Is Recession Really in the Tea Leaves?

Ever since the yield curve inversion and several disappointing economic reports, the mainstream media have declared repeatedly that the United States is due for a recession. Of course, they are pushing openly for a downturn just to hurt President Donald Trump’s re-election chances, proving that they are truly the privileged ones as they clamor for job losses and diminishing income. But is this how recessions happen? Contrary to what the e-lliterate talking heads on the Counterfeit News Network say, economies do not suddenly shrug their shoulders and tell their psychoanalysts that they feel like going into contraction mode.

The Powell Putsch Lives

Speaking in Zurich recently, Federal Reserve Chair Jerome Powell said that he does not anticipate a recession either in the United States or in the global economy. Powell did note that the central bank will act appropriately to “sustain this expansion” by monitoring factors, risks, and geopolitical mishaps that threaten growth.

The fed chair believes that the economy will experience moderate growth moving forward, repeating statements he made during the Jackson Hole symposium last month. Still, the consensus is that the Eccles Building will cut interest rates at the next Federal Open Market Committee (FOMC) policy meeting this month by at least 25 basis points. Some on The Street are prognosticating the return to ZIRP (zero-interest-rate policy).

It is difficult to believe that the head of the most powerful institution in the world would concede that a financial crisis is on the horizon. This would send the market into a tailspin, and panic – along with a bombardment of presidential tweets – would engulf the nation.

By the way, Trump once again lambasted Powell, arguing that the Fed raised rates “way too early.” He then added this doozy: “Where did I find this guy Jerome? Oh well, you can’t win them all!”

That said, Austrian Business Cycle Theory (ABCT), data, and trends do back Powell up on this one.

Know Your ABCT

According to the National Bureau of Economic Research (NBER), a recession is defined as "a period of falling economic activity spread across the economy, lasting more than a few months." There are also other more precise factors, including a two-point jump in the unemployment rate to a level of at least 6% and a 1.5% decline in gross national product (GNP).

Because the US economy is presently experiencing the longest expansion in the nation’s history (124 months), the people who play experts on television say that the country is due for a steep recession. While America’s chronic long-term health condition leaves something to be desired, a variety of factors suggests that a recession is probably not happening in the coming months as many on the left hope.

First, it is important to note that the bust phase of the business cycle is not dependent on the length of the boom phase. Nowhere does it state in the ABCT that a boom cannot linger for a decade or two, though the longer the charade goes on, the closer the economy is to the collapse. Despite apparent weakness in the US economy, some contend that a rate cut is unnecessary to sustain the manipulation; the main belief among libertarians is that this will just exacerbate price inflation.

Second, it is crucial to understand what triggers the recession, at least from the Austrian Theory perspective. ABCT states that the business cycle is a result of immense growth in bank credit from artificially low interest rates brought on by the Federal Reserve, which spurs borrowing and lending that leads to a significant jump in capital spending. This causes malinvestment. When money supply growth either slows down or contracts, a subsequent recession happens in an attempt to reallocate investment.

In the first half of 2019, growth in the M2 money supply – coins, notes, money market funds, and short-term bank deposits – was sluggish. Since then, however, the M2 has skyrocketed, especially after the central bank cut rates. With the Fed expected to pull the trigger on another quarter-point rate cut this month, you can anticipate a surge in money-printing toward the end of the year, which is necessary to cut rates. Plus, we are seeing a gradual return to quantitative easing after the Fed purchased $14 billion in Treasuries last month.

Some will point to the trade war as the cause of the economic slump. While it is true that the trade dispute has been damaging to both the US and the global economies, the spat is unlikely to ignite the bust phase of the business cycle. Though, if the US-China bickering lingers for another decade, which White House Chief Economic Adviser Larry Kudlow suggested to reporters could happen because of the monumental stakes, then it would have serious consequences on the recession (depression?).

When the bust phase finally appears, it will be frightening to watch. Cover your eyes and wait for the jump scare! Subzero interest rates, bailouts, and trillion-dollar stimulus packages  – all are on the table. Everyone knows politicians and bureaucrats never just allow the recession to cure what ails the economy, so anticipate intervention – and lots of it.

A Lifetime Supply of Ink

Some critics are justified when they say there is only so much money that the central bank can pump into the economy. The Fed is not emulating the initiatives of socialist paradises Zimbabwe or Venezuela, so who is to say that the Eccles Building cannot suppress rates and print the money to do so for another ten years? The next recession will be a whopper, thanks to the enormous levels of debt taken on by consumers and government alike. This time, however, the Fed will be unable to resuscitate the economy, prematurely firing off its inventory of bullets, arrows, rocks, bananas, and loose change.

~

Read more from Andrew Moran or comment on this article.