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Are Recessions Inevitable?
Are Recessions Inevitable?
Stocks fell last week following news that the yield curve on Treasury notes had inverted. This means that a short-term Treasury note was paying higher interest rates than long-term Treasury note. An inverted yield curve is widely seen as a sign of an impending recession.
Some economic commentators reacted to the inverted yield curve by parroting the Keynesian propaganda that recessions are an inevitable feature of a free-market economy, whose negative effects can only be mitigated by the Federal Reserve. Like much of the conventional economic wisdom, the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.
Interest rates are the price of money. Like all prices, they should be set by the market in order to accurately convey information about economic conditions. When the Federal Reserve lowers interest rates, it distorts those signals. This leads investors and businesses to misjudge the true state of the economy, resulting in misallocations of resources. These misallocations can create an economic boom. However, since the boom is rooted in misperceptions of the true state of the economy, it cannot last. Eventually the Federal Reserve-created bubble bursts, resulting in a recession.
So, recessions are not a feature of the free market. Instead, they are an inevitable result of Congress granting a secretive central bank power to influence the price of money. While monetary policy may be the prime culprit, government tax and regulatory policies also damage the economy. Many regulations, such as the minimum wage and occupational licensing, inflict much harm on the same low-income people that the economic interventionists claim benefit the most from the welfare-regulatory state.
…click on the above link to read the rest of the article…
Barron’s Nonsensical Idea: Cut Rates Like Mad to Avoid Recession
Barron’s Nonsensical Idea: Cut Rates Like Mad to Avoid Recession
Barron’s writer Matthew Klein proposes to stop the recession by cutting interest rates like it’s 1995.
Klein says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.
One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.
So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders…
Absurd Notion
The rest of the article is behind a paywall, but I can tell you with 100% certainly Klein’s notion is absurd.
Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt or other fundamental problems.
Those problems will not not go away if the Fed “cuts rates like 1995” or even like 2008.
If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.
Not even negative rates can stop recessions.
The Eurozone, especially Germany, has negative rates. Yet, it’s highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).
Monetary Madness
As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.
Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?
Stop recession for how long? Zero months? Six months? And at what expense?
What Then?
Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.
And if that doesn’t work?
…click on the above link to read the rest of the article…
Major Recession Alarm Sounds
Major Recession Alarm Sounds
Red, red, in every direction we turn today… red.
The Dow Jones shed 800 scarlet points on the day.
Percentage wise, both S&P and Nasdaq took similar whalings.
The S&P lost 86 points. And the Nasdaq… 242.
And so the market paid back all of yesterday’s trade-induced gains — with heaps of interest.
Worrying economic data drifting out of China and Germany were partly accountable.
Chinese industrial production growth has slackened to 4.8% year over year — its lowest rate since 2002.
And given China’s nearly infinite data-torturing capacities, we are confident the authentic number is lower yet.
Meantime, the economic engine of Europe has slipped into reverse. The latest German data revealed second-quarter GDP contracted 0.1%.
Combine the German and Chinese tales… and you partially explain today’s frights.
But today’s primary bugaboo is not China or Germany — or China and Germany.
Today’s primary bugaboo is rather our old friend the yield curve…
A telltale portion of the yield curve inverted this morning (details below).
An inverted yield curve is a nearly perfect fortune teller of recession.
An inverted yield curve has preceded recession on seven out of seven occasions 50 years running.
Only once did it yell wolf — in the mid-1960s.
An inverted yield curve has also foretold every major stock market calamity of the past 40 years.
Why is the inverted yield curve such a menace?
As we have reckoned prior:
The yield curve is simply the difference between short- and long-term interest rates.
Long-term rates normally run higher than short-term rates. It reflects the structure of time in a healthy market…
Longer-term bond yields should rise in anticipation of higher growth… higher inflation… higher animal spirits.
Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.
Bond investors therefore demand greater compensation to hold a [longer-term] Treasury over a [short-term] Treasury.
…click on the above link to read the rest of the article…
Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start
Collectively, the world’s major central banks have pumped $1.1 trillion into the markets over the past year.
The result of all this money printing is now well known: massively inflated real estate, stock and bond asset price bubbles, as well as extraordinary wealth and income gaps across society.
Some day all of this insanity will end. But how? Will it unwind in an orderly and polite way, as the world’s central planners hope? Or will be disorderly, resulting in painful portfolio losses and mass layoffs?
Michael Pento, fund manager and author of The Coming Bond Bubble Collapse returns to the podcast this week to offer his prediction that events will most likely take the latter route. In fact, he sees the developing inversion of the yield curve as a dependable precursor to the US economy entering recession as soon as this Fall:
The Fed is now raising rates. They raised rates from 0% up to 2%. They’re supposed to do it again in September/October. And again in December. That will be four hikes this year.
They are also selling assets, aka ‘draining their balance sheet’. I say ‘selling’ because that’s exactly what they have to do. Let’s say the Fed is holding a 10-year note that’s due: if they want to destroy that money, they say “OK, Treasury, give me the principal”. The Treasury doesn’t have any money so it has to go the public and raise money. Well, the Treasury will have to do that to the tune of $50 billion per month come October. Right now it’s $30, it has to go in July to $40 billion a month then it goes to $50 billion. That’s $600 billion a year added to the public supply of Treasurys they have to actually finance at a market rate. That’s on top of the $1.2 trillion debt we’re going to have in fiscal 2019.
…click on the above link to read the rest of the article…
