So, I know we’re coming up to Thanksgiving — and it truly is one of my favorite holidays — and Thanksgiving is quintessential American history celebrating the first harvest of our early settlers. It is a very inspiring and optimistic story. One of the reasons I love him is that the story is so optimistic, and I am an optimistic person who always believes in the greatest founding soul of the United States of America.
But I have to deviate from this optimistic script for just a little while. I’m talking about economics. I have to tell you, I see a number of leading indicators all pointing towards recession. I don’t like it, but that’s what I’m looking at. We may already be in a recession, but next year looks like an even deeper recession.
Now, there is a way out of this mess, and I’ll get to that in a few moments, but first some clear empirical facts. I’ll start with a huge decline in the conference board’s leading economic indicator.
This is a very old-fashioned series, but it is an extremely accurate forecasting tool. It has interest rate spreads, consumer expectations, manufacturing, stock prices, building permits for new homes, and other measures. There are 10 in all, and as you can see from the graph, the rate of change is absolutely declining.
GROCERY INFLATION DRIVES AMERICANS TO RESTAURANTS FOR THANKSGIVING
Second, perhaps a more controversial indicator, called the M2, which is an inadequate measure of the nation’s money supply, but something to watch out for nonetheless. It was introduced by the great Nobel Prize winner Milton Friedman. This is a monetary interpretation of the economy and tells us about future inflation and growth.
You can see from this graph that, over 20 years, M2 has grown substantially modestly, which has something to do with 2% average inflation. Not everything, but something to do with low inflation. Then we come to the craziness of the last couple of years, with a massive increase in federal spending which has led to an equally massive money printing by the Federal Reserve.
This was Joe Biden’s biggest mistake. He moved the inflation rate from around 1% to almost 10%, which is why real wages have fallen for 18 consecutive months. This is the soft underbelly of Biden’s economy and now, as the Fed makes its belated correction for its own earlier mistakes, the US economy is in grave danger.
All of this it could have been avoided, but it hasn’t been avoided and now here we are, with the threat of a difficult downturn next year. One that probably started this year, but Milton Friedman argued that inflation is too much money to chase too few goods – and, simplifying it a bit, Uncle Sam created the money and then the overregulation, the tax increases and, of course, the war on fossil fuel production. high barriers to the production of goods.
Yes we have had a COVID supply chain hangover, yes there is Vladimir Putin invading Ukraine but most of this economic mess is homegrown based on the politics of big government socialism and large central planning ladder. In addition to leading indicators and the money supply, just to add one more: the bond market has flipped with short-term rates now much higher than long-term rates.
A very useful recession forecasting model that was developed years ago at the New York Fed and has a very high degree of accuracy. In essence, when the three-month Treasury bill exceeds the yield on the 10-year Treasury bill, the probability of a one-year recession becomes higher and higher. Right now, the three-month bill is now 4.30 and the 10-year bill is 3.80. This is a very alarming sign.
Now, there are a lot of other indicators I could point to — a big housing recession, a major manufacturing slowdown, I don’t want to delve into the weeds as much as I have to. No model is perfect, but I’ll suggest that keeping an eye on leading economic indicators and M2 and the Treasury yield curve gives everyone a pretty decent idea of where we’re headed. So, inflation will come down slowly, but the recession could be very difficult.
Again, always optimistic, we should be able to do much better in the future with regards to economic policies than we have done in the last couple of years. You’ve heard it from me before, but first we should immediately turn on the taps to produce more oil and gas, allow for licensing, pipeline, refining. All this would reduce prices, promote employment and economic growth.
John Kerry’s COP-27 Green New Deal, the socialist, redistribution, climate repair scheme: he’s trying to bribe poor countries not to use oil and gas is just more stupid than stupid. Joe Biden shuts down coal plants across America, more stupid than stupid. The new EPA regulations and taxes on clean-burning natural gas are even dumber how stupid, if such stupidity is possible.
So, we need to re-impose the labor rate and work requirements on able-bodied people who receive government assistance. Good? This succeeded 25 years ago in reducing welfare spending and eventually led to a balanced budget.
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We also need to make Donald Trump’s supply-side corporate tax cuts permanent. So we need to curb Biden’s regulatory assault on all businesses, a policy that has literally strangled the economy.
At the end of the day, we had less money to chase more cargo under those policies. Less money chasing more goods. Inflation would collapse, the economy would soar. We have done it in the past and we can do it in the future. It’s time to act as stewards of economic prosperity. We replace the utopian socialist schemes which always cause recession and impoverishment wherever they are implemented. I know we can right this ship and I’m going to say, Happy Thanksgiving – gobble, gobble, gobble – and that’s my riff.
This article is adapted from Larry Kudlow’s opening comment on the November 22, 2022 edition of “Kudlow.”