Rescue From Recession Won’t Be So Easy This Time

Optimism in the face of adversity is an admirable trait, perhaps an American one. But the line that separates resilient optimism and stubborn self-delusion is a fine line that, when crossed, can only bring about merciless frustration.

So it’s natural to worry a bit about the evolving state of mind 19% of Americans rate the country’s economic condition as “excellent” or “good,” according to a poll. by Quinnipiac this month.

Who could they be?

Perhaps if you don’t have a baby formula-fed, sold all of your crypto investments three months ago, haven’t tried to buy a home or taken out a loan, don’t have a 401(k) or any exposure to a broader range than the stock market, don’t drive a car (at least not on gas) and somehow manage to get a raise above the 8.3% that consumer prices growing, everything must be pretty good.

Or it could be that the universe of short sellers Netflix (73% down from its peak) or Peloton (89% down) with dubiously good times is much larger than we imagined so far.

Of course, the bigger story is that the ranks of optimists are rapidly thinning. At the end of 2019, the horrifying days when Covid-19 was still just a tremor in the finger of a researcher in the Wuhan and Ukraine laboratory was the place that has led to the impeachment of US presidents, 73% Americans rate the economy as excellent or good.

President Joe Biden once worked for a man who asked us to believe in the audacity of hope. Less than 18 months into Mr. Biden’s presidency, hope now demands a concrete audacity. The same Quinnipiac poll tells us that 80% of Americans rate current economic conditions as “not too good” or “poor.”

The worrying thing now is that even their seemingly realistic assessments do not fully explain the difficulties ahead. America finds itself trapped in an economic landscape it hasn’t experienced in 40 years. Navigating them successfully will require a degree of policy-making ingenuity that has been absent in the monetary and fiscal spheres in recent years.

To be fair to 19%, there are reasons to measure satisfaction. The US economy has recovered more quickly than most from the depths of the Covid-19 recession. The need for labor remains almost desperate. The unemployment rate is back near its historic low. Hiring rates and voluntary quit rates are both near all-time highs. If you own your home, you’re feeling about 30% richer than you were before the pandemic.

But there are reasons to think that these lingering causes for hope will soon be extinguished.

Read more Free Expressions

For more than 30 years, we have become accustomed to a familiar pattern in business cycles. As the economy expands, the Fed raises interest rates to curb inflationary pressures. Finally, some combination of credit squeeze or excessive inventory accumulation then leads to a downturn in the economy. The Fed is cutting rates – and in recent cycles, has provided an extra dose of quantitative easing through asset purchases – and soon enough free money will be available to revive animal spirits and make demand for mobility. switch back.

This is the pattern in cycles ending in the last four recessions: the 1990-91 credit downturn, the 2000-01 tech bubble boom, the 2007-09 Great Recession, and the 2007-09 Great Recession. short-lived Covid recession. This is the real economy version of the “Fed offering,” the comforting view that, when the market plunges, the central bank comes to the rescue with cheap money.

But it’s a pattern facilitated by massive simultaneous deflation. Each of those recessions started with a lower inflation rate than at the start of the previous recession. This creates a comfortable environment in which the Fed can aggressively stimulate the economy without fear that any resulting spike in demand will create destabilizing inflationary dynamics. The Fed could start cutting rates in 1990, 2001, 2007 and late 2019 because each time inflation has been lower than it was at the end of the previous cycle.

The Fed is raising interest rates again today, as in the past, to stave off inflation – a bout of inflation it insists was only temporary a few months ago. If the past is any guide, this tightening will soon cause a sharp decline in economic activity.

But if the United States enters a recession later this year, it will do so with inflation rates still much higher than at the start of last year’s recession. The Fed would then cut rates when it was in jeopardy—between its duties of price stability and full employment.

Fiscal policy will have little scope to help. Even as the federal deficit falls from historic highs, total debt as a percentage of gross domestic product has doubled since the start of the last recession in 2007. Public debt is now equivalent to about 100% of GDP. . Fiscal pumping at those debt levels will further exacerbate price pressures.

Decades of deflation encouraged increased fiscal recklessness and escalating monetary greed. It’s not just the 19% who are about to discover that these don’t come without a cost.

The Journal’s Editorial Report: Fears of inflation and recession put Democrats at risk. Image: AP / Shutterstock Composite: Mark Kelly

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