We need a recession. Nobody likes recessions, but they are a natural part of business cycles going way back in history. And we really need one now, however onerous that may sound. In most past recessions, the problem was deflation, where workers lose jobs and business activity slows down to levels where many enterprises may not survive. Hardship for millions usually follows. But in any new recession now, we would be going in with workers still in short supply, and with many business sectors such as airlines and leisure unable to keep up with demand.
Inflation, not deflation is the problem this time around, and one of the best remedies for inflation is an old fashioned recession. No, I’m not taking pleasure in anyone’s potential privation, I’m looking at where the problem is this time. The problem in this environment is excess demand; a demand explosion in some cases. More than $7 Trillion of free federal money during 2020 and 2021 caused the demand tidal wave, and now we’re living with the consequences. The US Government took good care of us during the worst of the pandemic, and all of us should be grateful. But now in retrospect, we can see the Feds were overly generous for too long and the Federal Reserve, fearing deflation too much and inflation too little, waited much too long to begin to raise intertest rates.
You still can’t get a new car, continuing supply chain snarls in semiconductors and other components are keeping auto makers from delivering into the massive demand for new vehicles, many of them selling (when you can get one) for well over sticker price. Unemployment, measured by the Labor Department’s U3 reading is below 4%, and millions of jobs remain unfilled. The number of unfilled jobs may well be overstated, but continued understaffing problems at restaurants, trucking, leisure, and variety of other sectors suggests that jobs are still looking for people and not the opposite, which is usually the case in a recession. Too many jobs, not enough workers, consumers willing to pay up for most anything, backlogs of demand for everything, very high home equity, unusually solvent banks and the list goes on. Does that sound like a bad recession scenario to you? The problem this time is on the supply side. We need more of everything. We are short of energy, food, strategic metals, semiconductors, housing, you name it. Demand needs to slow down. Supply needs to catch up.
A recession would cool off the voracious demand for everything. Supply chains would have time to catch up. Potential workers who are still checked out of the labor force would gradually come back to work. Commodities prices from energy to food and other items would cool off. Massive transport imbalances caused by pandemic displacement of goods flows would ease.
Financial markets got the ‘we need a recession’ message in the opening days of this year and has been telegraphing the recession probability all year. Stocks, bonds, SPACs, wacky crypto coins, junky NFTs all got clobbered this year, and after the total debauchery-fest of greed we saw in 2020 and 2021 you knew it was only a matter of time. Speculation went totally berserk last year; we lost our minds. (How are your Bored Apes doing?) A cooling of FOMO (fear of missing out) has been replaced with FOBI (fear of being in). This is a return to normal. Normal is a very underrated word.
All this financial carnage may well be constructive and corrective in retrospect. It can give us back a world that we would recognize again, where supply can meet demand and we can build a more balanced economy for the future. We really need a recession, and if we get a shallow and reasonably short one, it would the Best Recession Ever.
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