Power & Market

Now That We're Officially in Recession, What Lies Ahead?

On the heels of what might be heralded as one of the most important Fed meetings in over a decade, all we can do is speculate about what our central planners have in store. Meanwhile, consider the anticapitalist mentality running rampant in the world around us: the global pandemic, civil unrest across the USA, sky-high world central bank balance sheets, nearly $26 trillion in US debt, the highest unemployment rate since the Great Depression, the Bank of England calling for the worst economic slump in the last three hundred years, the Fed still having potentially trillions of dollars more in unused liquidity facilities at its disposal, and the stock exchange on the verge of reaching all-time highs once again. Then The Economist has the audacity to publish an encouraging article that suggests "Don’t Worry About Inflation—Yet" with the headline quote:

Monetary stimulus is unlikely to spark sustained price rises while labour markets remain depressed.

Because, according to The Economist,  money creation, combined with less goods and services produced, doesn’t lead to a rise in prices. Nor does it cause a rise in the prices of assets such as stocks and contribute to the overall unaffordability of life for the average family. Don't forget to factor in a $14.3 trillion household debt level which has now surpassed the debt level during the Great Recession. Yet we’re supposed to think that this is acceptable since interest rates are low and "inflation" appears to be "feeble" according to mainstream news sources.

As for the Fed, they remain under media blackout. No comments have been made publicly this week or last. However, billionaire hedge fund manager Steve Druckenmiller highlighted the disconnect between the stock market and reality best on CNBC:

What is clearly happening is the excitement of reopening is allowing a lot of these companies that have been casualties of Covid to come back and come back in force.

Surely, the several trillions of dollars that were literally created out of thin air by central banks had something to do with the rally in the stock market. Or, explained differently, if the Fed had not taken  extensive measures to support the economy by purchasing trillions of dollars in debt, would the stock market have rallied as it has?

As we watch the market continue to rise, the disconnect with reality becomes even more pronounced. The National Bureau of Economic Research (NBER) press release on Monday declared the obvious:

The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.

The good news is that the NBER offered a faint source of optimism at the conclusion of the statement, noting:

The unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.

With countless challenges ahead, it will sadly be up to a handful of wealthy elites to steer the economy in the direction they see fit. Although the FOMC statements are normally templated and lackluster, it’s the Q&A that provides valuable insight into the mind of a planner. We can only hope someone will ask questions such as “How does a central bank unwind a $7 trillion balance sheet?” or “What does a $750 billion bond/exchange-traded fund program have to do with the Fed’s mandate?” But if not, at least we’ll get to hear about their invaluable economic projections!

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