Why A Recession Is Unlikely In 2023 (SPX)

In this piece we try to show that it is government deficit-spending and bank credit-creation that fuels the stock market and will prevent a recession in 2023.

The most dangerous human condition is ignorance. It makes us susceptible to lies and losses.

The biggest of these lies is the concept of government “debt” (in its own currency). There is no such thing! The $31T of public “debt” is simply the accounting of the money that Congress has spent into the economy and not taxed back. In other words, the money that Congress left in private bank accounts instead of taxing back and destroying. The only way to settle this “debt” would be to tax $31T out of private bank accounts. And the only way to not continue adding to this accounting, is to either tax back every penny that Congress spends, or not spend at all. The latter, is impossible, and the former would plunge the economy into a depression.

Those in Congress, who are insisting on spending-cuts before they allow the government to pay for the goods and services it has already agreed to provide the American public, are not only ignorant, but also dangerous; they are threatening economic-murder-suicide.

Fund Flows

Putting the “debt” limit political circus aside, the fund-flows which are going into the economy will prevent the widely expected recession.

The Federal government is now spending more on interest payments than it is on National defence (chart below).

Interest payments are approaching $1T; that is money that flows into private bank accounts, and even though it is going to the already-rich (financial institutions, mostly) and not to the bottom of the economic pyramid where the producers and consumers reside, it will help support the stock market and at least delay a recession.

Recessions tend to occur 6-18 months after the second 10y-2y yield inversion, and after the unemployment rate starts to rise, which means there will not be a recession in 2023, but there could be one in 2024-25 (chart below).

The Treasury continues to play the “shell-game” of moving funds around the agency accounts in order to deal with the insane “debt”-ceiling and continue to pay its bills.

• The 20-day average of daily net-transfers (deficit-spending) is +$5.07B/day. This is the net-amount of money that the government is depositing into private-bank accounts on an average day (and not taxing it back).
• An increasingly positive net-transfer (blue-arrows on the chart below) correlates with an increasing stock market (SPX).

The chart below shows how the rising slope of the SPX is associated with the government’s yearly net-transfer rate.

The SPX has now moved up to the trend-line associated with a $3T/year net-transfer rate. A recession does not seem possible when trillions of dollars are being added to private bank accounts.

The other source of money-creation, besides government spending, is bank credit. When banks make a loan, they create a deposit in a private bank account, just like the Treasury does, but unlike the Treasury-spending which does not have to be taxed back and cancelled, every bank loan must be paid back and cancelled either by the borrower or by the bank’s own capital. Bank credit-money is temporary by nature, while government money that is not taxed back is permanent. The latter is recorded as (and misnamed) the $31T National “debt”; it is not debt like a household debt, it is a record of the money the government has created (spent into existence) by depositing into private bank accounts, but has not taxed back.

Aggregate bank credit goes through a seasonal weak period at the start of each calendar year, but in the latest reporting week all the major loan types rose, except for credit card debt which was lower for the third week in a row. The industrial loan sector is again starting to rise and indicates economic activity (chart below).

The return of bank credit-creation growth will add to liquidity. The chart below shows our liquidity model and how the SPX is affected by the amount of free money in the economy.

In conclusion, there is too much money flowing into the economy from both government spending and from bank credit for the economy to fall into a recession in 2023.