How bad could the next recession be?
morganstanley.com
morganstanley.com
This is common wisdom but I wonder how true it is. A majority of Americans live paycheck to paycheck [1] so it stands to reason the stimulus paid about a month's rent and groceries. I'm having trouble understanding how this stimulus is responsible for today's inflation.
[1] What percent of Americans live paycheck to paycheck?
https://www.google.com/search?q=what+percent+of+american+liv...
When you increase the money supply dramatically, that money is in circulation, and various factors determine its average velocity. There's also a multiplier effect in the form of debt created on top of base money. But the key point is that almost all money is continuously flowing through an economy. Incidentally, disincentivizing people from leaving money at rest for too long is precisely why it's important for a currency to be inflationary.
It isn’t at rest when it is in bank accounts, either. A large percentage of that is loaned out.
Money is created when people take out loans right? (like for a home or car, or when a buisness takes out a loan for capex)
So if the population contracts (i.e. the boomers start dying) doesn't that mean there should a contraction of money supply since fewer people will exist to take out loans?
No they are not orthogonal. You seem to still not understand. What happens to the money used to buy an unproductive speculative asset? The answer is it keeps moving and, in fact, on average it probably continues to move very quickly so long as it's stuck in speculation limbo. Hence, on average, it doesn't stay trapped in speculation limbo for very long. It's a brief detour, not a destination.
And would you say it's a good thing for the circulation you describe to float free of productive activity? I would say, sure, for a little while and in moderate amounts. But if allowed to expand without bound and continue indefinitely it risks untethering minds and markets from the material foundations that make it all possible in the first place
Receiving $600/week in addition to unemployment for 24+ weeks was.
Many hourly workers were making more money than working when you combine $600/wk and unemployment at 30-60% of their regular paycheck.
This dramatically stimulated the economy. And businesses.
And then there are all the PPP funds that equates to 50-75% of a companies annual payroll.
Also dramatically affected companies, and gave a false sense of security - preventing innovating into ‘the new normal.’
These people weren't exactly rushing out and buying Krug and caviar with their $40K/yr pre-tax wage. That's what some tech workers get every month.
[1] https://aspe.hhs.gov/topics/poverty-economic-mobility/povert...
As you say, basically $40k/person, which is more than a lot of people make (think especially of families with part time workers, like students or parents). And with reduced expenses for many: no commute, no other work-related expenses like clothes, often no childcare costs, less eating out and entertainment.
But yea, we had people work construction and dock work for cash.
We got about 30% back. One guy in particular came back for about 4 hours before telling us where we can stick it and he was going back on unemployment, anyone of us would have said prior to his vacation he had a good work ethic and never once expressed issue with the job.
As to PPP, we took a very small amount to help keep people on, and two competitors took millions and have now fired a lot of people and moved mfg over to China. So… yea, I don’t think these were the right moves.
"Small business owner receives $2m in PPP, then uses it to buy a second house" is a common anecdote.
Insanely magnified purchasing power for those with access.
Consider housing. Blackrock and the Google Squad hoovered up a ton of real estate and converted them into rentals. Normal people can't offer 20-40% above asking for a home, so they were priced completely out of the market.
Starter homes have doubled or tripled in price over the past four years. Salaries have not risen to match.
Same is true for many other goods, and when combined with deliberate supply chain sabotage at the behest of the ruling class, effectively turned a significant chunk of the population into serfs overnight.
The knock-on effects of this aren't going to be pleasant.
People take pride in their work when they have a future to build towards. That no longer true for younger folks, or even a lot of people in their prime working years, so everybody is just sort of... phoning it in.
Imagine you're a high school graduate today. All you can see down the road for you is an either an infinite series of "gigs", or, if you're lucky, the luxurious serfdom of corporate servitude. In the latter case, you still don't earn enough to ever own property, but you get free food and access to approved activities from your masters in the company hierarchy.
Given how much stable companies borrowed to beef up their balance sheets, my suspicion is that the core business environment may not be as badly affected as many suspect, as they have the means available to weather the storm, but that there will be a lot of folks caught out in it when it really hits, likely with quite a few bankruptcies in the tech sector, and as a result, a fair spike in unemployment. That will undoubtedly bleed into consumer spending, but again, given the healthy balance sheets we see in more core industries, I'm not seeing a cascading failure of the whole system on my crystal ball just yet.
Guessing a 6-7/10 if we wanna put a number on "how bad".
I would attribute inflation to some combination of the "silver tsunami" of retiring baby boomers, the Russian war of aggression upon Ukraine, the lasting disruption of the COVID pandemic, profit seeking from corporations, over reliance upon JIT inventories and underinvestment into infrastructure for decades, and the usual rent seeking. Some blame may be laid upon the Fed for keeping rates so low for so long, but there were probably sound political and economic reasons for doing so. However, I'm not economist, just an accountant who studied economics for awhile.
> I'm having trouble understanding how this stimulus is responsible for today's inflation.
The stimulus was paid out more to businesses than to citizens. The airline needed bailouts, paycheck protection program, etc. Defense spending is always increasing. Child tax credits and an expansion of snap/wic benefits and stimulus checks reduced child poverty for a time, but we're regressing in the US now as far as child poverty and malnourishment rates are concerned. I don't suppose I covered everything, and I am just recapping from memory here.
https://www.cnbc.com/2020/05/21/many-americans-used-part-of-...
However I don't doubt many considered the stimulus payments "found or free" money and basically gambled with them.
As for the managers of those mutual funds...well, most of those funds don't have them anymore, since the Vanguard revolution initiated by Jack Bogle, as the bulk of the industry is passive mutual funds, which simply track their associated index. They're cheap (in terms of expense ratio), but offer nobody steering the ship to react in the face of turbulence...always a trade off to bear in mind.
followed by doubling of fuel costs which were in part driven by huge surge in demand after lockdowns ended plus no new supply of oil refineries because, in part, the war on fossil fuels in the US and elsewhere
and all fed by our expectations of higher prices that allow the greedy corporations to raise prices with less fear.
Anyone ignoring the effects of the Russian invasion of Ukraine is missing a big part of the picture IMHO. That's the main driver behind higher food and fuel prices (there's shortages of them in some places, which drives prices up and worries markets even in places which aren't impacted - e.g. Indonesia banned the export of palm oil due to rising oils prices at home due to the lack of sunflower and similar oils normally exported from Ukraine and Russia). Then add in the supply chain issues due to the pandemic and the war (a big chunk of the world's heavy duty air cargo aircraft are out of commission), and why are people focusing only on the money supply?
The matter of whether or not the response is justified is another matter, but to clearly understand the economic situation it must be recognized that a choice was made regarding a response, and that choice is what has left us with these repercussions.
As with every war, nothing is as simple as it seems in Ukraine.
This time, we have fiat currency, we've offshored most of our manufacturing, and find ourselves dependent on a failing globalized just in time supply chain. We're now dependent on continually drilling and fracking new oil wells to keep up with demand. (Fracked wells go dry in a few years, instead of a few decades)
It's not looking good. Especially when you have a public with zero trust in institutions.
Nobody is worried about "The Great Simplification" that's rapidly coming down the pike, as the easy to reach oil runs out and it takes too much energy to get at the rest.
That one hasn't failed yet. But it might happen, in case that there is a conflict between China and Taiwan. Everybody is in deep shit, if that one happens...
Right now we got:
- rising energy prices and rising 'commodity' prices; Now these trickle down to every product, so that there is rising inflation.
- it is harder to raise money, due to rising interest rates
He said 'failing' not failed. Supply shortages are still being felt in local industries based on anecdotes I'm hearing. I'm pretty sure that'd qualify as 'failing'.
I always wonder to what degree financial institutions say what they're thinking, versus what they want the public (or other financial institutions) to think. Or even what they want others to think their beliefs are.
Games in Type II chaotic systems get confusing quickly.
My predictions are that the federal government will step in dramatically in the American southwest next year. Water and crop issues will persist next year just as they've been getting worse for over a decade now, which will increase migration rates, conflicts, and elevate food prices. More people will move from the American southwest to the northwest and eastern US. The Russian war will drag on. To the world's hunger and pain, the US will reduce agricultural and growth exports due to water issues. US efforts to 'reshore' manufacturing and chip fabs in particular will falter and slow as shipping rates fall, as cheap labor centers become available and more cost efficient again, as labor costs in the US increase and labor actions increase year over year even with poor economic conditions, and as water issues prevent or delay Intel and others from building their water intensive chip factories in the US. I could go on but hopefully you get the picture. As I've said before, I'm just an accountant with some light studies in economics and mild curiosity, so maybe take some these predictions with a grain of salt.
So we pay 10% of our revenue each year in interest. Not too bad.
But do some simple arithmetic… $437 billion is 1.43% of $30.5 trillion.
As interest rates rise, that percentage rate will go up:
2.86% = $874 billion interest
5.72% = $1.78 trillion interest
We are almost assuredly going to hit these rates across Treasury yield curve over the next year or two. Series I Treasury bonds are already paying 9.6%!!
What’s going to happen when we’re paying almost half of revenue on interest on our debt?
Bonds have an analytic property called duration. Most people interpret that to mean the amount of time until the bond matures. The true definition of duration though is a bond’s interest rate risk.
“Old debt” interest rate can go up because of:
1. A bond matures and must be refinanced at current market rates
2. A bond has a variable interest rate and simply goes up at the next reset period
A higher average interest rate on the “old debt” will be coming across the treasury curve, it’s simply a matter of time.
The big sneeze involved some fancy face decorations as well. These things aren't cheap either.
Why would something happen?
The important number is total debt, not government debt. It's the balance of payments that's killing us, and unloading government debt onto individuals is a no-op in relation to that.
On the other hand, we have had loose money (interest rates near zero) for most of the last decade or more. I don't think that makes the oncoming recession really "inflation triggered [rather than] caused by credit excesses".
In startup land, think about the parts of the business that get humored when the company takes a round. Maybe the business doesn’t work, maybe it’s a vanity project for some executive/board member. Without a compelling reason to upset people, these can be allowed to go on for a long time.
Maybe someone can enlighten with hard numbers, but last I looked dead-man-walking companies like Macy's and TJMaxx have billions and billions of bonds outstanding while their annual revenue is a fraction that.
Now as rates rise they can't go to the well again and all these bonds will end in default. Who gets hurt? Pension plans, mutual funds, all the "safe" funds... so buyer beware with corporate bonds right now.
The fed was consistently raising interest rates from 2016 up to the pandemic, and the u-6 rate was consistently falling, and median weekly earnings rising, all in the same time frame.
Mostly inflationary environment of low interest rates, heavy stimulus, high consumer spending, supply chain disruptions, and irrational exuberance.
Probably looks more like the 2000 cycle than the 2008 cycle as a result.
2008 and other debt driven recessions are much worse - https://en.wikipedia.org/wiki/Balance_sheet_recession
All of this debt information is publicly available and the market has "priced it in".
This is a bold prediction given that multiples are near all time highs [1]. The Schiller PE ratio suggests that in historically normal times stocks would be worth 50-60% less than they are today, and monetary policy is quickly returning to normal.
I suspect this is the crypto bubble burst vs the dotcom burst 2.0. But if you were frisky enough to invest in crypto you deserve what is coming, just like a pets.com investor in 2000.
So many people are insanely leveraged.
As crypto and the stock market deflate, they will have to sell assets to cover their collateral difference. This means tax, which means more sales. This is going to continue all the way down. I would expect housing price crashes in local markets that skew towards tech.
do not get me wrong, I think decentralized approach is good and we do have the same problems with banks serving more credit that they should.
just saying that this is another factor in this pile. as well as mega billionaires who themselves unbalance the system without any resistance. at least, the damage they cause should be reverted back to society in someway.