The next recession (opens in new tab)

Yup. I’m always amazed when people say nobody saw the recession coming, because I distinctly remember multiple news stories about the subprime mortgage brouhaha for a year or two before the bubble burst.

People hear what they want to hear, and remember what they want to remember, I suppose.

I clearly remember NPR was talking about the subprime in Feb-Mar of 2007. That does not mean that NPR foresaw 2008 great recession. Most people saw a dip, but very very few people saw a Valley that it truly was.

Why do you wish that you had bought the house despite accurately predicting and waiting for the downturn? Didn’t you get a significantly better deal or did it just get offset anyway? Curious because it’s a similar decision now. A recession is inevitable, will it happen in the next 3-6 months or take two years is hard to predict.

It's almost as if people don't understand uncertainty.

Just because economists are not EXACTLY right about everything, does not mean they are ALWAYS wrong...

Think about all the possible scenarios that could have happened in 2008, and think about how closely economists -- on average -- were to that. They're actually ASTOUNDINGLY accurate. But just because they're not completely accurate, for some reason so many people think they have 0 value.

This is a false analogy. Economists bill themselves on being able to guide policy and large-scale decision-making given the tools and research at their disposal. If said tools and research are bunk, then the appropriate action is not to press on with guidance, but to stop with the guidance and predictions altogether. We're in the mess we're in now partly because of risk management techniques that don't work.

After the fall - House prices - The Economist https://www.economist.com/leaders/2005/06/16/after-the-fall

I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money.

Historically this is usually coupled with run-away inflation, however since it was isolated to the wealthy sectors of the economy (rather than the typical economy as a whole) there is only inflation among goods in that sector (housing etc). The big red flag is that stocks and VC are in that pool as well.

So while there was 20 trillion dollars of growth over the last 10 years, there was also 21 trillion dollars of debt generated.

The way I see it, QE successfully generated economic growth, however none of that economic growth was "real" growth. There were new innovations, particularly in the tech space, but a huge swath of them have no method to generate real sustainable profit.

All this means we should see a MASSIVE correction in markets. Due to financial rules, banks likely won't exit the market like 2008, but the massive number of companies that took out cheap debt will be at risk.

Basically we have a potential repeat of 2008, but swap out sub-prime homeowners with corporations.

Difficult to prove impact but during 08 global recession the Australian (Labor) Govt gave everybody money with the directive “to spend it”. Also pumped money into system through govt projects and rebates (schools building, solar rebates, etc).

On the other hand, Australia was also exporting coal and iron ore to insatiable (at the time) India and China. We also didn’t have the same real estate bubble (at the time).

Hard to prove either way, but Aus did move first and injected a lot of capital into the system, we didn’t enter a recession (unlike rest of OECD), and we didn’t end up having to bail out banks.

This is really the opposite of what happened.

The wealthy did not sell assets at above market prices, they in fact sold them at bellow market prices. Remember when they were trying to sell assets, they were exchanging these for cash. The problem was that the cash that they were getting in exchange had above market returns.

What was happening during the financial crisis is that even the safest private assets were risky illiquid and had low expected returns.

Some estimates say that marginal "safe" private assets had a expected real returns of around -4% after adjusting for risks and liquidity.

But since central banks were not aggressive enough, not creating enough inflation and unwilling to use negative interest rates, the returns on cash was like -1.8%, way above what you could get with safe and liquid private stores of value.

Investors wanted to get their hands on this government paper having above market returns so they attempted to sell private assets and stockpile cash. This is clearly visible in the shooting up of excess reserves in banks. Investors were hoarding cash. The low inflation and relatively high 0% interest rates (compared to market rates) was a huge subsidy to those who wanted to get out of the private markets, stop investing in the real economy and hold government paper to protect their savings.

Destruction of the economy, throwing workers to the curb was basically subsidized. Investors were being shielded from the markets by the government. They kept their government paper promises to be redeemed in the future when private markets looked more favorable. Central banks allowing cash to have returns above market put the private investment markets in a gridlock and economic activity slowed down significantly.

Cash is effectively an IOU from non cash holders to cash holders. This means that the above market returns investors got by hoard cash was a implicit subsidy from poor unemployed to rich savers. The unemployed and underemployed effectively subsidized the destruction of their own jobs.

When jobs returned and workers could buy stuff again, the savers' cash, now worth above what they could have gotten in the private markets, also flowed back into the asset economy and bid assets prices up and made them more expensive to those who were just starting to have money again, at just the time when they were buying again. People who had been the poorest during the crisis were effectively paying the bill for the subsidy that destroyed their past careers.

It is crucial that central banks run a counter cyclical monetary policy and that inflation is kept higher than usual during a crisis to avoid all this from happening. It is crucial that cash doesn't become a subsidy to divestment and crowd out private investment like it did. When the private markets return -4% (risk and liquidity adjusted), government paper should return less than -4%.

A big part of the recession danger was that if several of the too large wall street banks failed, there would be chaos and cascading failures, because you wouldn't be able to get your money from them for a while, it would take months or maybe years to figure out what really was owned or loaned. If I was say retired, my 401k might be 25% bonds and 25% cash and x% stock but if the company that held the records failed (say fidelity) and the stock market crashed, and the value of the bonds was unclear since so many companies went out, you can't easily get your money to live on - that was the danger of the 'cascading series of failures' scenario.

QE was more of a way to keep the system alive than a "broad monetary stimulus".

Giving money directly to the people in a crisis creates ultra-high-velocity spending and massive inflation. People rush to the stores buying up wares expecting the money to become worth far less soon. Store owners hold back stock and raise prices, fulfilling the fears of the people. A similar situation is currently unfolding in Turkey, by the way.

If it's the road to currency collapse (presumably via inflation), that doesn't explain why inflation not only failed to materialize, but the Fed undershot its own inflation targets for most of the next decade.

As far as I understand it, it's not that the central banks are unaware of inflation pressures due to QE, it's that they see other deflationary pressures and try to use QE in a proportionate way to counteract them. Judging by the end result of minimal inflation, if QE is inflationary there was probably substantial deflation pressure.

I don't think it is reasonable to be concerned primarily about inflation but not also deflation. A deflationary collapse not only leads to reduced investment in the future (why invest when prices are falling), but a big enough one will lead to bank failure, with people unable to get money out, the FDIC insurance program bankrupt, etc.

The US domestic political situation is already dysfunctional as it is. It's hard to imagine it remaining stable through an inflationary or deflationary collapse. And if history is any guide, radical political changes in a crisis are often not positive ones, since someone who knows who to blame and promises to solve everything can often undermine democratic institutions. I'll take (some level of) stability, thanks.

Anyway, to answer your last question, QE is determined by economists at the central bank and not directly by politicians. I think the main reason they are looking at unconventional monetary policy is that their traditional way to end recessions, lowering interest rates, stops being effective once interest rates are at zero.

> It's the road to currency collapse

This is overly simplistic. QE led to neither rampant inflation nor dollar depreciation. Money velocity fell and monetary policy responded. (Fiscal policy’s relative non-responsivensss meant monetary policy had to overcompensate.)

Money is always debit based. It can be private debit, or government debit. Some government debit is also interest free. But it's always debit.

Speaking from this space, everyone I see on my end is paying higher rents but it is eating into their ability to save and forcing them to consume less. Wage increases exist but are coupled with moves to riskier companies.

> Rents go up when people can afford higher rents.

Only if supply is capped artificially, e.g. in major cities where it's almost impossible to build.

> Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects.

Other reasons to take out loans: The wealth effect (currently fully in force), cheap loans (record low interest), easy loans (no risk assessment), outright stupid loans (US student loans) or loans that are necessary to make ends meet. All signs of a market overheating.

> Chapter 11s were at the same level in 2011 -- were you predicting a recession then too?

There was no reason to predict it when it had already just happened.

"Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects" - this likely applies to the upper 20% (my estimate) who have enough savings to survive an emergency and can afford to save a little less to put in the new kitchen. The majority of people especially those who cant afford a $400 emergency save less and take out CC debt because they need it to survive until the end of the month.

Rents do go up when people can afford it and then there is the very real possibility of a a large portion of people suddenly not being able to afford it anymore and evictions spike. People afford it because they have to live somewhere if all rents in the area are high and they cant afford to move, they cut elsewhere. The 35% of people that cant afford $400 cant afford to move so they will eat the rent increase of $50 per month because they have no choice.

Chapter 11's are an indicator, perhaps not a strong one but as business consolidates, employee choice is affected.

> There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge.

Isn't that mainly the result of the large cuts to corporate taxes? Deficits are also up as the article notes for the same reason making it harder for the US government to respond with stimulus in the event of a recession.

Sadly, booming economies often create the conditions for recession (e.g. supply chain constrictions, pricing distortions). They're hard to predict - often we don't know we're in one until it's been going for months. The old adage still stands - if it can't go up forever, it'll come down.

> A number of your indicators are signs of a booming economy.

35% of adults not being able to handle a $400 emergency is a sign that a third of the country is barely managing to live, and a relatively small problem can have huge consequences for them. I don't know about you, but it really makes me sad.

> Rents go up when people can afford higher rents

Or is it that rents go up when people can't afford to buy homes due to higher interest rates and down-payment requirements, which ends up putting a lot more people in the renters market, thereby raising rents in a supply-demand price war?

Asking, not stating.