Recessions Are Like Sleep: Seemingly Wasteful, But Necessary
So-called market manipulation by private firms is illegal under the Securities Exchange Act of 1934, but for the government, it is completely legal. In fact, the Federal Reserve does it every couple of weeks by adjusting the money supply.
Recessions always reflect previous economic errors, but they do serve a vital purpose. In a “perfect world” everyone would be able to live like kings, where their paychecks increase, while the cost of goods and services does not. But that type of “fantasy world” economy is not feasible. The government claims to create such an economy, but their attempts merely mask the problem and create the sleeping giant of inflation.
The economy repairs and reinvents itself during recessions. It shakes out bad companies and bad debts, and the worst of which must be weeded out. The U.S. shelled out $10 trillion in combined fiscal and monetary stimulus in two years after COVID. That did not stop the 2022 stock market decline. Massive government spending without being followed by market growth is a recipe for eventual disaster.
The best companies should be so strong that they can withstand recessions, while the weak companies will falter. That is not how the country works. For example, in 2006, Morgan Stanley, among the major conglomerates in American finance, made around $30 billion in revenue, but somehow, they needed the government to bail them out during the Great Recession, among other financial institutions. Of course, small businesses that spent below their means during the late-2000s got nothing from the government. The bailout system rewards overly risky and unwise decisions. Recessions that will not be followed by government overreach will cause businesses to make financially wise decisions. Sure, the Wall Street banks can make excess amounts of money as the free market allows them to, and because of smart leadership, but it should not be because of a government “insurance” system.
Harry Dent, a financial expert and Harvard MBA graduate said:
If you think recessions are bad, you don't know [jack] about anything. You don't understand the most fundamental thing about the economy. It's like saying we should never go to sleep because we could work those extra eight hours. That shows you don't understand the human body.
If the human body skips a night of sleep, it will be very unproductive the next day, making the eight hours it forgoes through sleep well worth the productivity of the next day. The American economy has gone 15 years without “sleep,” and eventually the collapse will come.
The problem with market bubbles is letting them rise to extremes. Once they get to those extremes, they must find fair value eventually, and there is never a soft landing. Housing prices have increased rapidly since the wear off COVID-19, and the best thing to happen in the housing industry would be for prices to fall back to fair value. Housing should go up because of the cost of building a house, and the demand for the land, not because of speculation.
It is fair to say that the Fed had overstimulated, and because of which, they were forced to tighten because inflation punched them in the face. If Harry Dent is right, the upcoming recession will be like a ticking time-bomb. No one knows when it will happen, but just that the result will be very, very, destructive. This economic contraction will come back to haunt the companies who made malinvestments during the 2021-22 spending spree.