Why a global recession is inevitable in 2023
economist.com
economist.com
Its like when I watch Artosis or Tasteless give a prediction during an SC2 tournament and immediately be wrong. "caster's curse" i think its called.
Inflation in the last 6 months in the US, as measured by the Fed’s CPI, has been about 2%. All the higher inflation headlines are simply comparing the CPI 12 months ago to today, but the fact of the matter is ever since June/July CPI’s annualized inflation is already at roughly 4% or lower. The Fed may not raise interest rates more than 0.5% above where they are today. If they stop there, the recession risk is IMO minimal because employment metrics are still very strong.
Almost all journalists do not know or understand this, which is why a lot are hand wringing that rates may need to raise much more from where they are today (to Volcker levels) to combat inflation, because from their perspective we have raised them so much only for inflation to have gone down by a third. What they don’t realize is we are already past the inflection point, and interest rate swaps aren’t pricing in much more increases. At least in the US, IMO the risk of a recession is minimal
What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals.
And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities.
my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).
Recent inflation was driven primarily by two things significant increase in energy costs. Just like in the the 70s large oil spikes will drive large inflation as the cost of everything requires energy.
Second was sever supply constraints due to lack of labor due to Covid (either people out side, plants running minimally, or older people retiring, or deaths). Labor force participation rates dropped 2% world wide 3% in the use. Overall labor force participation has been slowly decreasing over time (due to countries moving up the development index), but that was roughly a decade worth of gradual reduction that just dropped overnight due to Covid. Supply became severly constrained for the same number of people. Increasing unemployment will only make the situation worse.
Look at world labor force participation rate [1], it still hasn't recovered raising unemployment will only make it worse. Or look at US which dropped almost 3%.
What needs to happen is that needs to recover. It started recovering slightly but still not back to the level it needs to be. That's what will fix inflation, increasing production of goods and services, not restricting them more.
What will increase labor force participation? Increasing wages. For almost-retirees, those with deciding whether to work or not wages aren't sufficient to incent them to do so. Raising wages would bring people back into the labor force (without causing inflation in real terms). Capital is taking such a large portion of the gains of productivity in high productivity countries that wages aren't drawing in people to work. Increase the wages and that will fix itself. That started to happen and the economy started rebalancing, and then govts began stepping in to halt it. As a result the are pushing us towards lower production with supply shortages (more or less stagflation).
1. https://data.worldbank.org/indicator/SL.TLF.CACT.ZS 2. https://www.bls.gov/charts/employment-situation/civilian-lab...
https://www.atlantafed.org/chcs/wage-growth-tracker [ click the "wage level" button ]
And there has been a historically low number of job seekers per job opening:
https://www.bls.gov/charts/job-openings-and-labor-turnover/u...
And the US unemployment rate has been running at historically low levels of 3.5-3.7%:
https://fred.stlouisfed.org/series/UNRATE/
I guarantee you that the top graph there of how wage growth is running is what is most concerning the Fed when they talk about inflation.
We had commodities inflation during the last oil spike around 2010-2014 and the Fed didn't care about that. They know that commodities inflation acts as a tax and a natural brake on the economy and is cyclical in nature, so they didn't act. It didn't show up in wage growth.
We have both acting together right now, but it is the wage growth portion that the Fed is reacting to.
And here's a good short reaction article to Jerome Powell's comments earlier this month:
https://nymag.com/intelligencer/2022/12/jerome-powell-needs-...
Particularly focus on:
> “We’ve made less progress than expected on inflation,” Powell said.
compared to:
> The Labor Department’s consumer price index shows that, on average, prices have risen just 0.2 percent during the last five months — a stark turnaround from the high of 1.3 percent in June
The Fed is not as trivially stupid as the portrayal of the person who can't get past the y-o-y inflation headlines. They understand that CPI inflation is down. Oil and gas prices are back down. Why are they still yapping about less progress than expected keeping inflation under control? They're not pants-on-head stupid. Their definition of inflation encompasses wage growth (and I'd argue that in fact that is the definition of inflation that they are MOST concerned about) and isn't any of the CPI numbers.
And you can read this concern directly from Powell's remarks:
> Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last three months. Although job vacancies have moved below their highs and the pace of job gains has slowed from earlier in the year, the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers. The labor force participation rate is little changed since the beginning of the year > [...] > The third piece, which is something like 55 percent of the index, PCE core inflation index, is non-housing-related core services. And that’s really a function of the labor market, largely. The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high. Vacancies are quite elevated, and, really, there’s an imbalance in the labor market between supply and demand. So that part of it, which is the biggest part, is likely to take a substantial period to get down. > The other—you know, the goods inflation has turned pretty quickly now after not turning at all for a year and a half. Now it seems to be turning. But there’s an expectation, really, that the services inflation will not move down so quickly, so that we’ll have to stay at it, so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time.
https://www.federalreserve.gov/mediacenter/files/FOMCprescon...
Increasing interest rates has systemic effects that take a while to propagate. We have already seen this reflected in CPI (which is also partially due to stabilizing after the supply shock of the war in Ukraine), and unemployment may get a bit worse than it is now, but the Fed absolutely will not want to increase unemployment into the ranges you mention unless absolutely necessary to combat inflation, because it’s contrary to their goals.
I'm not saying you're wrong (those periods are different from the present in a lot of ways), just that your reasoning isn't very apparent.
They need >6% so there's a gap between here and there. Right now we're clearly at the rail and unemployment has not budged. The jobs overhang has significantly abated, but that has been a short-term reaction to the policy changes, and it can change back on just as short of a term.
I didn't say you did, just that you haven't said anything to motivate the 6-8% number. It's plausible sounding, but as far as what you've said so far, you might as well have drawn those numbers out of a hat.
The 8% number is motivated by the fact that the economy is highly nonlinear and the Fed really doesn't control how bad the next recession is going to be. It could, of course, be even worse.
I'd also argue that "inflation death cycle" packs a lot of negative political assumptions into it. And the "death spiral" economists were typically worried about decades ago was the deflationary death spiral of savings gluts causing deflation causing more savings.
And my assertion is that "the Fed conquering inflation" cannot be read off of the CPI numbers for the past 6 months. We're still at what the Fed would call "full employment" and inflation is lurking and all we've seen is a short term abatement in inflation. If the economy revvs up again, then in the short term the curve will be the same and inflation will reappear.
For the Fed to consider the job done the curve needs to move so that the economy can rev up again without inflation reappearing. That will only happen if there's more slack in unemployment numbers. If we are at 6-8% unemployment then it will take time for the unemployment rate to fall back down to 3.5% and for inflation to reappear. By creating more unemployment you shift the curve so that the economy can run hot for awhile and grow while keeping wage inflation down. So shifting that curve is what the Fed's actual goal is, they're looking beyond what last months inflation numbers were (and they look not only beyond the y-o-y headline inflation numbers but they look beyond the m-o-m inflation numbers). They want to shift the curve, and the way to shift the curve is to have more slack in the jobs markets, which is economist-speak for a higher unemployment rate.
They also will very likely overshoot whatever target they think they have, they don't have a magic wand to control the economy. They mostly just detonate a few bombs in the economy and they don't know how much dry powder is waiting to go off in secondary explosions. Or the way this is usually phrased, "when the tide goes out we find out who was swimming naked".
And there's a tension here in HN between the oft stated belief that a decade of low rates has led to all kinds of malinvestment, and the belief that we're due for a soft-landing kind of recession. One of those I think has to be incorrect. And looking at the vacancy rates in downtown cores, etc I'm pretty sure the soft-landing story is going to be the wrong one. There are a lot of entities surviving on persistently low short rates, and they're going to go under once their loans adjust. The strict capitalists will celebrate this as bad investments going under and getting flushed, but that comes with pain, just like it was painful in 2008.
Typically unemployment doesn't spike until months after recessions begin: https://fred.stlouisfed.org/series/UNRATE
There is no such thing as “the Fed’s CPI”.
BLS publishes the CPI, which the Fed does not use.
The Fed uses the PCE, published by the Bureau of Economic Analysis.
Appealing to your sense of whether predictions are correct is a conversation starter at best. We can track forecasts and see how accurate they are.
Anyway, here are two IMF working papers:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
Secretly I hope his kids see his achievements and one decides to take the mantle later down the line. It'd be a first in history, a second-generation GSL caster.
I hope things get better, but I think you'd be mad to plan for global growth this year.
Like what countries exactly? They can't even hold the ground they conquered in the previous months in Ukraine. Armenia already asked Russia's help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
China is building bases around the South China Sea, pushing borders back, commandeering fishing rights, making a claim on Taiwan and their territories, and pushing very close to US naval support in the area. What has the West done?
We're paralysed by our inability to build stuff, and our unwillingness to go against the electorate and actually stop them buying all the Chinese tat that they do. Our reliance on their mineral mining and processing means cutting them out means far worse than a recession in the short term. It would take two decades to even come close to replacing China and at an unimaginable construction cost because much of the world doesn't even make its own steel any more. And China has links, they own significant portions of Africa's mining rights.
China are untouchable and their military and their nukes have nothing to do with it. China has real power. If you ever want to imagine the end of the world, imagine what happens if we can't buy cheap shit from China and follow the thread through to a conclusion.
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But why would they help Russia? That's probably a better avenue of thought. Russia has crazy territory, and resources without the real means to explore of extract.
Russia could make it worth their while.
The latest developments already complicated the getting cheap shit from China part.
Look at the Kurds, Afghanistan, Yugoslavia, Iraq, Iran, Korea, Vietnam, Yemen, Palestine, Egypt, Pakistan, Central America, South America, Africa. Look at the IMF. People like Fred Hampton, MLK, murdered by the West.
> If you ever want to imagine the end of the world, imagine what happens if we can't buy cheap shit from China and follow the thread through to a conclusion.
The west should stop exploiting all the poorer countries. Capitalism sucks. If the west can’t live without exploiting other people, the west doesn’t deserve comfy lives.
Although I agree with your sentiment in general, I don't like when people lump Yugoslavia with the rest. The West didn't start that war, it effectively ended it. They did what they failed to do in Rwanda.
You could say 'it's not their job, if people like killing each other let them kill themselves.' But it wasn't so. There were aggressors and there were victims. There is something sinister in watching people die when crying for your help just because you don't want to get involved. So while cases like Iraq and Afghanistan are clear-cut - these were just acts of bloody aggression fueled by feelings of revenge - Yugoslavia (and a few others on your list) are not.
Because the West is throwing lots of resources at that. Should that resolve crumble, that could change.
> Armenia already asked Russia’s help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
Should the West shift to a more containment-oriented policy, the beyond-Ukraine danger is largely to CSTO countries. (Yes, they are nominal allies, but so was Afghanistan.)
The CSTO is mainly just Russia and they've demonstrated they're incapable of providing military aid to their members. However, Russia getting allied with Iran and China and their puppet North Korea is a problem.
I really wish the US defeats Russia again, like it happened with the USSR, but that's just wishful thinking. We are tired of Germany and France doing business as usual with Russia. Poland basically has zero trust in the EU handling Russia, that's why they arm themselves to the teeth. The others need to look at Poland and get their act together.
No, Russia can demonstrably not hold much territory in other countries. But Finland, Poland, and the Baltic states would be foolish not to recognize that Putin desperately wants them back under his thumb, and is willing to go to obviously irrational lengths to attempt to fulfill his desires, however unrealistic.
Plus, he still has nukes, at least some of which are almost certainly still functional.
To fight on territory which isn't recognized as Armenian by everyone else. A reminder that Russian peacekeeping unit is at the Armenian-Karabakh border, not Karabakh-Azeri.
And Russia has backed themselves into a corner, diplomatically. Not even the other CIS members have enthusiasm for Putin. So this idiot, who started this desperate for a legacy, only has a prison sentence for war crimes or a nuclear firework party in his future.
It is right to mock Russia's decisions, it's right to point out how pathetic their war has been, but it isn't right to claim they have no power to affect others near to them.
And if the GP says that they don't have the military strength to pull that off, well, they don't. But they don't have the military strength to defeat Ukraine, and yet the fighting goes on, in complete defiance of sanity. No, Russia can't (successfully) invade either place. That doesn't mean he won't try. If I were Finland or Poland, I'd be preparing hard right now.
On the other hand, in Finland and Poland there is no similar plan A, only total war with NATO. It is not impossible, but from the geopolitical POV it makes no sense at all.
Something to do with 3 quarters of negative growth
You can see on this graph that the rule-of-thumb didn't hold right at the beginning of the graph in 1947 when no recession was declared, nor in 2008 when it started with a single quarter, or even 2001 when it started with a positive quarter: https://fred.stlouisfed.org/series/A191RL1Q225SBEA
Sure, I mean, we might only be ~4 years from a recession (see 1966). It's true that, as recession is defined roughly as the period of decline from an economic peak, they usually start during a period of low unemployment, but that doesn't mean low unemployment signals being in a recession. Most low unemployment periods are outside of recessions.
> It generally doesn’t spike until months after recessions begin
Every recession shown on that chart either begins simultaneously with or after sustained unemployment increases, I don’t see any where it lags significantly.
There are several places where the low unemployment plateau before a recession is extended, and even a couple where an apparent low plateau is followed by another drop and another plateau.
1948, 1953, 1960, 1974, 1980, 2001, and 2008 all fit what I said.
1957, 1970, 1981, and kind-of 1990 are the exceptions.
As for the extended low unemployment... If you ignore the covid anomaly (as most people seem to since it wasn't a natural market reaction but caused by lockdowns), we're at the same 3 years of the previous maximum duration.
I'm not talking about using the unemployment rate as a leading indicator, which is what you're describing here.
The unemployment part can't indicate current state either because it usually doesn't spike until months afterwards. We can easily be in a recession with unemployment still being low.
Yes, it can. Nonfarm payroll employment--along with GDP--is one of the key measures used by the NBER in their determination of whether or not we're in a recession, so it is by definition a current indicator. You are stating that it's not a sufficient indicator in determining a recession, which is correct, but that's not what I was saying anyway. Unemployment is absolutely a relevant measure here, and you are wrong.
But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate, and pretty much all of history is pointing towards the current macro setup ending with recession.
By and large people tend to be overly optimistic that this time is different re economic cycles and monetary policy.
E.g. Wall Street analysts predicted 10% earnings growth in 2008, and ended up being -70%.
They are throwing darts in the dark.
God bless them, it's a hard job and someone should probably be looking into it, but never kid yourself about what their predictions are actually capable of.
The principles of the economy are quite clear. If people have incentive to do something, they will. If you alter incentives, you alter behavior, everything stems from that.
The problem with making predictions is that the macro economy has billions of variables which obviously all cannot be realistically modeled. That doesn’t invalidate the validity of theory. Economic theory works just the same as physics if you were able to observe and model every value accurately. Most physics problems deal with far fewer variables and can be simulated and replicated quite easily.
In this case its easy to predict because Powell has indicated for all intents and purposes that he will create a recession. And if he wants to, he 100% has the power to do it regardless of any other variable.
The goal is to motivate it but also to prevent it from running away.
While this might be technically true in the sense that they're trying to fight inflation by tightening monetary policy, and that has the effect of slowing economic activity and driving up unemployment, I dislike the framing because it implies that the fed wants to high unemployment as some sort of end goal, as if they have some sort of diabolical agenda to oppress workers or whatever.
The Fed has to do this because they vastly overstimulated. It was entirely avoidable if responsible policy had been pursued
The people who make it into a bleeding heart kind of issue are largely misguided, and don’t understand the distinction between real and nominal. Real wages have been declining at the fastest pace in history yet they point to nominal numbers like its some victory
Rate of CPI change is declining on a MoM basis due to one time fiscal headwinds/supply normalization. The demand side has not been addressed at all, with nominal GDP growth close to 10% YoY and the tightest labor market in history along very high wage growth numbers.
If the Fed doesn’t raise unemployment before loosening policy, CPI will rebound due to the level of labor market tightness and wage growth.
It’s possible the Fed will use declining headline CPI to justify pivoting prior to rise in unemployment, but this will almost certainly turn out to be a mistake and require even higher rates a year or two out.
If the Fed pivots before actually triggering a solid softening in the economy, all assets will rally and labor market will retighten.
They made exactly this mistake many times in the 70s and 80s. The only way out at this point is to keep policy tight until a recession event kicks off
From now on, every recession can be blamed on journalists that refused to publish its prediction
House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income. People in their 20s (and 30s) increasingly don't believe they will ever own a home.
If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?
Summary: Governments and local landowners/homeowners benefit from increasing prices, so they prevent homes from being built or for density to be increased in areas with existing homes and services. This causes supply not to be able to meet demand, which causes rising prices.
Write in complaint about never affording a home. I’ll be 40 next year and in an apartment. Largely, still, because my sub-generation got absolutely knee capped by the Great Recession and just general crap conditions.
This is the fundamental problem though, because there is a shortage of housing, as wages increases, housing costs (either rent or mortgage) increase to suck up every available penny that’s earned.
What is needed is for housing supply to be able to meet housing demand.
That is by design. Banks figure your monthly payment as a percent of income. Then based on interest rates they figure out how much you can borrow. Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it. This is why lower interest rate cause higher house prices.
Interest rates are going up. Home prices have slowed. Speculation is over. Still waiting for the drop. The economy seems to have gotten really good at moving ahead in spite of pressure to slow. I fear there may be built up negative pressure that's about to give. Not sure though.
Of course those groups urge you to spend the maximum: they're all being compensated if you do exactly that.
At the end of the day, it's still you who is signing the contracts, responsible for how you spend your money, and has to live with the outcome of your decisions.
If those groups can convince a decent percent of people to spend the max that they can get away with, it doesn’t matter what you do personally. Prices will inflate because most others are still spending big.
The differences among households' incomes are already higher than the reasonable ratio between the max approvable to borrow and the sensible amount to borrow. (A household making $300K can already sensibly borrow more than one making $100K can be approved for and one making $100K can sensibly borrow more than someone making $30K can be approved for.)
Households are still competing with others to buy individual properties, of course. That competition doesn't mean that you should YOLO it with the largest purchase most people will ever make just because others are willing to do so.
> Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it.
Those numbers seem insanely high to me. I would've thought people are looking for more like $100k.
This reads like people complaining that a new iPhone is $1,200 and then saying "BUT I NEED A PHONE!". Yes, you need a phone. No, you do not need the $1,200 phone. Take the blinders off, there is a whole ass world out here.
> This reads like people complaining that a new iPhone is $1,200 and then saying "BUT I NEED A PHONE!". Yes, you need a phone. No, you do not need the $1,200 phone. Take the blinders off, there is a whole ass world out here.
And you read like an angry and sour person who wants to rub people's nose in it just to say "told you so" by deliberately missing the point I made. Maybe it makes you feel good but you are not helping anyone.
All I said was:
> Or maybe living close to friends and family matters more ? Moving 2000km away from family and friends is an uprooting move.
Which is basically a fact that explain why it's hard to move for some. I don't see how it can - or needs - to be argued. I am not even claiming it's a valid reason not to move.
> Except I'm right, which matters more. The best way to help people is to be honest with them. [..] I'd rather be right and sound like an asshole than [..].
Oh but you just don't sound like one. Pretty sure you've already been told that.
The solution is simple. Stop moving to the same 5 overpriced cities. Or, don't expect to be able to buy a house there if you do. These are facts, ignoring them causes problems.
No.
> Or maybe living close to friends and family matters more ? Moving 2000km away from family and friends is an uprooting move.
I was talking about why some people would find moving away from SF to more affordable places hard.
It wouldn't make sense to point that living close to friends and family matter more to some when moving to SF than moving to Dallas or Kansas City. What difference would it make to move 2000km away from family and friends to SF or to Kansas City ? Both case you miss friends and family.
You don't hear people from Dallas or KC or Cleveland or Pittsburgh or wherever complaining they can't afford to buy a house there, because I can go to Zillow and show you hundreds of houses in every one of those metro areas (and more) that are under $150k, and affordable to first time home buyers with an FHA mortgage putting less than $5k down and having a mortgage of around $1,300/month which makes it affordable to anybody making over $25/hour. In short, people are making excuses nd pointing to extremes in the Bay Area or NYC or wherever to validate their feelings.
Those are facts, and that is the math. Everything else is just feelings.
Your insistence on trying to paint me into the object of your obsession, that people think the Bay Area is the real world and they are entitled to things you believe they have no rights to, while being wrong and out of place, is preventing any progress on your side in understanding what I am trying to tell you:
> Moving 2000km away from family and friends is an uprooting move.
It's hard, it hurts. That plays a role in people's behavior. You may not like it but it is what it is [0].
All the while you keep trying to convince me of something I don't disagree with (prices of real estate and houses in the US market). Quite frankly it's tiresome and I'll let you have the final word (another copy-paste of a napkin plan to become a homeowner or a rant against the youth-of-today and their damn iPhones I suppose).
[0] That being said, I can understand how frustrating it must be for you since according to your posts you don't seem to hold feelings in high regard or even have some, which would explain it all.
Back in the late 80s Elizabeth Warren and coauthors showed that the most common reason American families went bankrupt was because their high housing costs were an attempt to get their kids into better schools.
The blunt truth is the 20 major metro areas are where nearly all the high income jobs are, so we've seen a decades long pattern of migration towards them. This is a huge underlying force in so much of US economics, politics, and culture. At the same time, these metro areas have not come close to matching demand with increased housing supply.
The result is increasingly people facing the dilemma where the best economic option for their family is for them to spend 3+ hours of their day commuting to an urban core from an outlying area they can just barely afford to rent in. And god help you if your kid gets sick or your car gets totaled. This is the reality for most working class Americans. It's not a matter of them living above what they can afford, it's about our society becoming so broken many people will never reach a threshold of affording anything like middle class prosperity.
And I am entirely out of patience for folks that earn tech industry money while moralizing about how poverty is just people overspending in some purely hedonistic stupid way.
The average commute time for Americans in 2019 (pre-pandemic) was 27.6 minutes each way: https://www.census.gov/newsroom/press-releases/2021/one-way-...
Yes, there are supercommuters out there with very long commutes, but saying 3+ hours a day describes "most" Americans simply isnt true.
> You are ignoring the reality many are facing, where essentially all the available options are above their means.
People who say this are convinced they need to move to SF/LA/NYC/Boston/Seattle. Yes, real estate is prohibitively expensive in San Francisco, we get it. So don't move there.
I just did a housing search recently and found this out the hard way.
Look at the median for an area and then figure that you can go 10-20% below that for a "fixer upper". Even that isn't an option if you don't have DIY skills.
That means a first time buyer can get into a $150k house with FHA for $4,500 down and $1,300/month (which includes property tax and home insurance).
This means someone making $25/hour can afford to buy one of these homes, right now, today.
That only applies if housing demand exceeds supply because buyers are competing. When sellers compete they try to reduce the price to cost plus profit where the profit is no lower than 3-5% because at some point other industries pay more.
Allow a wage-price spiral of about 6% a year, which would raise long rates, allow short rates to increase eventually without a recession and that would cut off the cheap money supply. Asset prices would fall in real terms because of persistently higher rates across the yield curve. In nominal terms they would be able to maintain more of their price while wages would inflate to the point where people would be able to buy houses and be able to pay back debts (particularly college loans).
Instead the Fed jacking up short rates right now is going to cause a recession, create high unemployment and cap wage growth and break unionization. This will be combined as usual by massive tax cuts for the rich as a bailout package, which will be the only thing possible to get past the Republican House. And the Fed will have to then sharply cut short rates and the cycle will continue. I doubt we'll be able to maintain rates at 0% for another ten years, but they're firmly opposed to trying to wage-inflate our way out of this, so we'll probably see shorter cycles between boom and bust as inflation starts to come back faster. There are no signs that they're going to start to give up on the way they've been running the economy though, I don't think there has been a massive fundamental shift in the economy -- other than no more 10 years of 0% with no CPI inflation.
Only employers can create this type of wage spiral - and I do not think they will do this. Employers are now looking into automation as much as possible to replace labor (supermarket checkouts, at fast foods order kiosks, online ordering, robots for cleaning hotel rooms, etc...)
From 2009-2016 the unemployment rate fell from 10% to 4.7%, it is now at 3.5%
> Only employers can create this type of wage spiral
They don't create a wage spiral, they would naturally want to pay people less, they don't wake up one morning and give people raises without a reason.
And the reason is the jobs overhang. When you have twice as many jobs per job seeker then employers are FORCED to pay more just by supply and demand laws.
That only happens though when unemployment is near its lower bound (which we seem to have empirically determined is around 3.5% at least for our economy right now).
It's still only part of the equation since interest rates are much higher now so mortgage payments are double what they were a year ago. So even if the home price isn't rising, the costs to finance it are.
Interest rates will come down again so the effect of them being a barrier will reduce. But the fundamental problem for most people here in the UK is getting a 10-20% deposit together when the average house price is £296k, average salary is about £27k, and average household income is £31k.
Anecdotal but I have 150k of equity in my house that I bought ~3 years ago and a 4.15% interest rate. Not a great rate but if I was to refinance I am looking at 6%. Even if I was to sell, and get 150k out, any house I want to buy afterwards has appreciated at the same rate as my current one, so it is more expensive as is the loan.
I think the only fix is building more housing but now the loans builders need to take out to build are more expensive as well as are building materials so even new construction is very expensive. In addition, the rate at which new houses are built in so low that they don't appreciably affect existing supply in a hard enough way to even approach demand so prices stay high. The only real fix would be a government financed program that dropped hundreds of billions in near 0 % financing to builders to build hundreds of thousands of homes. That isn't happening.
True and yet, compared to house price/income multiples in other developed countries, the US metric is remarkably low (yes, Fannie Freddie etc). Perhaps Americans are just catching up
This isn't obvious, wages can drive as well as lag inflation.
> but house prices remain stagnant with no increase, would that bring them down in real terms
Yes.
> without a “housing crash”?
Perceptually? Likely. Substantively? Only if it was a long, slow inflation, and therefore a long, slow real-value decline.
> Could this be a “good thing” and does that even make sense?
It’s the same thing, requiring the same conditions, as the real-value decline without inflation, but with inflation.
What I think you actually want is wages rising greater than both inflation and housing prices (not real decline in housing prices as such), so that wages rise with respect to housing. But the problem isn’t defining the output on that level, anyway, its dealing with housing supply/demand to make either scenario happen.
New car manufacturers don't like to drop prices, but they do like to offer cash back and below market rate interest incentives. Especially towards the end of the model year. Very low cost leases show up from time to time as well.
You also see things like pausing production when supply is outpacing demand. Sometimes it's subtle like stopping the line a few weeks before the scheduled stop, or starting it back a few weeks later, and sometimes it's a month off during the model year.
This would require heavy regulation of the housing market. For example, we could add a hefty tax on any home that isn't owner-occupied. Otherwise, housing will remain one of the better places to invest earnings and the cost of housing will continue to rise with earnings. However, such a tax would likely increase the cost of renting.
But why are home prices going up? Is it because non occupying buyers are bidding with each other to drive up prices beyond what is rational? If so, banning those buyers might indeed bring prices down to a saner level. However, if prices are high as a result of supply and demand (ie. more people want to live in desirable places and we can't build more homes to accommodate), then banning non occupying buyers won't do much. Given how the overwhelming majority of home purchases are still done by owner occupiers, I'm very skeptical that it's the former, and it's much more likely that it's the latter.
The only way to bring down housing prices is to out-build the demand -- which no constructor will do voluntarily, because it's a guaranteed loss proposition. Personally, my only hope is that remote work will even out prices between low-value and high-value areas -- but I'm aware that proximity to the job is not the only factor determining the value of an area.
Non-occupying owners are a factor in supply and demand; banning them (or even just increasing costs on them, e.g., via taxes on long-term vacant units) reduces the number of prospective non-occupying owners buying and causes existing ones to sell. Similar factors applies to owners with residences used exclusively as short-term rentals rather than residences, which I would expect are usually more of an issue than units held vacant by non-occupying owners.
> Given how the overwhelming majority of home purchases are still done by owner occupiers
The share purchased by investors has gone up much higher than usual to 24% of single family homes nationally last year, with Georgia leading the nation at 33%: https://www.pewtrusts.org/en/research-and-analysis/blogs/sta...
The problem with this analysis is that it ignores that homes owned by non-occupying owners (ie. landlord) are still occupied by somebody, and is therefore suppressing demand for buying houses. Or put another way, if you got a landlord to sell a home, there would be one more home on the market, but at the same time whoever was previously renting that home will get kicked out and will also need a home, so the net effect on supply/demand is zero.
There's no actual requirement for deregulation.
Austrians made prices affordable and improved housing quality with public intervention, and it worked well[0]. I yet have to see an housing deregulation experiment that worked.
As the economist stated here or elsewhere in this group of articles, the effects of raised rates take a year to take effect. It’s also economic dogma that the labor market reaches equilibrium after all the other markets.
Me, I’d raise rates no higher than 5.5% for a quarter or two. There’s every reason to not jerk so hard on the economy that the economy reacts wildly. I hope they're not seeking additional runway for a future regime of lowering rates. The time for that is a time that looks like 2017-2019-not a time compounded by fall out from pandemic, war, threats of war, and increased uncertainty. Ceteris paribus.
A wild reaction at this point looks like more people leaving the labor market than entering, I suspect.
Edit-economics in general may point to a recession. But this particular Fed has yet to convince me that they’re about their joint mandate of low unemployment and low inflation. They bought actual stocks (correction:bonds) during the Pandemic-a sure high point of departure from the past.
Is this true? I'm pretty sure the wildest thing they did was purchase corporate bonds via ETFs.
Difference without a distinction.
No, you're just playing fast and loose with facts. The fed also financed the federal government through treasury purchases, and the federal government sent out stimulus checks to americans, some of which bought crypto/meme stocks, but it would be disingenuous to write a screed about how bad the fed is because they bought "crypto/meme stocks" using the aforementioned reasoning.
I’d still largely say this Fed is departing from history. The economy last saw a pandemic like covid in 1918. And that was during a world war.
Who is "they"? The fed I presume? I doubt they were directly involved in foreclosures.
So you would've preferred that the whole system came crashing down and believe that average people would've had a better long term outcome from that?
Everything about this "boom" from 2012 on was, from a market perspective, about as artificial as you could get. At least the events leading up to the .COM and '08 crash there weren't central banks openly putting their thumbs on the scales by being an active market paticipant buying debt securities, the quality of that debt be damned, and making price discovery next to impossible.
The lesson investors took from '08 and certainly from 2020 was that the powers that be will gladly use moral hazard to protect asset prices. Profits are privatized and losses are socialized.
And what do you mean by "sacrifice the wealth of future generations for the sake of the current"? The government issues bonds to pay for stuff. Then at some point :) the bonds presumably become due, and future generations have to pay it back. Whom do they pay it back to? Isn't it back to themselves? Even assuming there's some proportion of foreign debt holders, they're getting paid back in the currency of the issuing state, which currency has generally deflated more than the bond rate over time, in other words effectively an interest free loan. If you could get a less than base inflation rate loan for 20, 30, 50, 100 years wouldn't you take it? Even assuming the 100 year horizon and thus the loan was to paid back by your estate, don't you think there's a good chance your estate would come out ahead after having paid back that low interest loan than if you had never taken the loan in the first place?
I'm just saying I'm not fully convinced that taking on national debt is universally bad, if it's payable in the sovereign currency.
I don't disagree with your overall point about sacrificing future generations for the current, but this specific point is probably true regardless as luxury often takes time to acquire.
From an adequate distance, fraction reserve banking looks a whole lot like a ponzi scheme.
The 2 phenomenons are very different, if you trace monetary movements from one economic actor to another. They are not even close. It's like comparing a hat and a car.
https://www.investopedia.com/terms/f/fractionalreservebankin...
"Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. "
So a bank can loan out more money than it has to loan. In addition to creating money out of thin air, that loan will accumulate interest fees.
It gets even worse when these loans are made to another bank who will loan that money out again.
No, let's look at this system, as I said, "from a distance." The entire system has X number of dollars in it and Y amount of loans. It doesn't take long and the amount of debt exceeds the amount of actual dollars that exist in the system. That is to say, there isn't enough money in the system to pay all of these loans back.
It's worse than a Ponzi.
Interest-paying debit can be quite healthy. It does not have to be a ponzi scheme.
When rates are hiked, a home with a mortgage, using credit cards or seeking loans to start a business become much more expensive. That results in people stopping purchasing homes, cut down on spending, think twice about starting a business. In addition to that companies will lay off workers and enact hiring freezes.
Everyone says it, the signs are obvious, and people here still think we won’t land in a recession.
Kinda feels similar to the irrationality of tesla investors, where everyone knew that the company is overvalued and needs to come down. Yet people continued buying or didn’t want to sell. Why? I would like to know.
A likely recession does not mean that selling stocks is advisable either.
Right now we face an energy, food, and fertilizer shortage. Will that cause a recession? Almost certainly. Or at least it’s a downwards effect. Maybe you think the economies will grow more than they shrink in spite of this for other reasons. But this is a rare easily observed negative pressure for everyone.
There's nothing particularly notable here. Speculation markets got overheated[1], now they're correcting and as a side effect money ends up more expensive to do "normal" activity too. Then we'll do it all over again until 2030 or whenever when we come back to write this kind of stuff as if it was a surprise.
[1] For lots of interacting reasons, I'm sure. There's good economics to be done to understand this stuff, but "ZOMG Recession" coverage is just tiresome.
But some people take it too far and think if there was no Fed there wouldn't be any oscillation. That is not true. Bitcoin also "oscillates".
Oscillations happen because of a time lag that leads to an overshooting of the target which then leads to overshooting on the way back and so on.
The economy never becomes perfectly stable but there is no rule that the oscillation can't be smoothed out until it is no longer a problem. We aren't that far yet.
[1] Which an economy is, almost by definition: spending makes the people who sold you stuff richer, who then spend; tight purses mean the producers are poorer too.
Are recessions a healthy part of a normal economic ebb and flow? (Over the long-term)
I suppose an extremely long recession/depression (e.g. 5-10 years) would obviously be bad. But are recessions that last 1-2 years really something to panic over at a macro level?
My (less than informed) assumption is high growth followed by a slight contraction/recession isn’t objectively bad if it helps an economy consolidate and become more efficient during the period of contraction before the next upswing.
So in a sense, yes, one could consider it to be healthy -- like an economic animal shedding some fat.
But I wouldn't personally. Recessions have deep cultural, social and political impacts that, if not dealt with properly, lead to long lasting adverse effects: rise of extremisms, lower social mobility, increased intergenerational poverty and so on.
Because of 2008, millenials lost about 5 years of savings, skill accumulation, etc. they will never earn back.
Ray Dalio discusses this in his video here: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=483s
And basically the answer he gives is "yes".
In economic terms, in the bulk cycle there's lots of resources sloshing around so it's easy to start a business, get finance and grow. Then in the cut cycle, the businesses that prove their value remain and we collectively dispense of the ones that don't.
Whilst it is healthy for the overall group, it's not much comfort for the individual humans on the losing end and we should probably do more to help them rebuild their lives afterwards.
I don't think many people panic about a recession though. Maybe make some adjustments. Panic only comes across from media outlets.
When that fantasy evaporates, people face hardship.
Worker efficiency makes that more likely, not less.
The real question is if 10 years of fantasy chasing growth followed by a year or two of reality, is better or worse than constant hardship where we never allow the fantasy of chasing growth.
People have not been able to afford rent and food in rich countries to the point of creating social unrests, let alone in poor ones. Unironically check your privilege, man.
The fact is that we have the world in a terrible economic situation. We have an editorial baffled at the state of the things. And we also have an user saying that in their understanding a depression on the top of the current situation would be "healthy part of a normal economic ebb and flow" and "not objectively bad".
I tried to tell the user in question that a recession right now might not be a problem for people in a good financial condition, but for sure it's an object of concern for the majority of the population who can't pay the bills and the people in charge who will have to deal with the revolt of such population.
When I start to see lots of headlines like "recession is inevitable", I remind myself that the stock market is a time machine and/or palantir operating at some arbitrary offset in the future.
Keeping my cash in safe bets and waiting until the Economist says "all clear" is going to be way too late to capitalize on much of the downturn or volatility.
As long as there’s a future for the company and valuation is fair, you should be fine though.
I’m doing the same. My threshold is roughly PE 15 or less with strong balance sheet and decent growth. Lots of REITs that are pretty sure bets at closer to 10x or lower multiples.
Still would not buy any 10x or more PS companies. By and large going to be stinkers over the next decade imo
Stagnation. Inflation is a sign of a booming economy. Unemployment. I see help wanted signs everywhere Huge building projects abandoned. Here in SE Michigan I am seeing active construction sites everywhere. The Economist runs headlines like "Are Recessions a Thing of the Past?
Or it can be an economy that’s fiscally out of control, or it can be a deeply unproductive economy. There are many possible causes, some of which can be simultaneous. Plenty of countries have had massive inflation without in any way booming.
If you read the article, you’ll find that all the factors you mention are discussed.
> The Economist runs headlines like "Are Recessions a Thing of the Past?
They ran that because some economists were making that claim. Their conclusion was that they aren’t.
Probably because the jobs don't provide enough income to be sustainable. I think the system currently is wabbling as employers are failing to keep rate with inflation in regards to pay. This will cause a bottleneck in regards to growth/performance for many businesses and ultimately be their downfall.
People have figured out that the cost of going to low-wage jobs like that is more than it is worth. The number of parents who realized they actually brought more money home by one parent quitting their job and taking care of the kids instead of paying for childcare while they work is high.
A lot of folks, after COVID, and seeing that business owners literally didn't give one fuck if they died on the job or not, decided that maybe living their life was more important than grinding at a job that will happily send you to your death to make a buck.
>Stagnation. Inflation is a sign of a booming economy
That's not borne out by the data. If you look at the graph for inflation[1], you see that falling inflation comes after recessions (helpfully shaded grey), not before. In other words, by the time you see stagflation, you're already deep in recession, or it has already passed. Therefore using it as a sign for "impending" recession makes no sense.
An analogy is an artist that puts out a limited edition print, lets say 100, and then realizes that he can make more money if he just prints 2 of each numbered edition, so there are two 1/100. That is inflation and the means of its fraud is the government “printing” more money, and thereby defrauding the people who have the currency based on the prior value.
It’s just common fraud on a ruling class scale with no one to hold the psychopathic common con artists ant the top accountable.
The Fed (among others) are just people scheming to commit fraud against the people who produce the value. Usually they just keep the fraud at a level that skims a certain low percentage that they get away with and no one notices when everyone is fat and happy, but they always get greedy and desperate when the Ponzi scheme they are running starts tipping over.
Increasing the money supply is one of the many things that can cause inflation. But to thing it is the only factor is overly simplistic, sort of Laffer-curve-esque. In that it makes a lot of sense in an economics 101 class but the reality is a lot more complex.
For example, if you double the money supply tomorrow but most of that extra money ends up in the bank accounts of the richest people in the world, it will have little effect on the price of avocados, for example. Rich people aren't buying more avocados because now they have $100m instead of $50m. But you can bet you would start to see inflation for yachts, private air
In other words, money supply only affects inflation in as much as it affects supply and demand.
What account for money supply can be gold (Spain Inflation, 16th century), diluted gold coins (look for monetary crisis in Roman Empire), paper and scriptural money emission backed by unchanged gold possession (French Franc, after 1913 ; US dollar in the late '60), paper money not backed by gold (look for chinese ligatures), scriptural and paper money backed by a mix of other currencies (in the form of foreign government bonds) and gold (central bank system after 1973)...
...And homeland government debts (central banks system after 2008), which is called debt monetization https://en.wikipedia.org/wiki/Debt_monetization, which was, strangely enough, the polite way to say printing money when I was a kid.
Sorry you can't predict the future of your stuff just by putting it in a contract. But nobody promised you that, and there are bigger problems to solve than the perfect autonomy of your resources. I guess your only hope is that the limited, motivated, holders of extremely large bags of capital will be able to move your regressive philosophy forward. Oh look that's what happening lucky you.
As opposed to squandering it all as soon as it is earned on the proverbial avocado toasts and dying in ignominious penury?
> Still waiting to learn why hoarding tokens is socially beneficial behavior that should be rewarded.
Do I need to address this silly assertion with a more thoughtful comment than it deserves?
I was under the impression that the economist was one of the last remaining high quality print magazines in existence.
Curious what makes you think they’re compromised? (And if you’re aware of any similar publications that aren’t compromised?)
Edit: just noticed the quote says “comprised” rather than compromised. Disregard this comment if that wasn’t a typo
It is important to recognise the causes because a lot of governments, in the US and Europe are running inflationary policies of mass subsidies in response to inflation, making the matter worse.
Have you seen evidence of causality that goes beyond theory?
(I’m not necessarily disagreeing, just saying it often seems like a faith-based view)
PS: though you can blame policy, I'd argue the hit now was a small price to pay for the potential for a much harder hitting system collapse if the COVID shock was ignored.
I am not sure what sort of evidence you would expect. Every time you print money you create inflation. Even the post 2008 QE created massive asset inflation that wasn't captured in the main CPI, but the logic still stands.
Seriously, the effect of money supply on prices has been established for quite some time, with historical data to back it up.
If I remember correctly the market is expecting earnings of the SP500 to _grow_ by 5% next year
When did the economists forget the term "market correction"?
"America’s economy enters 2023 in fundamentally stronger shape than either China’s or any in Europe. The Federal Reserve’s aggressive rate increases will tip the economy into recession, but with the labour market still strong and household savings copious, it will be a mild one."
It doesnt feel like the planet is currently reaching for a peace and cooperation dividend and 2023 will still be working out the impact of the covid and ukraine war shocks
https://www.oecd.org/economy/germany-economic-snapshot/
https://www.oecd.org/economy/united-kingdom-economic-snapsho...
I'm also astonished by the denial in forums that the Sars-Cov2 and Ukraine policies are the cause. You may like those policies, but it requires mental contortions to deny their influence.
I don't mean to introduce politics into the discussion more than as a thought experiment: if we had a different president (Trump, for example) would your opinion on whether we are in a recession be different?
It's sort of an interesting method of self reflection.
The US debt to GDP ratio has been over 120% since 2020. By IMF definition >120% means the country is an an economic death spiral. The government can't pay it's bills (all those loans for all that free bailout money.) By 2028 the US will only be making payments on the interest on it's loans, not the principal, which is the point of no return/when the economic death spiral becomes irreversible with US insolvency by 2042.
Those are just the numbers and the timeframe. Look at how many countries are >120% and how they are each able to manage the problem (or not). The best example is Japan who can manage it even with lost decades because they are incestuous with their own money and resources. This has been a global economic crisis that has been hidden/ignored since at least 2014. Do a search for economic crisis and you'll see how long this has been going on and how long the government has had a timeline for it's own bankruptcy. Yet they overspend and prop up the economy for political purposes. China built entire fake cities to prop up their credit rating just so they could lend the US money.
Anyway, as interest rates go up, private money goes into T-Bills, not stocks. That's what raising interest rates does. Private investment evaporates and smart money goes into stable not risky volatile assets whose price doesn't move much or at all (historically cash or gold), or those with best guaranteed returns, such as bonds. That's why T-Bills returns on short term bills are so high (if you trust the government can pay their bills, which they can't. They are betting on future growth and earnings, which comes with innovation, and barring solid state batteries, cold fusion or zero-point energy, we're all out of value innovation.) Soylent Green maybe??
So all that free money from the government with low interest rates on borrowing gets paid back before the government goes bankrupt. In theory. In reality it just excuses more overspending by government at the taxpayers expense. (just look at the past 20 years for reference.) Either way, recession is already underway despite what the government is telling you. The question is are we due for a depression. Barring some technical innovation/catalyst, all indicators point to yes without some major overhaul of the global economic system where debt is forgiven, digital currency which would end up working like a stock split, or war, which is the historical solution.
Just a simple explanation of why inflation isn't going down is in this video: https://youtu.be/COZocfFifQw?t=423
Apply this to most businesses/business models that took advantage of free/cheap/easy money for the past 10 years but didn't shift/pivot to a sustainable business model moving forward. Businesses will need to fold en masse before things START to change,(all the sick people dying off makes what's left look healthier) and that's going to kick into high gear starting his year. Systemic failures started in 2022. Just look at the food supply chain and the energy crisis that was created in the name of green energy and you'll start to wake up to how disastrous things have gotten thanks to energy and foreign/trade policy.
The best option seems to me to stay local and hunker down but keep talking to each other. Fibre optics are cheap. Can't Xi and Biden just play Starcraft or something?