Economy Now 2015

Economy Now 2015

By Alex Saitta

January 10, 2015

Introduction:

The table below plots the length in months of US economic recoveries/ expansions for the last 150 years, from the economic low to the economic peak of each cycle. You can see the upswing of the economic cycle lasted an average of about 3 years. That’s the natural cycle.

What you see the past few decades is the upswings have lasted longer. Prior to the late 1960’s the government did not try to manipulate the natural economic cycle by printing money or deficit spending. That changed in the 1970’s and has continued since.

Keynesian Economics: Deficit Spending/ Printing Of Money

In the 1930’s the government discovered if it just borrowed and spent or printed money, it could shorten recessions and lengthen recoveries/ expansions. This is called Keynesian Economics. Over time this philosophy was accepted and is in full use today.

A couple of points.

Looking at the last few years, the natural economic cycle is being manipulated by the government to the extreme.

In comparison, George W. Bush’s largest annual deficit was about $450 billion (his last year). Every government deficit since then has been much larger than that. Four years in a row, the deficit was above $1 trillion and no one seemed to care, many supported the fiscal stimulus.

Whenever the Federal Reserve buys an asset it prints money to buy it. The first 95 years of existence, the Federal Reserve accumulated assets of $800 billion. The last six years it added 4 times that in assets. Its balance sheet now has $4.4 trillion in assets. Wide open printing of money.

Next Recession:

The Great Recession ended in June 2009 when the US economy grew in Q3 of 2009. By definition, a recession occurs when there are two consecutive quarters of negative growth. The economy has been recession free for 66 or more than 5 years.

According to even the recent averages, a recession is due, however, I don’t think it will happen as long as fiscal and monetary policy is this stimulative. (Falling oil prices are stimulative too.) The Federal Reserve is keeping its short-term interest rate target of zero. The US Treasury is still running a $500 billion deficit. The short-run always looks bright when the US Treasury and Federal Reserve are stimulating the economy.

Keep an eye on the stock market. It tends to peak 6 months before a recession. Right now stocks are making new highs, so a recession in the near-term is unlikely. Interest rates remain low. The dollar is firm. Gold is falling. All indicating the US economy will continue to expand. I don’t see a recession until the end of 2016 or 2017.

Long-Term Effect:

The concern I have is the long-term effect. We’ve never seen this much artificial/ government stimulus of the US economy.

I for one, believe in the natural business cycle. Every phase has a constructive purpose — recession, recovery, expansion and even the depression phase. Talk to your 90 year old grandparents. They will tell you the valuable economic lessons they learned from the 1930’s and 1940’s that successfully guided them through a prosperous and productive life. They learned to work hard in order to keep from starving. They saw the evils of excessive debt, and saw the value in saving for a rainy day. They learned they couldn’t have it all, and setting spending priorities or going without is natural for them. Look at the latest generation. Do they have those values?

When the government overstimulates the economy and eliminates the depression phase and shortens and makes the recession phases much less frequent, there is going to be a long-term consequence. And it is negative.

Also, the 70-month and counting period of zero interest rates and easy money encourages more borrowing, less savings and more speculation in stocks, bonds and derivatives. All the things that led to the Great Recession and financial crisis of 2008-09.

To me, all of this is like feeding a marathon runner speed every time he needs to rest. Each time, to get him to run again, you have to give him more speed. It sounds like the US economy to me. Record stimulus is being applied every time it slows down and it is just eking out 2% GDP growth. At some point, without notice, the runner just gives out.

Over the next decade or two I think economic growth continues to slide (lower and lower GDP growth over time), and at some point the economy just gives out and the government will not be able to lift it back up.