Whither the Economy?
up, down, or sideways?
Anyone that’s worried about his life, his fortune, and his sacred honor — or at least his 401(k) — has to be wondering what happens next with the economy.
First of all, the Federal Reserve Board. It has two modes: fighting inflation and fighting recession.
Right now the Fed is fighting inflation and has raised short-term interest rates from zero to 4 percent in 6 months.
Second, there is the real GDP. It has been flat since January 1, 2022.
Third, there are stock prices. They peaked January 1, 2022, when the M2 money supply stopped increasing. But in recent months the S&P has shown signs of life, up 12 percent since October 1, 2022.
So, when does the economy respond to the Fed’s tightening?
I looked at the run-up to the last big economic crisis, 2006-09.
The Fed started cranking up interest rates in March 2004, raising the 3-month Treasury Bill in two years from 1 percent to 5 percent by July 2006. By mid-2006 there was a clear “reverse yield curve” where short-term Treasuries had a higher rate than long-term Treasuries. T-Bill rates started down in March 2007 — Fed switching to fighting recession — and bottomed out at zero percent by January 2009.
S&P stock prices peaked in June-July 2007, and started down seriously in early 2008, bottoming out in March 2009.
Real GDP started down in Q1 2008 — over a year after interest rates peaked — and bottomed out in Q2 2009.
So. Back in the 2000s the Fed raised interest rates slowly from 1 to 5 percent over two years. M2 money supply went from $6.9 trillion in August 2006 to $7.7 trillion in March 2008 and then flat until Lehman Brothers failed in September 2008. Then off like a rocket in six months to $8.4 trillion by March 2009.
This time T-Bills went from 0 to 4 percent in 6 months. Just between you and me and don’t tell Treasury Secretary Janet Yellen. And, of course, M2 money supply has gone from $15.5 trillion in January 2020 to $21.7 trillion in January 2022, and since then M2 has gone down slightly.
So what will happen this time? Really, who knows, especially the Bidens and Powells and Yellens and their experts at the controls of the economy.
But I’d say that the very fast swings in monetary and interest rate policy over the past three years are going to end up in Lehman Brothers type failures, and Sam Bankman-Fried and his crypto failure is just the start.
My basic notion about the economy is that nobody knows nothing. It is way too complicated for any one person to understand.
Nevertheless, politicians and war-lords manipulate the economy to finance their wars and power plays. And this causes horrible distortions to the economy and privations to ordinary people.
If the war-lord loses his war or his battle with climate change then the economy is devastated, and, as the Russians say, the old people start eating the paint off the walls.
If the war-lord wins his war, there is still a tricky adjustment from a war economy where the gubmint basically takes everything to a peace economy where the gubmint takes only enough money to reward its supporters.
Assuming that our leaders just won a glorious victory against COVID — and forget the complete mess on the green energy front — I’d say that there is a definite “period of adjustment” ahead of us.
And I’d say the best government policy would be to reduce payments to its supporters to a dull roar.
And I’d say that the Biden administration — indeed the entire ruling class — has no clue just what a tricky adjustment is ahead, and how, chances are, it will be a major disaster for the American people, and possibly the ruling class itself.
However, I admit: I am not an expert.