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Weekly eLetter 6/15/2018 – Recession is Coming…Someday

Because this was a headline this past week, I feel motivated to present a different view. The headline is attributed to former Fed Chair Ben Bernanke; he gets the headline. But, as in so many things, the details are important.

I agree that a recession is coming…someday. But then a July snowstorm in Phoenix is also (probably coming)…someday.  Recessions are a fact of life, like death and taxes. But predicting one that will occur in 2020, as Mr. Bernanke did, is (in my opinion) rather like consulting a crystal ball. It’s pure chance, and no one (certainly including me) can see clearly that far into the future.

It not just Ben who is predicting an upcoming recession. Other analysts are saying it, too. When they do, they get their name in the headlines. Scary headlines attract attention. But there is good news here. They don’t think the recession starts tomorrow. No longer is the outside event (Brexit, Grexit, student loan defaults, a poor result of NoKo meeting, etc.) ready to cause an imminent collapse. Now the recession is two years away. Think about that. If the advancing recession were such a sure thing, why would we have to wait two years for it to show up? Wouldn’t we at least be moving in that direction now?

More detail: the current problem is that the economy is growing too fast. It wasn’t long ago that we were hearing the same speakers pontificate on how the ‘low-growth economy means a recession is coming.’ Today it’s that a ‘high-=growth economy means a recession is coming.  Real GDP is too strong, so the FED will over-tighten and inevitably cause a recession’.

No one knows what the FED will do (not even the FED!).  IF the FED follows its own forecasts and raises the funds rate to 3.5% in 2019, that certainly doesn’t tell us whether the policy is ‘tight’ or loose, or just right.

– Read more …