The Crypto Crash is just the beginning
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The US economy is not doing very well right now. US GDP contracted in the last quarter, despite strong results from US consumers. Inflation is high; markets are down; wages and personal savings rates show troubling statistical signals. Is the United States destined for a recession in 2022? I don’t know for sure. But here are nine signs that worry me.
1. Everyone’s stock portfolio is disgusting right now. The Nasdaq is down 30%. Growth stocks and pandemic darlings such as Peloton and Zoom slumped more than twice that amount. The hedge funds that backed these growth stocks, including Ark and Tiger Global, were crushed. If you look at your 401(k), you’ll see that… no, cross that out, you shouldn’t look at your 401(k) under any circumstances.
“The stock market is not the economy” is something some people like to say. But this is not a very useful mode of analysis. Health care is also not the economy, nor is metropolitan Los Angeles gross product. But if either of those things crashed 30% in a quarter, we’d all agree that was significant. Sharp declines in stock values can ripple through the economy in all sorts of ways, discouraging investment and spending, or leading to a contagion of layoffs.
2. Jhe crypto bubble has burst. Crypto fans had fun, fueled by exuberant 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 soar, investors sell their positions and billions of dollars of value are wiped from the industry. According to one estimate, more than $200 billion in stock market wealth was destroyed in crypto alone, in just a few days. The bursting of the crypto bubble seems quite reminiscent of the dotcom bubble of 2000, when the Nasdaq crashed and the effects rippled through the wider economy, wiping out retail investors and reducing business investment. until we find ourselves in a brief recession. If the bursting of the crypto bubble was the only thing going on right now, I don’t think a recession would be likely. Except that’s not even close to the only (or even the most important) thing going on right now.
3. Inflation is very high and widespread, and that’s bad. This week’s inflation headlines were a little confusing. the the wall street journal reported that inflation had “subsided”. the New York Times reported that prices are “rising rapidly”, at a rate close to a 40-year high. Who is right ? They both are. the rate price increases decreases, but the level price increases is still extremely high and unfortunately widespread. Several months ago, some economists offered relief to worried consumers by pointing out that inflation was overwhelmingly in a handful of odd categories, such as used cars. Well, that’s no longer true. Today, used car prices are falling due to inflation shifted to service industries, such as restaurants and tourism. This week, gasoline prices reached their highest average nominal price on record. Inflation is bad for all sorts of reasons. People really hate it: the University of Michigan consumer confidence index is near a 60-year low.
4. Many people feel poorer than a year ago. Unemployment is very low and the labor market is tight, which means workers can easily quit their jobs and take on new positions to earn more money. (This trend is sometimes called the “great resignation.”) That’s a nice situation. But inflation increases every month, and increases rarely occur more than once a year. This means that “real”, or inflation-adjusted, wages are actually falling. Worse, according to the Atlanta Federal Reserve, wage growth is begins to stabilize, even as inflation continues to rise. This is not a tenable situation.
5. Savings decrease and debt increases. From 2020 to 2021, the US government sent most US households several thousand dollars in checks to get through the pandemic. With much of the economy shut down, many Americans hoarded that stimulus money and the personal savings rate soared to a 60-year high. But now Americans have spent just about all that money, and the personal savings rate has fallen below its 2010s average. During a time of instability for the economy – with collapsing markets, rising inflation and the Federal Reserve dragging down the economy – the typical household doesn’t have much protection. Instead, consumer debt is breaking new records.
6. The Federal Reserve’s interest rate hikes are already wreaking havoc. One of the Federal Reserve’s mandates is to keep inflation around 2%. So much for that one. Inflation soared past 8%, leading the Fed to announce a series of rate hikes aimed at slowing 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 of these categories and more declines, 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 is rising do not have caused a recession. On its way to crushing inflation, the Fed could destroy trillions of dollars of wealth and economic activity.
7. China is a mess. The world’s second-largest economy has had a strange 2022. China’s zero-COVID policies have led to shocking lockdowns in major cities like Shanghai, freezing economic activity. China is also facing an implosion in real estate investment, declining business confidence and a surprising drop in economic activity. Why is this troubling for the United States? Because China was expected to account for about a quarter of global economic growth over the next few years. When China sneezes — or, more accurately, when Chinese authorities forcibly quarantine anyone who sneezes — the world could catch a cold. The United States could have been in a strong position to weather a Chinese slowdown if its other trading partners were all doing well. But they are not.
8. A recession is looming for Europe. The UK economy is shrinking and the central bank says inflation will exceed 10% this year. The war in Ukraine has sent energy prices skyrocketing across Europe, and most economists believe the continent’s economy will contract this year. Europe most likely seems headed for both stagnation and inflation – the dreaded combination that 50 years ago gave rise to the ugly term stagflation. If Europe contracts as Chinese growth slows, US exporters will struggle to contribute to GDP growth.
9. Ooh yeah, it’s still a pandemic. Restaurant activity and air travel are nearly back to pre-pandemic highs as most Americans return to something like “normal.” But we don’t know what the virus and its variants will throw at us yet. Could the next variant be more transmissible and deadlier, and also bypass our immunity? I hope not. But these are the 2020s. Anything is possible.