Recession risks
Apr. 24th, 2023 12:53 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
walkitoutI don’t normally talk about recession risks here and nothing I am about to say should be considered advice of any sort whatsoever, except possibly that you should try not to panic, even if everyone else around you is, because panic is not helpful, altho careful observation, knowing your values and making plans with the people you care about and care for IS helpful.
Anyway.
We’ve had some inflation, mostly because pandemic/supply chain/deciding to abruptly move everything online at first temporarily and then more permanently. Also, all of the above created an environment in which people were _accepting_ of inflation, so people raised prices to make more money, and also workers said, hey, pay us more because all of the above.
Then the Fed said, okay, that was NOT transitory, so we’re going to raise rates until everyone calms down. Raising rates pressures everyone who is lending money at low interest rates and needs to borrow money at higher interest rates. Some of those people promptly folded (or were folded), but the banking industry as a whole is under pressure as long as interest rates are rising. While rising interest rates did reduce some demand (tech companies laid some people off, some startups ended, etc.), it has not yet reduced _enough_ demand, because we’ve been underbuilding housing so there is a lot of pent up and generational demand as people who put off having kids/buying a house are now doing so.
The Fed will quit raising interest rates when they arrive at their target rate of inflation. We could arrive at that target rate by an increase in supply (China production being all the way back, for example, and more people entering the work force would help, however companies are now aware of single country sourced production as an existential risk and will continue to distribute production in 3 or more locations and that will keep costs elevated for a while and maybe forever) OR a decrease in demand (people quit consuming as much) or some combination thereof. Every in-person retail operation that goes under frees up a little labor to go do something else. Every tech person laid off becomes someone who could help smaller companies hire the talent they need to automate. Etc.
Here’s another thing that could do it: a bond market crisis. If the bond market had a complete meltdown, and news media focused exclusively on that for a little bit talking up and generally stoking the belief that a recession _with layoffs broadly_ was imminent, _that_ could all by itself incrementally reduce demand enough to make inflation stall completely. In conjunction with the massive amount of multi-family housing that will be coming onto the market in the next few months and a total collapse of commercial real estate, the Fed might not have to raise rates further AND might let them reduce rates a bit, taking a lot of pressure off of banks.
Want to know what might cause a bond market crisis? Failing to raise the debt ceiling.
I am _not_ advocating for failing to raise the debt ceiling. I am noting that if the Republicans insist on driving off that cliff, we should _definitely_ all get really mad at them. And also enjoy the reduction in inflation that lets interest rates come down while we talk about what a weird thing it was that we had that massive crisis and yet still such low unemployment.
Anyway.
We’ve had some inflation, mostly because pandemic/supply chain/deciding to abruptly move everything online at first temporarily and then more permanently. Also, all of the above created an environment in which people were _accepting_ of inflation, so people raised prices to make more money, and also workers said, hey, pay us more because all of the above.
Then the Fed said, okay, that was NOT transitory, so we’re going to raise rates until everyone calms down. Raising rates pressures everyone who is lending money at low interest rates and needs to borrow money at higher interest rates. Some of those people promptly folded (or were folded), but the banking industry as a whole is under pressure as long as interest rates are rising. While rising interest rates did reduce some demand (tech companies laid some people off, some startups ended, etc.), it has not yet reduced _enough_ demand, because we’ve been underbuilding housing so there is a lot of pent up and generational demand as people who put off having kids/buying a house are now doing so.
The Fed will quit raising interest rates when they arrive at their target rate of inflation. We could arrive at that target rate by an increase in supply (China production being all the way back, for example, and more people entering the work force would help, however companies are now aware of single country sourced production as an existential risk and will continue to distribute production in 3 or more locations and that will keep costs elevated for a while and maybe forever) OR a decrease in demand (people quit consuming as much) or some combination thereof. Every in-person retail operation that goes under frees up a little labor to go do something else. Every tech person laid off becomes someone who could help smaller companies hire the talent they need to automate. Etc.
Here’s another thing that could do it: a bond market crisis. If the bond market had a complete meltdown, and news media focused exclusively on that for a little bit talking up and generally stoking the belief that a recession _with layoffs broadly_ was imminent, _that_ could all by itself incrementally reduce demand enough to make inflation stall completely. In conjunction with the massive amount of multi-family housing that will be coming onto the market in the next few months and a total collapse of commercial real estate, the Fed might not have to raise rates further AND might let them reduce rates a bit, taking a lot of pressure off of banks.
Want to know what might cause a bond market crisis? Failing to raise the debt ceiling.
I am _not_ advocating for failing to raise the debt ceiling. I am noting that if the Republicans insist on driving off that cliff, we should _definitely_ all get really mad at them. And also enjoy the reduction in inflation that lets interest rates come down while we talk about what a weird thing it was that we had that massive crisis and yet still such low unemployment.