Forget about "risk of recession", it's already here.
Jerome Powell’s Fed Pursues a Painful and Ineffective Inflation Cure
Please consider Jerome Powell’s Fed Pursues a Painful and Ineffective Inflation Cure by Elizabeth Warren.
'That's a non-paywalled link if you wish to read in entirety. Here are a few snips.
Inflation is a global phenomenon inflicting significant financial pain on families everywhere. Rising costs are an urgent problem, and interest rates play a key role in maintaining price stability. But urgency is no excuse for doubling down on a dangerous treatment.
Mr. Powell has acknowledged this. Testifying before the Senate Banking Committee in June, he noted that elevated interest rates likely wouldn’t bring down gasoline or food prices. “There are many things we can’t affect,” he admitted in a June press conference—namely, the key causes of today’s inflation. Higher interest rates won’t end skyrocketing energy prices caused by Vladimir Putin’s war on Ukraine. They won’t fix supply chains still reeling from the pandemic. And they won’t break up the corporate monopolies that Mr. Powell admitted in January could be “raising prices because they can.”
Nobel Prize-winning economist Peter Diamond has warned about the substantial risk of a crash landing from the Fed’s aggressive approach. Mr. Powell has even conceded that the Fed’s actions may lead to a downturn, saying recession “is not our intended outcome at all, but it’s certainly a possibility.”
Despite these warnings, the Fed chairman still has cheerleaders for his rate-hiking approach. Chief among them is Larry Summers. “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” the former Treasury secretary recently told the London School of Economics. You read that correctly: 10% unemployment. This is the comment of someone who has never worried about where his next paycheck will come from.
Low unemployment and high inflation are painful, but a Fed-manufactured recession that puts millions of Americans out of work without addressing high prices would be far worse.
Congress should do its part to fight inflation. Investing in high-quality, affordable child care would lower costs by bringing more than a million parents into the workforce. Ending tax breaks for off-shoring and investing in American manufacturing would create good jobs and strengthen supply chains. Allowing Medicare to negotiate prices for prescription drugs would lower healthcare costs. And giving the Biden administration more tools to bolster competition policy would help crack down on price gouging by large corporations.
Her Cure, More Inflation
Warren is correct that the Fed made a mistake. But Inflation was roaring well before Putin’s war on Ukraine.
Warren does not admit the administration's responsibility and here own responsibility.
The biggest source of inflation was the third round of free money fiscal stimulus. Free money coupled with eviction moratoriums (that she supported), and QE that artificially lowered mortgage rates are the cause of this mess.
Warren also wants to cancel student debt. That's just more free money for the inflation fires.
Ten Percent Unemployment?
No one can say for sure what it will take to rein in inflation.
But given the debt loads, wealth effect of a stock market crash, and a labor market that never fully recovered from the pandemic, ten percent unemployment seems more than a bit extreme as a cure.
Whereas Warren embraces more inflation, Summers is promoting a deflationary collapse.
The most dangerous people are those who are partially correct about something but propose the wrong thing to fix it.
Warren and Summers are both in that category.
Expect a Long But Shallow Recession With Minimal Job Losses
I expect the Fed to overshoot a bit but nothing as extreme as Summers suggests.
As a result I foresee a Long But Shallow Recession With Minimal Job Losses.
Fear of ignitigning another round of inflation will prevent the Fed from launching more QE or being aggressive with rate cuts.
That's why the recession will be long or alternatively the US will flirt on and off with recession for years.
So expect a disaster in the stock market. We are not close to the bottom.
This post originated at MishTalk.Com.
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