The Crypto Crash Is Just the Start

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The US economy is not looking good right now. U.S. GDP contracted in the last quarter, despite a good sample of U.S. consumers. Inflation is high; markets are down; both wages and personal savings rates show some worrying statistical signs. Is the US destined to have a recession in 2022? I don’t know for sure. But here are nine signs that concern me.

1. Everyone’s stock portfolio is disgusting right now. The Nasdaq is down 30 percent. Growth stocks and pandemic favorites like Peloton and Zoom have more than doubled that amount. The hedge funds that supported these growth actions, including Ark and Tiger Global, were crushed. If you look at your 401 (k), you’ll see that … no, scratch, you shouldn’t look at your 401 (k).

“The stock market is not the economy” is something that some people mean. But it is not a very useful mode of analysis. Health is not the economy, nor is the gross metropolitan product of Los Angeles. But if any of these things fell by 30 percent in a quarter, we would all agree that it’s important. Sharp declines in stock values ​​can flow through the economy in all sorts of ways, discouraging investment and spending or causing a contagion of layoffs.

2. TThe cryptographic bubble has appeared. Fans of cryptocurrencies have had a fun ride, driven by a lush risk-taking in an era of low interest rates. But now the car is going down the other side of the roller coaster. As fear and interest rates rise, investors are selling their positions and billions of dollars worth of value are being wiped out of the industry. According to an estimate, more than $ 200 billion worth of stock market wealth has been destroyed just within cryptography, in just a few days. The bursting of the cryptocurrency bubble seems quite reminiscent of the 2000 dot com bubble, when the Nasdaq fell and the effects reverberated throughout the economy, eliminating retail investment and reducing business investment until we ended up in a brief recession. If the bursting of the cryptographic bubble were the only thing happening right now, I don’t think a recession is likely. Except it’s not even close to the only (or even the most important) thing that’s happening right now.

3. Inflation is very high and it’s broad, and that’s bad. This week’s headlines have been a bit confusing. O Wall Street Journal reported that inflation has “attenuated.” O New York Times reported that prices are “rising rapidly,” at a rate close to the 40-year record. Who is right? Both are. O rate of price increases is declining, but the level of price increases is still extremely high and frustratingly wide. Several months ago, some economists offered help to concerned consumers by pointing out that inflation was overwhelmingly over a handful of strange categories, such as used cars. Well, that’s not true anymore. Today the prices of used cars are declining like inflation passed to the service industries, such as restaurants and tourism. This week, gasoline prices hit their highest average nominal price. Inflation is bad for all sorts of reasons. People really hate it: the University of Michigan Consumer Sentiment Index is close to its 60-year low.

4. A lot of people feel poorer than a year ago. Unemployment is very low and the labor market is tight, which means workers can leave work easily and take up new jobs to make more money. (This tendency is sometimes confusedly referred to as the “Great Resignation”). That’s a nice situation. But inflation rises every month, and increases rarely come more than once a year. This means that “real” or inflation-adjusted wages are declining. Worse, according to the Atlanta Federal Reserve, wage growth is starting to level, although inflation continues to rise. This is not a sustainable situation.

5. Savings are falling and debt is rising. From 2020 to 2021, the U.S. government sent several thousand dollars in checks to most U.S. households to overcome the pandemic. With much of the economy closed, many Americans kept that stimulus in cash and the personal savings rate soared to a record 60 years. But now Americans have spent almost all that money and the personal savings rate has fallen below the 2010 average. During an unstable time for the economy, with collapsing markets, and rising inflation and the Federal Reserve slowing the economy, the home typical does not have much protection. By contrast, consumer debt is breaking new records.

6. Federal Reserve interest rate hikes are already causing chaos. One of the mandates of the Federal Reserve is to keep inflation around 2 percent. Well, both for that. Inflation soared above 8 percent, prompting the Fed to announce a series of rate hikes aimed at curbing economic activity. In theory, the plan works like this: the Federal Reserve raises interest rates, making it more expensive to borrow money for mortgages, cars, and business investments. As a result, investment in all these categories and lower, and the economy cools. But here’s the problem. Modern history has very few examples of such low unemployment and such high inflation where the rate rises no caused a recession. On the way to crushing inflation, the Fed can destroy billions of dollars in wealth and economic activity.

7. China is a disaster. The world’s second largest economy has had a strange 2022. China’s zero COVID policies have caused shocking blockades in big cities like Shanghai, which have frozen economic activity. China is also facing a surge in real estate investment, falling business confidence and a sharp decline in economic activity. Why is this worrisome for the US? Because China is projected to account for about a quarter of world economic growth in the coming years. When China sneezes, or, more aptly, when Chinese officials quarantine those who sneeze, the world can get cold. The United States could be in a strong position to cope with the Chinese slowdown if its other trading partners are doing well. But they are not.

8. A recession is coming to Europe. The UK economy is shrinking, and the central bank says inflation will exceed 10 per cent this year. The war in Ukraine has skyrocketed energy prices across Europe, and most economists believe the continent’s economy will shrink this year. Europe seems very likely to be heading for stagnation and inflation, the dreaded combination that, 50 years ago, gave birth to the horrible term. stagflation. If Europe shrinks as Chinese growth slows, U.S. exporters will have a hard time contributing to GDP growth.

9. Oh yes, it is still a pandemic. Restaurant activity and air travel are almost back to their pre-pandemic highs as most Americans return to something like “normal”. But we do not know what else the virus and its variants will throw at us. Could the next variant be more transmissible and deadly, and also prevent our immunity? I hope not. But these are the 2020s. Anything is possible.

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