US FED: SHUTTING THE MONEY TAP?

An inherent recessionary tendency characterizes the current global economic situation. Specifically, the money supply in the United States has been contracting for approximately ten months, decreasing the available monetary resources.

This phenomenon can potentially affect economic activity with a delay of approximately six to 18 months. If the Federal Reserve persists in this approach, it is likely that a severe and protracted recession, possibly of the magnitude of the 2008-2009 financial crisis, will ensue.

Banking Faultlines

Central banking plays a critical role as it is the driving force behind much of the current economic activity.

A recession’s likelihood appears inevitable, particularly if central banks persist in disregarding pertinent economic signals and instead focus on extraneous noise. The current approach of over-squeezing the money supply via quantitative tightening, as executed by the Federal Reserve, the European Central Bank, and the Bank of England, is a problematic strategy that exhibits limited attention to the money supply.Experts claim these institutions lack sufficient consideration of the quantity theory of money, which establishes a rela- tionship between variations in the money supply and economic activity, prices, and related factors. Instead, they focus on daily data, allowing excessive noise to influence their decision-making processes. In the process, they are failing to properly attend to the money supply signal, which is the most relevant and crucial aspect of this situation.

The crucial factor to consider is the direction of the money supply, as it provides insights into future developments. If the money supply is still declining, it indicates that the situation will deteriorate further instead of reaching a bottom and becoming more optimistic in the next six to twelve months.

While the most significant metric, money supply, is contracting, Central Banks have persisted in their policy of tightening. The Fed and other central banks are complicit in creating 9 per cent inflation, which they failed to address in a timely manner. As a result, they have raised rates rapidly and extensively, an unprecedented feat. Thus, there is a risk of over-tightening by the Fed and other central banks, potentially creating t the looming storm clouds of recession.

GETTING TO THE ROOT OF THE PROB -

There are two important factors to consider. First- ly, even if central banks pause their activities, there is a lag effect from previous rate hikes that can take up to a year to manifest in the economy. Additionally, lending standards are tightening, a trend that the banking crisis has aggravated. This tightening of credit serves as an additional rate hike, making it essential to wait until the next Federal Open Market Committee’s (FOMC) meeting before deciding if another rate hike is necessary.

Secondly, there is the issue of how significant these factors are in terms of contracting the economy further. This contraction could potentially force the Fed to intervene and save the system, regardless of its intention to wait until inflation has been fully tamed.

Prior to the events involving Silicon Valley Bank, First Republic Bank, and other similar incidents, the loans and leases offered by commercial banks, which make a substantial contribution to the growth of the money supply, were already experiencing significant deceleration and cutbacks.

Consequently, year-end inflation forecasts have been revised downwards to a range of two to five per cent, based on the decline in the money supply and the contraction of credit in the commercial banking system. The inflation narrative seems to have reached its conclusion, as the Fed’s actions have resulted in excessive tightening, causing inflation to emerge from the system despite their assertions to the contrary.

If we examine the money supply, we can observe that it is contracting at a rapid pace. This is a significant indicator, as inflation tends to change with a lag of 12 to 24 months after such contraction. Consequently, we have revised our inflation forecast for the end of the year from 5 per cent to a range of two to five per cent. The importance of considering lags should not be overlooked, and one must monitor the money supply closely. The lags can be divided into two periods: the first period occurs one to nine months after the money supply begins to change significantly, resulting in changes in asset prices, such as equities, home prices, and commodity prices.

These are followed by changes in real economic activity, or real GDP, which occurs with a lag of about six to 18 months. Given the significant contraction in the money supply, a recession is expected to follow within six to 18 months.

In order to gain a proper understanding of the state of the economy, one must recognize the importance of lags. Relying on current economic data alone leads to confusion and noise in the analysis. Instead, attention should be paid to changes in the money supply over the past year, as it is a crucial factor in the economy.

Last summer, bank credit was growing at a rate of 10% year over year, but as of February, it had decreased to 5.5%. This trend is expected to continue, potentially resulting in a contraction of bank credit. Even if the Federal Reserve chooses to leave Fed Funds rates unchanged or only decrease them slightly, the ongoing reduction in the money supply will contribute to a longer recession. At present, there appears to be a widespread focus on inflation as a significant concern. However, this concern is misplaced as inflation is already weak- ened. Instead, we should focus on what comes next. The crucial factor to consider is the money supply and what has been happening with it for the past 12 to 24 months before the inflation data becomes available. This will provide a clearer picture of the situation.

The decline of the bull market and the inflation aspect of the story have already been addressed because the Fed was excessively strict. They failed to consider the crucial factor, i.e., changes in the money supply.

The crucial factor to consider is the direction of the money supply, as it provides insights into future developments. If the money supply is still declining, it indicates that the situation will deteriorate further instead of reaching a bottom and becoming more optimistic in the next six to twelve months.

As we approach an economic downturn, the signs of trouble are becoming increasingly evident. Despite these ominous indicators, there is a disconnect between the Fed’s official stance and the market’s predictions.

While the Fed has announced its intention to continue pursuing inflation and may hike interest rates if necessary, it has also suggested that it may pause for the remainder of the year.

In contrast, the markets are forecasting a potential shift in Fed policy this summer. Furthermore, the markets have been relatively bullish this year, which appears to contradict the dire outlook being communicated by the Fed.

Regional Dynamics

Inflation is not a global phenomenon but rather a local one that is heavily influenced by the actions of central banks in their respective countries. For example, countries such as China, Switzerland, and Japan have very different inflation rates despite not engaging in similar monetary policies.

China’s inflation rate is currently at 1%, Switzerland’s is at 3.4% year-over-year, and Japan’s is at 3.3%, despite none of these countries engaging in extensive monetary pumping. Therefore, it is crucial to examine the local actions of central banks and their impact on the money supply when assessing inflation.

With respect to global impact, the primary focus is on the United States, as the monetary conditions there have a significant impact on global economic conditions. Europe and the United Kingdom are struggling, with a sharp decline in the money supply and a squeeze on credit.

Additionally, the ongoing conflict between the United States and Russia is complicating matters further, as it’s negatively affecting both the U.S. and European economies. The third major player is China, which is gradually returning to normalcy after implementing counterproductive lockdowns.

Lockdowns have been observed to have no significant positive impact on public health but result in severe economic consequences. For instance, China implemented strict lockdown measures that caused a significant slowdown in its economy. However, China is gradually recovering from the economic impact of the lockdowns.

Meanwhile, India and Indonesia are experiencing relatively stable economic conditions. Nonetheless, the overall outlook is bleak due to the uncertainty of the severity of the economic storms that the United States, Europe, and the UK will face. Although a storm is inevitable, the exact intensity of the impact remains unknown.

In the past, recovery measures that have lifted the economy out of recessions are less likely to be effective in preventing the current looming recession. Previously, outsourcing labour to foreign countries and strict monetary policies from a more stringent

Federal Reserve helped to heal the economy during the 1980s recession. However, the present-day Federal Reserve appears determined to gradually reduce inflation through relatively moderate monetary policies.

Additionally, increasing geopolitical tensions stemming from the Russia-Ukraine conflict and growing mistrust of the Chinese government have prompted corporations to bring supply chains closer to home, leading to a hiring surge in the United States and resulting in the lowest unemployment rate since 1968. The robust strength of the labour market is likely postponing the onset of the impending recession for now.

The current economic situation seems set for a recession, given central banks’ persistent tightening of money control. Experts warn against the short-term focus on inflation, which masks the deep-rooted signs of recession which no one is paying attention to.

Central banking plays a crucial role in driving much of the current economic activity. However, experts have pointed out that central banks give more weight to extraneous noise than pertinent signals.

Despite the fact that the most significant metric, money supply, is contracting, they have persisted in their policy of tightening. Consequently, they have failed to timely address the 9% inflation they helped create. In response, they have raised rates in an unprecedentedly rapid and extensive manner. This raises the risk of over-tightening by the Fed and other central banks, potentially leading to a severe recession.