WE ARE ALREADY IN A RECESSION!
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
WE ARE ALREADY IN A RECESSION – THE QUESTIONS ARE: HOW LONG; HOW PAINFUL?
Everywhere I turn, I hear the dreaded R-word. Not Republican, something far worse R-E-C-E-S-S-I-O-N!
A recession is a deterioration of the economy, lasting longer than a few months, with painful losses in:
- Gross Domestic Product {GDP}
- Jobs
- Household income
- Savings
- Household Net-worth
- Industrial production
- Retail sales
- AND MORE
Based on 1Q 2022 GDP {decreased at an annual rate of 1.6 percent} and expected decline in 2Q GDP, plus the reality we are experiencing declines in all the above factors – WE ARE LIKELY IN A RECESSION!
The U.S. goes into recession about every seven years, with the last recession occurring from December 2007 to June 2009.
INFLATION
Even Warren Buffett noted how much his favorite breakfast at McDonald’s has increased! “On his five-minute drive to the office, which he’s been making for the past five decades, Buffett stops by McDonald’s and orders one of three items:
- Two sausage patties,
- Sausage, egg, and cheese biscuit,
- Or bacon, egg, and cheese biscuit
“When I’m not feeling quite so prosperous, I might go with the two sausage patties, and then I put them together and pour myself a Coke,” A good market day warrants the more expensive bacon, egg, and cheese biscuit. And in the middle is the Sausage Egg and Cheese biscuit.”
I’m guessing Mr. Buffett has recently settled for the two sausage patties. I’m asking for tap water!
THE FEDERAL RESERVE’S TOUGH JOB IS LOWER INFLATION WITHOUT PUSHING THE U.S. INTO A RECESSION! {NOW IS THE TIME TO PRAY}
THE ROLE OF FEDERAL RESERVE {FED}
The job description of the Federal Reserve {FED} Chairman mandates the use of high tooting {southern speak} words. FED Chairman, Jerome Powell called inflation transitory (temporary) in 2021. Janet Yellen, Treasury Secretary, the White House Press Secretary, and a long line of others echoed Chairman Powell and called inflation temporary (pardon –transitory)! Why say temporary when you can force people to google a word. President Biden avoided the word transitory as he did not know the meaning or pronunciation. Instead, he whispered, “everything will be all right, folks.”
We know they were as mistaken as a famous (for the wrong reasons) Captain when he attempted to set a speed record and sunk the “Unsinkable” Titanic. That was the last time the word unsinkable was used in cruise ship marketing!
This morning June 29th I listened to FED Chairman Powell explain how they were shocked that inflation was non-transitory. Their precious models were wrong. REALLY?????
LET’S LOOK AT 2020 – 2021 FACTORS
- A global and deadly pandemic with zero treatments or vaccines
- $5.5 Trillion pandemic relief payments (under Trump and Biden) put a lot more money into the checking accounts of many Americans and helped drive consumer spending. Many employees gainfully employed, including my own daughter and niece received two stimulus checks. They both deposited the money in their savings accounts.
- But many Americans started spending, driving demand up at the worst possible time.
- Manufacturing facilities that utilize just-in-time processes had to shut some lines down or worse case the entire plant. While demand is soaring, supply is rapidly deteriorating. Driving prices up.
- Our supply chain on life support is unable to fulfill demand, driving prices up. Think about used and new cars.
The FEDS believed a 100+-year-old model would work in this crisis? WOW – AND WE PAY THEIR SALARIES!
BLESS THEIR HEART
The FED, “bless their heart” {in the south, this means: “you are pitiful and did something you shouldn’t but were too dumb to know better”} is responsible for maintaining REASONABLE core inflation (about two and 1/2 percent). Currently, U.S. core inflation is approaching nine UNREASONABLE percent. For reasons known only to the FED, core inflation does NOT include price increases for food and energy (gasoline, cost to power your home, etc.). I believe most of us eat food and use some type of energy daily. Just bless their little heart.
The bottom line – inflation is UNREASONABLE today, and when you count food and gasoline, you probably say words you would NOT in front of Mom!
A friend spent $175.00 to fill up his truck! Amazingly, he did not sit on the ground and cry.
CAN THE FED LOWER INFLATION WITHOUT SINKING (PUN INTENDED) THE U.S. ECONOMY?
The Fed uses interest rates like a doctor uses a defibrillator when a patient’s heart is beating out of control. When the heart is beating too fast, the doctor may attempt to slow it with a defibrillator. When inflation rises, the Fed will increase short-term interest rates, slowing the economy to get inflation under control.” The Fed wants to make borrowing money more expensive/painful so consumers and businesses hold off on making investments and hiring employees, thereby reducing demand and pushing down prices. BUT, when the ER doctor hits a patient with too much juice, or the FED increases interest rates too fast, you may KILL the patient. The main worry is the FED raises interest rates too quickly and dampens demand too much, stalling our economy and creating a RECESSION.
Banks borrow money from the FED. When the FED increases interest rates charged to banks, the banks raise interest rates charged to individuals and businesses. Thirty-year mortgage rates rose from about three percent in 2020 to almost six percent YTD 2022. A $400,000 mortgage payment at three percent is ~$1,686.42 per month. That same mortgage costs ~$2,398.20 per month at six percent interest. The doubling of the mortgage interest rate increases the payment by $711.78 EVERY MONTH, or a 42.21% increase. The average American family cannot afford that significant increase. This increase in mortgage rates is slowing demand for housing and will most likely reduce home prices and values. And eliminate some jobs in the home building industry.
Currently, the FED is increasing monthly, Federal short-term interest rates charged to commercial banks. The central bank wants to raise rates gradually so that the economy slows just enough to bring down prices without creating too much unemployment.
WE WANT A SOFT LANDING! CAN THE FED DELIVER?
Captain Sully had several advantages the Fed Chair does not. The captain was 100% in charge. The Federal Reserve is part of the Biden Administration, with many old roosters clucking around! Where is Colonel Sanders when you need him!
One driver of inflation is the incompetent energy policies of the Biden administration, which reduced the U.S. energy supply. “On his first day in office, Mr. Biden canceled the Keystone XL pipeline and halted new leases in Alaska’s Arctic National Wildlife Refuge. A week later, he banned new oil and gas leases on federal lands and waters, and in June, he shut down exploration on existing leases in ANWR. In October, Biden increased the regulatory burdens on building pipelines and other infrastructure. This February, Biden limited leasing in Alaska’s National Petroleum Reserve.”
Shortly Biden heads to the Middle East on bended knees to blow (whoops spell check) beg the Saudis. Versus work with, NOT AGAINST, U.S. energy producers!
CONCLUSION
Fighting inflation by pushing up interest rates will weaken the U.S. economy. The only question is how much.
“Monetary policy alone can’t cure sustained inflation. The government will also have to fix the underlying fiscal problem. Short-run deficit reduction, temporary measures, or accounting gimmicks won’t work. Neither will a bout of growth-killing high-tax “austerity.” The U.S. has to persuade people that over the long haul of several decades, it will return to its tradition of running small primary surpluses that gradually repay debts. That outcome requires economic growth, which raises long-run taxable income. Raising tax rates alone is like climbing a sand dune, as each rise hurts income growth. The U.S. also needs spending reform, especially on entitlements. And it needs to break the cycle that each crisis will be met by a river of printed or borrowed money, bailouts for big financial firms and stimulus checks for voters.
The good news is that inflation can end quickly, and without a bruising recession when there is joint fiscal, monetary and economic reform. The inflation targets New Zealand, Israel, Canada, and Sweden adopted in the early 1990s are good examples. They included deep fiscal and economic reforms. The sudden end of German and Austrian hyperinflations in the 1920s, when fiscal problems were resolved, are more dramatic examples. In the U.S., tight money in the early 1980s was quickly followed by tax, spending, and regulatory reform. Higher economic growth produced large fiscal surpluses by the end of the 1990s. Without those reforms, the monetary tightening might have failed again. If those reforms had come sooner, disinflation might well have been economically painless.”
Mr. Cochrane is a senior fellow at the Hoover Institution and author of “The Fiscal Theory of the Price Level,” forthcoming this fall.
Based on 1Q 2022 GDP {decreased at an annual rate of 1.6 percent} and expected decline in 2Q GDP, we are likely in a RECESSION. The questions remain: HOW LONG; HOW PAINFUL?
Two closing thoughts: The Fed Chair job does not pay nearly enough! We should hire FED Members with real-world (non-government/fairy tale) experience and competency.
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Wilson’s No-Kill Animal Shelter: https://wcnkas.org
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an NC. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, and real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
