For some reason, there are people on the internet predicting a new recession, here, now, in early 2022, where the main concern is hysteresis and high inflation. I find it ridiculous to the max. Here’s why.
Some Background
This first came to my attention when I saw a post on the toxic waste dump of an internet community r/superstonk. The post claims that mainstream financial institutions, via CNBC of all places, are covering up the arrival of a massive, recession-triggering market crash. I’ve seen claims of an oncoming recession elsewhere, from twitter to real life, all surrounding perceived hypervolatility in finance.
Add in above-average inflation and a crash in crypto prices, plus an adjusting market, and every annoying person you know is calling a recession. What’s interesting to note is that crypto, supposedly a hedge against inflation, matches stock returns, supposedly fueled only by easy money and not fundamentals, better than it does inflation. To quote the Washington Post:
The stock market sell-off has been pronounced and attracted the most attention in recent days. The Dow Jones industrial average fell 3.9 percent for the week, while the broad-based S&P 500 shed 5.1 percent since Tuesday. The tech-heavy Nasdaq composite index fell 6.2 percent this week. But instead of investors pulling money out of the stock market and piling it into bitcoin, the pullback from crypto has been even faster.
“You’d think with the inflation we’re seeing, you’d see the opposite,” said Bob Fitzsimmons, the executive vice president for fixed income, commodities and stock lending at Wedbush Securities. “That’s been one of the selling points for bitcoin, so its correlation to stock prices has surprised me.”
Yet, the story I’m seeing seems to proximate inflation and recession, ignoring the crypto crash, throwing around terms like institutional confidence with no idea what they mean. To understand why this isn’t a recession, however, we must first understand what actually triggers recessions.
What Triggers Recessions
Recessions are falls in real output relative to expected output, such being equilibrium output based on capacity (which is not always fully utilized). It is a “pluck” on the string of growth (there is no such thing as overexpansion):
Depending on the cause, recession can be accompanied by inflation or deflation. Almost invariably, that cause is a demand (read: monetary) shock. Supply shock recessions are quite rare.
To avoid a demand-shock recession, the monetary authority must credibly commit to a spending level that sustains the output of the economy. This involves raising real wages by raising spending, easing financing conditions, and giving clear policy guidance. See more here.
A supply-shock recession is easier to understand: a physical factor exogenously destroyed some amount of production. However, the monetary system still has a role to play in curbing the recession.
The Great Recession was not a market crash-triggered recession. It was instead caused by real and nominal factors like monetary policy1 and housing scarcity.2 So where are those factors now?
Why This Isn’t A Recession
A couple factors can clue us in to the actual stance of the economy. Real factors, like capital investment and labour markets, are one, as well as nominal factors like Fed policy announcements and expectations. What we are seeing is a churning real economy and uncertainty about monetary policy.
“Real” markets are trending strong, but COVID-19 still lurks, thus causing lingering weakness. Capital investment is very high, as is labour market tightness. What problems remain are lingering frictions.
On the policy side, inflation is high, but firms still seek additional easy liquidity (for aforementioned reasons). Nominal GDP growth is on track, but that does not preclude bumpiness in the transition to a “normal” economy.
I think a boom is building, but it’s going to be harsh tremors until it erupts.3
To quote Yeats’ “The Second Coming”:
The darkness drops again; but now I know That twenty centuries of stony sleep Were vexed to nightmare by a rocking cradle, And what rough beast, its hour come round at last, Slouches towards Bethlehem to be born?
Postnote
I haven’t really been active for some time. I’ve had a tremendous amount of personal issues (if there is a legitimate desire to hear more about why I despise high school, be sure to let me know), but I should be more active from now on as I’ve decided to stop caring. Posts every Friday is the goal, if not more often. Be sure to share or subscribe if you enjoyed this post.
Be sure to share or subscribe if you enjoyed this post.
See Scott Sumner’s The Money Illusion (2021).
See Erdmann and Sumner, 2021.
Weirdly, some sense can be found in this article from Forbes.
The Abject Ridiculous of Current Recession Calls
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