The approach of a pivotal moment in time resembles a troubling spectacle. As one prepares for what may be a dire outcome, there is a peculiar excitement that becomes evident. Each moment before this impending change carries the weight of uncertainty.
When it comes to the economy, there is no way to halt its relentless advance toward an uncertain future. The critical moment is drawing near, and we intend to make the most of our time.
We remain vigilant, listening for signals about what lies ahead. Recently, a notable observation came from Bank of America-Merrill Lynch’s head of U.S. equity and quantitative strategy, Savita Subramanian:
‘“We are seven years into a full-scale attempt by central bankers to stimulate demand.”
‘“By analyzing various indicators that have traditionally predicted recessions, we can forecast that, if current trends continue, a recession will hit in the latter half of next year.”’
More Troubling than the Great Depression
It’s important to note that by the time a recession is officially recognized, the economy has typically been on a downward slope for six months. The standard definition of a recession is two consecutive quarters of negative growth in the gross domestic product (GDP).
If, as Subramanian predicts, we do enter a recession in the latter half of next year, does that mean the decline will technically begin in the first quarter of 2017?
If that holds true, the new President will take office on January 20, 2017, amidst troubling economic conditions. It will likely be a grim day for the United States, as the incoming leader will inherit the most significant economic and financial turmoil the nation has ever faced.
This suggests that we may be entering a chapter of American history that could prove more challenging and prolonged than the Great Depression. Unfortunately, it appears that the next President, along with the Federal Reserve, the Treasury, and others, may be powerless to mitigate the impending crisis.
While the fiscal stimulus and monetary policies since 2008 have delayed the worst effects of the Great Recession, they have failed to correct fundamental economic imbalances. Instead, these methods have led to significant misallocation of resources and rampant distortions in asset prices.
Moreover, these strategies have inflated government debt, severely limiting the Fed’s ability to respond to future crises. Yet, this doesn’t mean central planners won’t attempt to implement more drastic measures…
Introducing Your New Stimulus Allocation Czar
This week, former Treasury Secretary Larry Summers, known for his controversial opinions, made headlines on CNBC. He pointed out that interest rates traditionally decrease by about 500 basis points during a recession, but we are already operating at very low rates.
“At some point in the near future, a recession will impact a significant part of the world. Yet, we lack the resources to respond effectively,” Summers noted.
“This is a serious concern for monetary policy frameworks, highlighting the need for more robust fiscal policies than we’ve implemented so far.”
Summers seems to be positioning himself for a future role advocating for a grand fiscal spending spree, with infrastructure investment touted as the solution. Perhaps he is contemplating a role as a designated stimulus allocation czar.
“In the short term, this approach fosters job creation. In the medium term, it enhances economic capacity. Ultimately, it could lead to greater economic growth and help improve budgetary conditions by addressing significant maintenance liabilities in our national balance sheet.”
In essence, Summers proposes that taking on more debt to finance projects will somehow enable us to alleviate existing debt burdens. His logic suggests that the solution to overspending is, counterintuitively, to spend even more.
This idea is precisely the kind of risky strategy that many politicians find appealing, providing them with justification to spend funds that do not actually exist.
Therefore, as the economy faces potential freefall early next year, prepare for a significant response from Washington. In previous bouts, the deficit exceeded $1 trillion; this time, we may witness a deficit of $2 trillion—or even more.
This may sound implausible, yet given the trends of the last several years, a $2 trillion deficit may very well be inevitable. Keep this forecast in mind.
Sincerely,
MN Gordon
for Economic Prism
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