‘Easy money’ and a looming recession
However, President Donald Trump’s counterproductive trade policies and unconscionable budget deficits during a boom — so much for Republican presidents being fiscal conservatives — would not be the reasons behind an economic downturn.
Recessions occur after the Federal Reserve creates an unsustainable boom with its easy-money policies.
The Fed engaged in the most massive creation of “new money” in American history to counter the Great Recession of 2007-09.
The inevitable consequences of easy money are bubbles everywhere: the stock market, the bond market and real estate.
In addition, individuals pour into sectors of the economy where the bubbles are creating the greatest demand for workers.
So when the inevitable recession hits, unemployment rises in those sectors.
The recession will commence when the Fed “tightens” the supply of money in reaction to accelerating price inflation.
This would be evidentwhen short-term interest rates rise, specifically the Fed Funds rate, which the Fed targets to “manage” the economy to damper price increases.
The recent inversion of the yield curve, when short-term rates are higher than long-term rates, has been an excellent predictor of past recessions.
However, as financial analyst Robert Wenzel pointed out, the current inversion is an anomaly, because long-term rates have declined faster than short-term rates have increased.
In short, a recession is coming, and Trump is correct to blame the Fed.
But his call for more easy money will only delay the day of reckoning.
Murray Sabrin, Ph.D.
Fort Lee The writer is a professor of finance and founder of the Sabrin Center for Free Enterprise at Ramapo College of New Jersey.