a severe inflation in commodity prices. Indeed, cycles apply to commodity prices but, when an artificial force exerts pressure on the economy in an un-sustainable way, an equal and opposite effect (to a great degree) will occur when the end of the line is reached, exacerbating the swings in energy prices.
This article will not dive into the specifics for a detailed review of exactly why and how this is happening.
To continue, the above may seem dubious to some. Eerily similar or the same to many arguments over the years that “haven’t come true”.
More recently, people like to call upon predictions made after 2008. Those predictions stated something along the lines of too much money printing and the inevitability of a collapse of the economy leading to depression, hyperinflation, etc.
The counter-argument is, we will continue to see mild to moderate recessions in their cyclical fashion, a mere reflection of the ebbs and flows of the markets.
The latter argument does not account for, or instead dispels or discounts the idea that an underlying problem has been accumulating for several years, even decades.
The general thesis is as follows: the Federal Reserve will continue to raise rates and may sustain heightened rates for an extended period for 2023. Following this, inflation will drop to 2-3%, and rates may be slowly brought back down. In the process, a mild to moderate recession will have happened due to these rate hikes (making money more scarce or difficult to obtain, hence creating a disinflationary and recessionary event). After 1-3 years, economic growth will be back. Many people believe this general thesis is true. The fact is, it probably isn’t.
That’s due to the underlying problem, creating a series of other associated problems.