Welcome to Recession-ville

Time for a pop quiz…

Q. What’s the sworn enemy of inflation?

A. Recession.

Recessions aren’t just the enemy of inflation, they’re its natural antidote.  

That’s because recessions slow everything down. People buy less stuff. Manufacturers produce less stuff. Farmers plant less stuff.  

If nobody’s buying, prices can’t go higher.

The fact of the matter is, and I’ve been saying this for months to my paid subscribers, it’s going to take a recession to break the back of the current bout of inflation that’s gripping the global economy. 

But what exactly causes recessions?

The Reality of Recessions

There’s a commonly accepted understanding that two consecutive quarters of negative GDP growth constitutes a recession. By that conventional wisdom, we should be entering our next one this July 28.

But that’s not exactly accurate. According to the Wall Street Journal:

There’s no precise definition. Instead, the task of identifying recessions is left to a little-known panel at the National Bureau of Economic Research, a nonprofit academic group. A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” NBER says on its website.

Which is even less helpful. 

There has to be something we can point to that causes recessions beyond the judgment of eight nonprofit economists. There are a number of things that have been blamed in the past…

  • Too high interest rates (A spike in the cost of capital makes growth prohibitively expensive)
  • Massive asset bubbles (More accurately, the busts that follow)
  • Government intervention (The only thing the government can deliver regularly, reliably and without fail are unintended consequences)
  • Too much debt and leverage (See asset bubbles)
  • War (Redirects resources that could otherwise support an economy)

The list goes on. But I’d only call these “contributing factors.” Because I believe there’s only one thing that’s actually at the root of all recessions…

The single cause of a recession is a lack of confidence — aka uncertainty.

Uncertainty about the future — uncertainty about their future — is what drives consumer behavior. When times are good, confidence is high. When times get uncertain, confidence can quickly disappear.

And recessions are the result.

Another Dilemma for the Fed

Years ago, the Fed came up with a euphemism — “soft landing” — to suggest that they could slow the economy enough to cool inflation without crashing it into Mount Recession. Which if you think about it, is pretty much a logical oxymoron. 

They want to believe they can slow the economy, while maintaining confidence in the economy. If they can just get you to cut back to one frappuccino a day instead of two… everything will be great. 

Well it’s not that simple. Because look at what Americans have been dealing with today. Like how earnings struggle to keep up with inflation (real earnings)…

Hourly Earnings

Source: Tradingeconomics.com

Inflation

Source: Tradingeconomics.com

Or how, as a result, personal savings has been getting crushed…

Personal Savings

Source: Tradingeconomics.com

Which likely has led to skyrocketing consumer debt…

Consumer Revolving Debt

Source: StLouisFed.org

All resulting in record low consumer confidence…

University of Michigan Consumer Sentiment

Source: Tradingeconomics.com

If uncertainty and a lack of confidence are what cause recessions, we’re likely already there. 

Whether the NBER says so or not.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily