So, I know we are coming up to Thanksgiving – and it really is one of my favorite holidays – and Thanksgiving is the epitome of American history celebrating the first harvest of our early settlers. It is a very inspiring and optimistic story. One of the reasons I love it is that the story is so optimistic, and I’m an optimistic person who still believes in the greatest soul of the founding of the United States of America.
But I have to deviate a bit from this optimistic scenario. I’m talking about the economy. I have to tell you that I see a number of important indicators that all point to recession. I don’t like it, but that’s what I watch. We may already be in a recession, but next year promises to be an even deeper recession.
Now there is a way out of this mess, and I’ll get to that in a moment, but first some simple empirical facts. I start with a huge drop in the Conference Board’s Leading Economic Indicator.
This is a very old fashioned series, but it is a very accurate forecasting tool. There are interest rate spreads, consumer expectations, manufacturing, stock prices, new home building permits and other metrics. There are 10 in all, and as you can see from the graph, the rate of change is absolutely abysmal.
GROCERY INFLATION PUSHES AMERICANS TO RESTAURANTS ON THANKSGIVING
Second, perhaps a more controversial indicator, called M2 – which is an inadequate measure of the nation’s money supply, but still one to pay attention to. It was started by the great Nobel laureate Milton Friedman. It is a monetary interpretation of the economy and it tells us about future inflation and growth.
You can see on this chart that for 20 years M2 basically grew modestly, it had something to do with an average inflation of 2%. Not everything, but something to do with low inflation. Then we come to the madness of the past two years, with a massive increase in federal spending that led to equally massive money printing by the Federal Reserve.
It was Joe Biden’s biggest mistake. He drove the inflation rate from about 1% to almost 10%, because of this, real wages fell for 18 consecutive months. This is the soft underbelly of Biden’s economy and now, as the Fed belatedly corrects its own past mistakes, the US economy is in grave danger.
All that could have been avoided, but it was not and here we are now, with the threat of a hard downturn next year. The one that probably started this year, but Milton Friedman argued that inflation is too much money for too few goods – and, simplifying a bit, Uncle Sam created the money, then excessive regulation, tax increases and of course the war on fossil fuel production. great obstacles to the production of goods.
Yes, we’ve had a COVID supply chain hangover, yes, there’s Vladimir Putin invading Ukraine, but most of this economic mess is homegrown based on the policies of socialism large governments and large-scale central planning. Besides the leading indicators and the money supply, to add one more: the bond market has turned upside down with short-term rates now much higher than long-term rates.
A very useful recession forecasting model that was developed years ago at the New York Fed and has a very high degree of accuracy. Basically, when the three-month treasury bill exceeds the yield of the 10-year treasury bills, then the probability of a recession in a year’s time becomes higher and higher. Right now the three month bill is now 4.30 and the 10 year bill is now 3.80. This is a very alarming sign.
Now, there are a lot of other indicators I could cite: a big real estate downturn, a major manufacturing downturn, I don’t want to go any further into the weeds than I have to. No model is perfect, but I’ll suggest that keeping an eye on the leading economic and M2 indicators and the Treasury yield curve gives everyone a pretty decent idea of where we’re headed. Thus, inflation will decline slowly, but the recession is likely to be very difficult.
Again, always optimistic, we should be able to do much better in the future on economic policies than we have in the past two years. You’ve heard this from me before, but first we should immediately turn on the taps to produce more oil and gas, allow the permits, the pipeline, the refining. All this would reduce prices, promote employment and economic growth.
John Kerry’s Green New Deal COP-27, socialist, redistributive, climate repair program – he tries to bribe poor countries not to use oil and gas is just dumber than stupid. Joe Biden is shutting down coal plants across America – dumber than dumber. New EPA clean-burning natural gas regulations and taxes are even dumber only mute, if such muteness is possible.
Next, we must reimpose workfare and work requirements on able-bodied people who receive government assistance. OK? It succeeded 25 years ago in reducing social spending and eventually led to a balanced budget.
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Additionally, we need to make Donald Trump’s bid tax cuts permanent. Next, we need to rein in Biden’s regulatory assault on all businesses — a policy that has literally strangled the economy.
In the end, we had less money to buy more goods under these policies. Less money for more goods. Inflation would collapse, the economy would soar. We have done it in the past and we can do it in the future. It’s time to act as stewards of economic prosperity. Let us replace the utopian socialist schemes which always cause recession and impoverishment wherever they are implemented. I know we can right this ship and I’ll say, Happy Thanksgiving – gobble, gobble, gobble – and that’s my riff.
This article is adapted from the opening comment by Larry Kudlow in the November 22, 2022 edition of “Kudlow”.
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