Impending recession
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Give me Liberty
Rodger Williamson
Recessions are an unfortunate part of economic cycles. Each economic cycle contains a period of growth, or expansion, and a period of decline, known as a recession.
Bad things tend to happen during recessions. Businesses will go bankrupt, workers will lose their jobs, and the stock market will decline.
Over the last four decades, the American economy has gone through four significant recessions. The recession of 1980–82, when Paul Volcker, the chair of the Federal Reserve, raised interest rates in order to fight inflation from the 1970s that was inflamed by the 1979 Iran oil crisis; the savings and loan crisis of 1991-1992; the dot.com bubble of 2000-2002; and the housing market crash in 2007, which then triggered the financial crisis of 2008. Note what was the cause of the first recession listed. This is where history repeats itself.
Thomas Hoeing, retired president of the Federal Reserve region bank in Kansas City, had been concerned about the threat of coming inflation since 2011. The Federal Reserve has been lowering interest rates and printing money since the 2008 financial crisis to move the economy out of the red.
Hoeing believed that the Fed was taking a risky path that deepened income inequality and enriched the big banks over others. He also warned that it would suck the Fed into a money-printing quagmire that could potentially destabilize the entire financial banking system.
Printing more than $3.5 TRILLION out of thin air between 2008 and 2014, the Federal Reserve has printed more money than ALL of the dollar bills that they had printed over the prior century. When COVID-19 hit, the Fed and other banks and governments threw another 13 trillion dollars onto the fire in order to combat the effects of the COVID-19 economic downturn.
Fueled by the Fed’s unprecedented money printing program, fast forward to 2022, where inflation is rising faster than anyone finds acceptable. With governments printing and spending at record levels, the Federal Reserve has watched inflation numbers rise, and as COVID-19 shut-down policy-induced supply constraints hit, accelerate to rise at a blistering 40-year record pace. The obvious results are higher-priced groceries and cars, other consumer goods and rising gas prices.
In a statement issued after its latest policy meeting, the Federal Reserve said that it “expects it will soon be appropriate” to raise rates. The Fed’s actions are sure to make a wide range of borrowing – from mortgages and credit cards to auto loans and corporate credit – costlier over time.
Those higher borrowing costs, in turn, would slow consumer spending and hiring. With less cash moving through the economy, the hiked interest rates would most likely in turn lead to stock and bond markets falling, which would then lead to yet another possible recession.
I am old enough to remember the recession of 1981–82 when the Fed did exactly the same thing of raising interest rates in order to fight inflation, and most of my memories regarding the economy of that era are not “pleasant.”
Even though this reverse of policy by the Fed will most likely crash the stock market, plunge the economy into another recession and create a financial crisis with surging unemployment, it is not a mistake. The original mistake was the Obama era Quantitative Easing (QE) and Zero Interest-Rate Policy (ZIRP) that started all of this, and the bigger mistake would be doing both again to inflate the bubble even larger before its eventual collapse.