We’re Overdue For A Sell-Everything/No-Fed-Rescue Recession

Tuesday, February 12, 2019
By Paul Martin

by Charles Hugh Smith via OfTwoMinds blog,
Tue, 02/12/2019

We’re way overdue for a sell-everything recession, one that the Fed will only make worse by pursuing its usual policies of lowering interest rates and goosing easy money.

As I noted last week, central banks, like generals, always fight the last war–until the war is lost. The global economy is careening into recession (call it a “slowdown” if you are employed by the Corporate-State Media), and while we don’t yet know just how deep and wide this recession will be, we can make an educated guess that it won’t be a repeat of any of the previous five recessions: 1973-74, 1981-82, 1990-91, 2001-02 or 2008-09.

Recessions triggered by energy or financial crises tend to be short and shallow as the crisis soon eases; recessions caused by structural imbalances tend to be enduringly brutal. Many recessions are structural, but the triggering event is a short-term crisis.

Some recessions savage specific sectors but leave most of the economy relatively unscathed. Others disrupt virtually everything, even the generally impervious-to-recession government sector.

Let’s run down the general outlines of the previous five recessions. If you’ve lived long enough, you’ve experienced the suffering firsthand. Younger readers will have difficulty relating firsthand, but understanding the dynamics is the goal here, and so direct experience is a bonus, not an essential.

1973-74: the Oil Shock to the U.S. economy as OPEC raised prices and punished the U.S. for supporting Israel in the 1973 Yom Kippur war created havoc–long lines at gas stations and a sharp downturn (a.k.a. recession). Though the economy supposedly recovered statistically in 1975, the structural issues that were laid bare by the recession continued eroding the economy for the next six years.

The U.S. industrial base had become accustomed to getting away with rising prices and stagnant quality. The rise of competing industrial nations such as Germany and Japan (and the resulting imbalance in trade flows that undermined the U.S. dollar’s gold-backed status) required a massive reset of America’s financial and industrial sectors.

The higher cost of energy revealed the inefficiencies of the U.S. economy, and coupled with the public demand to clean up industrial pollution, the industrial sectors were forced into a disruptive and costly reset.

The Fed’s only “solution” to any slowdown– easy money–fueled runaway inflation. The key takeaway here was: the structural problems were not financial, and as a result the usual Fed tricks of easy money failed to fix what was broken.

Instead, loose fiscal and monetary policy made the situation much worse. On top of a major reworking of fundamental issues such as energy, pollution and global competition, the policies of the Fed and Congress added runaway inflation to an already dicey situation.

The next recession in 1981-82 was devastating, as the can could no longer be kicked down the road. Inflation destroys wealth, savings, industries that rely on credit, and trust in the institutions of the central bank and state. Fed chair Paul Volcker jacked up interest rates, laying waste to auto sales and housing, and slowly but surely, inflation was tamed–at great cost.

Although political credit is generally given to President Reagan, who took office in 1981, the painful decade-long structural reworking of the U.S. economy finally began to bear fruit in the 1980s. The counterculture techies and immigrants (Andy Grove of Intel, et al.) in Silicon Valley launched the digital revolution, energy prices dropped and stabilized as the petro-dollar system was institutionalized and the economy normalized high interest rates: home buyers cheered when mortgage rates slowly declined to a low, low 10%–a big improvement over 12% mortgages.

The Rest…HERE

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