APRIL 1st, 2023 | RYAN TYLER

Recession Or Depression? Something is happening

Things are happening, but do they point to a recession, a depression, or something different?
The scariest part is that the monetary policies of our central banks aren't working fast enough. We have seen the fastest rate hikes since fiat money became a thing, but inflation is holding steady. The illusion of progress is created by unusually low oil and natural gas prices, which will eventually elevate inflation when they rise back up to normal levels. Under normal circumstances, a 4% hike in rates within 18 months would have tamed inflation. As of now, it hasn't. With banks going bust and investors struggling through an erratic market, it's clear that something is happening.
Our economies haven't fully recovered since the 2008 meltdowns, but things were looking good until 2020. The United States began recording some the lowest rates of unemployment in 50 years, stock markets were skyrocketing, consumer spending was on the up and people were easing back into a normal boom cycle. Then the pandemic happened.
Fast forward three years and the pandemic is gone, but inflation is still at 6% in the United States, labour shortages are strangling supply chains and a handful of regional U.S. banks have gone under. Just when things were starting to look hopeful, U.S. inflation ticked back up, Silvergate became insolvent and many of the events that led to the previous recession are repeating. In Canada, our annual carbon tax increase happened on schedule and our governing Liberals, who are facing allegations of Chinese bribery, couldn't care less about the struggles facing the middle class.
As our healthcare system implodes and grocery bills triple, Canadians are wondering how much worse it could get. Many of us know something is about to happen, but we aren't sure if it will be a normal recession, a full blown depression, or something else.
Here are some clues.

Money Supply Contraction

For the fifth time in 150 years, the U.S. money supply contracted. The last time the money supply contracted, it led to the Great Depression. Before that, it happened three times; in 1921, 1893 and in the 1870s. Each time, the economy entered a depression with an unemployment rate above 10%.
The growth of our money supply saw a contraction of 2% in 2023.
In what has been the quickest quantitative tightening scheme in history, the money supply is shrinking fast—but inflation isn't. To make it even more disturbing, this isn't just happening in the United States. The pandemic response was a global effort and nearly every central bank and government in the world has reacted in the same way. The economic shutdowns and handouts happened in almost every country, making inflation a global problem. In the U.K., inflation was above 10% in February.
Every central bank is tightening their money supply to stop inflation.
History never repeats itself in an identical manner, but there are things that happen with a great deal of consistency. Make of it what you will, but so far we haven't seen a contraction since the Great Depression and there hasn't been one historical instance in which it has ended well. In 1921, a similar 2% contraction following the Spanish Flu led to 11% unemployment and severe deflation.
One caveat to note: we haven't had a full scale depression under our current fiat system. Prior to the Great Depression, the money supply was backed by something other than air. Whether this changes the outcome of the current contraction is anyone's guess, but we should find out soon enough.
A second caveat to note: liquidity remains high and there is currently more money floating around in the system than at any point in history, making that 2% contraction look more like a good thing.

Persistent Inflation

What a lot of people don't realize is that natural gas prices are below normal, while oil has remained under $80 per barrel for a majority of the past 18 months. On average, natural gas prices range between $3.50 and $4 per gigajoule, but they have been below $3 for most of the winter—which is unusual. When these prices start to come up, which they will, inflationary pressure will increase. On the flip side, higher oil prices could be a sign of economic strength and demand.
Inflation peaked at around 7% and 9% in the U.S. and Canada, then it started to decline six months ago. However, as mentioned above, much of this could have been due to lower natural gas, oil and gasoline prices. Even before any increases in energy prices, inflation remained stubborn in the United States at 6.4% to start 2023. Canada's inflation rate stayed nearly the same, starting the new year at 5.9%. In February, it dropped to 5.2%, but food inflation remained above 10%.
With the new “not-a-bail-out” bail outs of Silicon Valley Bank, Credit Suisse and others, inflation isn't likely to sink below 4% this summer.
If oil and gasoline prices rise, inflation could tick back up. If it does, it means our current monetary policies aren't working like they should be. If inflation remains unmoved—or higher—following what have been historic rate hikes and a 2% contraction in the money supply, we might be in bigger trouble than we realize.
There could be too much money in circulation for the central banks to control before the economic consequences become unstoppable.

The Prognostications

Everyone from Michael Burry to Ann Pettifor have predicted gloom, while some other investors have stayed course with positive positions. Both Pettifor and Burry sounded alarms over the recent bank failures—but Burry has been sending out warnings for almost two years. Pettifor and Burry are both credited with predicting the 2008 meltdown.
Jeremy Grantham has had the worst prediction yet, suggesting the stock markets could crash more than 50% after the “everything bubble” finally bursts. JP Mortgan has predicted that the economic engines are about to turn off and that the U.S. economy has passed the point of no return. Meanwhile, some 30% of 212 fund managers polled last month think a credit crunch could sink the economy. Central banker, Mark Carney, has also warned of a recession.
On the bright side, some are predicting a soft landing—or a full recovery.
Writing for Bloomberg, Tyler Cowen predicts that the recent bank failures won't wreck the economy. Lawrence Fuller at Seeking Alpha says the recent bank failures are a stage in our economy's adjustment to the new normal and that the Fed probably won't hike rates any higher in the short term. Over at Business Insider, Jennifer Sor tells us that oil prices are flashing signs that the U.S. economy could avoid a recession.
In the end, someone will be right and someone will be wrong. Until we know for sure, we should all remain vigilant and invest with caution.
APRIL 2023


March 2023