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A Looming Recession on the Cards?

When the financial markets bottomed out about a decade ago, Wall Street looked like the iconic scene from Gone With the Wind when the camera panned back to show thousands of bodies – dead and wounded – at the burning of Atlanta. The economic collapse was a bloodbath unseen since Black Tuesday of 1929, when the Dow Jones Industrial Average crashed 12%. By the arrival of 2009, families had lost their homes, retirees had seen their assets wiped out, and taxpayers had been ordered to bail out banks and automakers.

Is the United States due for something similar soon? The recent numbers do point to a crisis.

Recession Talk

So far, this is the first month (December 2018) since November 2008 that there have been no junk bond sales, as no company has borrowed funds from the $1.2 trillion U.S. high-yield corporate bond market. About $176 billion worth of corporate bonds plunged from “A” credit rating status to “BBB” this quarter. The CBOE Volatility Index (VIX) has been parked above 20 since October; anything above this number suggests the market fears a decline in stocks.

FAANG stocks are in a bear market, crypto is plunging, and crude oil is trading barely above $50. Banks appear to be getting cold feet on risky lending, turning down about half of subprime applications. Consumer debt tops all-time highs. Subprime is all the rage these days.

The experts anticipate something major. A new CNBC Fed Survey raised the chances of a recession over the next 12 months to 23%, and a separate study revealed half of America’s CFOs fear a contraction next year.

Should the Federal Reserve hold off on rate hikes, it could suggest that Chair Jerome Powell and the Federal Open Market Committee (FOMC) also see something stirring beneath the surface.  President Donald Trump is now encouraging the central bank to hold off on rate hikes, telling the Eccles Building to “feel the market … before they make yet another mistake.”

If the United States is hit with a recession, it’s all President Trump’s fault, correct? Because he took credit for the record gains over the last two years, he should be the fall guy for the pain of the future? Well, in a word, no. While it might be convenient and pleasurable for the left to blame Trump for a financial crisis, he will not be the cause of the bust – and neither will his successor.

Politics of the Economy

The economy is a political football for presidents and the opposition. When things are booming, presidents take credit for the good times. When the market goes sour, White House occupants either deny the negative developments or pass the buck to the predecessor. The media also are complicit in this behavior, often ignoring the roaring economy of the last two years; the press will certainly home in on recessionary figures. [perfectpullquote align=”left” bordertop=”false” cite=”” link=”” color=”” class=”” size=”24″]Administrations and politicians can establish a pro-business environment…[/perfectpullquote]

But should politicians take credit or blame for everything that happens in the economy? Administrations and politicians can establish a pro-business environment of low taxes, few regulations, and small government. But that is all they can do, relying on the Fed for manipulations. The rest is achieved by the marketplace, from job creation and swelling portfolio valuations to bigger paychecks.

In 2012, President Barack Obama told business owners, “If you’ve got a business – you didn’t build that.” This type of rhetoric distorts the role of government and creates resentment among left-leaning voters. Meanwhile, to cap the Thanksgiving weekend, Obama expressed gratitude for himself and his administration’s policies he suggests led to falling oil prices, which, again, dismisses the power of the free market.

When the Republicans slashed corporate taxes, the government gave companies their money back, which they then used to raise wages, invest in workplaces, boost benefits, and buy back stocks. The left hated this move because it believes corporations and the wealthy should pay more than they do today, though the top 1% pay 40% of the country’s taxes.

But Trump hasn’t done himself any favors with his trade war that threatens growth in the same way the Smoot-Hawley tariffs of the 1930s helped extend the Great Depression.

If the U.S. slips into a recession at any time during Trump’s presidency, he will put the blame on the Fed for raising interest rates, unwinding the $4.5 trillion balance sheet, and moderating money-supply growth. Should Trump lose his re-election bid and the U.S. then gets saddled with a recession, two things will take place: The billionaire real estate mogul will pull an “I told you so!” for not being given a second term, and his successor will blame Trump for the mess he or she inherited.

End Big Government

Warren G. Harding

Recessions happen; a bull market cannot stampede forever. These economic hiccups are necessary to allow the good bacteria to kill off the bad. The issue is when the state employs Keynesian measures that prolong the common cold and metastasize it into full-blown influenza.

These discussions of whose fault it is or isn’t would be moot if the era of big government ever came to an end. Sure, the current administration has achieved quite a bit in terms of fiscal policy, but it still maintains the hallmarks of big government: more spending, bigger deficits, and rising national debt. Indeed, it is highly unlikely that the White House reverses the big government trends of the last 70 years, evident in the latest numbers that the debt this year surged at the fastest pace since 2012.

Of course, no matter what happens, it will be exploited for political gain.

What’s the real solution?

Every president would be better off looking to Warren G. Harding. When the 1920-1921 depression happened, he cut spending, lowered taxes, sat back, smoked cigars, and had affairs with women. A model presidency!

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