There are quite a few reactions to the recent dip in the stock markets, some with a tinge of panic. It seems premature to me—for DJIA at least it’s not even a correction yet. This report from Matt Egan at CNN puzzled me a bit:
New York
CNN Business
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Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a “mild†one.Now, it’s warning of a deeper downturn caused by the Federal Reserve’s quest to knock down stubbornly high inflation.
“We will get a major recession,†Deutsche Bank economists wrote in a report to clients on Tuesday.
The problem, according to the bank, is that while inflation may be peaking, it will take a “long time†before it gets back down to the Fed’s goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.
“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,†Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.â€
This is the part that puzzled me:
Of course, no one knows precisely how this will play out. Although Deutsche Bank is pessimistic – it’s the most bearish among major banks on Wall Street – others contend this gloom-and-doom is overdone.
Goldman Sachs concedes it will be “very challenging†to bring down high inflation and wage growth, but stresses that a recession is “not inevitable.â€
“We do not need a recession but probably do need growth to slow to a somewhat below-potential pace, a path that raises recession risk,†Goldman Sachs economists wrote in a report Friday evening.
Can someone explain that thinking to me? I agree that borrowing more to increase demand would aggravate the present situation but I don’t understand how less economic growth is better than more.
I suspect they are expecting greater velocity (its been falling since 1998) as people spend now in anticipation of higher prices. So throttle GDP………if you can.
If you think about trying to manage the psychology of V, while getting QP and M to behave is it any wonder we don’t have soft landings, as I noted in a recent comment?
And its one reason Friedman thought the Fed always got it wrong.
40 years ago we produced a lot more of what we consumed and the international holdings of dollars was much smaller than at present. I consider it an open question whether any single central bank can constrain inflation with its country in a globalized economy without truly draconian action.
“I consider it an open question whether any single central bank can constrain inflation with its country in a globalized economy without truly draconian action.”
Perhaps. But think about the opposite. The Fed balance sheet grew by 8ish x the past 12 years, half of it in the last two. That’s draconian, and got a result: inflation.
It always puzzled me – where’s the inflation? The Fed got away with easy money for quite some time in a falling velocity environment. Or maybe more accurately, due to a falling velocity environment. For an awfully long time V was 1.6ish. It peaked at about 2.5 in the late 90’s. It has fallen steadily since, now at 1.2ish. If its an upward inflection point expect inflation to be very difficult to curb.
There is no free lunch.
It was pretty obvious that QE resulted in asset inflation. Wasn’t that the point?