The Gloomy Economic View | Seeking Alpha

I have been writing this post since February 8, 2008.

The Great Recession began in December 2007.

So, I have been writing this post for a long time, and I have written during the worst economic recession since the Great Depression and during the spread of the Covid-19 pandemic and accompanying recession.

I must admit that I am very pessimistic at this time. How my present state of mind compares with earlier situations is really undefinable at this stage of the economic picture that is evolving.

But, let’s say that right now, I am pretty pessimistic about the near-term future.

The underlying cause of this pessimism is inflation.

I went through the inflation of the 1970s. In fact, when wages and prices were “frozen” by President Richard M. Nixon and the Cost of Living Council, I was there.

I was a close observer of Fed Chair Paul Volcker and his battle to defeat inflation in the early 1980s as a professor of finance at the Wharton School, University of Pennsylvania.

I led three bank turnarounds in the 1980s moving into the 1990s and dealt with the consequences of organizations paying for their behavior during periods of high inflation.

So, I have experienced the environment of inflation before.

We Pay For Our Sins

The first lesson I would say that I learned from this experience is that we “pay” for our past actions.

In the 1960s and 1970s, the U.S. government did a lot, both Democrats and Republicans, to bring the country onto an inflationary foundation.

We paid for this and it was very painful.

And, as I have written about almost continuously over the past ten years or more, the U.S. government created a new inflationary foundation in the 2010s as policymakers invented a new approach to generating economic stimulus: the tool of quantitative easing.

We did not get an inflationary response in consumer prices from quantitative easing, but we did get inflationary responses in asset prices like housing prices, stock prices, commodity prices, and so on.

Then, the spread of the Covid-19 pandemic took place and U.S. policymakers responded by providing direct payments to needy individuals hit by the pandemic and by a Federal Reserve program of quantitative easing that resulted in the Fed buying outright about $120.0 billion per month in securities and continuing to do this for about sixteen months.

The securities portfolio of the Federal Reserve climbed from about $800 billion at the start of December 2007 to just over $8.3 trillion at the end of 2021.

And, the money created by the Federal Reserve spread internationally.

Globalization may have fallen away in some trading activities, especially during the Trump effort to “decouple” the United States from other countries, especially from China.

But, globalization has picked up in the area of money and finance, particularly as the world of money and finance has become more digital.

The world is filled with dollars!

And, we are now paying for that.

The Fight Against Inflation

Inflationary pressures began to shift in late 2021 as economic and political conditions began to change around the world.

Supply factors coming from the pandemic slowdown, energy issues coming from political factors, and, finally, the Russian invasion of Ukraine, generated conditions for consumer price increases to start spreading again.

And, this is where we are now.

Inflation in the United States and in the world has returned to levels not seen since the late 1970s and early 1980s.

in the United States, consumer prices rose by 8.8 percent in September 2022, while core inflation rose to 6,6 percent, a fort-year high.

The Federal Reserve is not in full fighting gear. It has raised its policy rate of interest five times this year, moving the effective Federal Funds rate from 0.08 percent to its current level of 3.08 percent.

Furthermore, the Federal Reserve is also allowing its securities portfolio to decline…$95.0 billion per month…so as to reduce the liquidity that remains in the banking system.

The portfolio has been reduced by about $190.0 billion since the middle of March 2022.

Another Factor: The U.S. Dollar

But, something else has entered into the picture.

With the rise in U.S. interest rates, the value of the U.S. dollar and risen dramatically.

For example, now one Euro only costs around $0.97. And, one British pound only costs about $1.13. At the beginning of March 2022, these currencies cost $1.10 and $1.33, respectively.

This rise in the value of the U.S. dollar has put a lot of pressure on world financial markets and especially has hurt emerging nations that have issued a lot of their debt in dollars.

This difficulty has grown as the synchronicity of the central banks of the major developed countries has moved into a common movement “not seen in the last five decades.”

The Federal Reserve System of the United States has the dominant reserve currency in the world, and it sniffles its nose, the rest of the world sneezes.

This just enlarges the problems every place else.

Global Darkness

Andrew Duehren and Yuka Hayashi, writing in the Wall Street Journal, quote Kristalina Georgieva, Managing Director of the International Monetary Fund:

“The worst is yet to come.”

Then the two authors provide these data points: Economies representing more than a third of global output will contract next year, while the world’s three largest economies–the U.S., the European Union, and China–will essentially stall.

Overall, the IMF projects 2.7 percent growth in 2023, down from 3.2 percent this year.

The U.S.? The IMF has it growing at 1.0 percent next year, down from 1.6 percent this year.

A lot of the world is in disequilibrium. Some way, somehow, the world is going to have to work its way out of this disequilibrium.

This will not be easy. It will not be painless.

And, getting out of a lot of these disequilibrium positions will be dependent upon what the monetary authorities do, especially the Federal Reserve.

And, the situation seems to be getting any less complicated.