2019 Year in Review- Stock Markets /Economy – Yellow Warning Lights are flashing.

After predicting what would happen economically and market-wise in 2018 with ease, the predictions for 2019 (in our tweets) were more nuanced. We see warnings of a recession on the horizon, but with a few caveats.

The reason we’re not currently in recession, but rather tiptoeing along the line, is largely that the Central Bank (Fed) has juiced the economy by pumping more money into it, and keeping interest rates very low.

When the Fed pumps liquidity (money) into an economy, it essentially makes funds readily available for borrowing through the banking system. In addition, when interest rates are low, that money becomes cheaper to borrow. Usually, this results in increased inflation because you have more money chasing a limited supply of a given asset.

For example, if you make the price of a loan cheaper, people are more likely to get that loan since the monthly debt service (payment) is lower. If lots of people take out loans for, say houses or cars, the sellers can ask for higher prices, hence, inflation.

However, there is a major problem with this picture. At Reconomix, we’ve been saying for years that the major yardsticks for measuring inflation (i.e. CPI, chained CPI, etc.) are deeply flawed. We believe that there’s actually more overall inflation going on than what’s being reported.

How does this affect the economic picture? It’s complicated! As an example, if we’re using incorrect measurements of inflation, we can be unknowingly fueling asset bubbles (which there are already a few) all over the place. Meaning things are being artificially inflated by cheap money. This is dangerous to an economy.

On the other hand- this has to do more with behavioral economics- if people are say, holding off on buying that expensive home and instead they’re buying luxury cars in order to satisfy their own cravings, then we have artificially-inflated markets for certain things at the expense of others!

What does all this mean?? It means that no matter what the overall picture says, (it currently says we’re growing slowly) that the Fed is playing a dangerous game by possibly creating artificial asset bubbles either by misreading the economy and/or by artificially affecting the behavior of the consumer. This is not good for an economy- and if those asset bubbles (student loans, car loans, home loans, credit cards, etc.) start bursting, the global economy will be in deep trouble!

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