PART 3: If economy stalls, spooked consumers could trigger another recession

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In the third installment of this series, noted financial experts David Stockman, Paul Krugman, and Larry Kudlow offer their insights, yet equivocate on the prospects for a coming recession.


David Stockman:


In April, David Stockman published an article on his own website, CONTRA CORNER with the headline that The Cult of Central Banking Is Dead in the Water. In it, he opines that the Fed has been sitting on the funds rate like some ‘monetary mother hen’ since December 2008.


There has never been a time in financial history when anything close to this has happened, including the 1930s. Nor was interest-free money for eight consecutive years ever even imagined in the entire history of monetary theory. So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression? Alas, there is none!


Stockman believes there is a structural growth problem, of course. But it has absolutely nothing to do with monetary policies; and it can’t be fixed with cheap money and more debt. By contrast, there is no inflation deficiency — even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics


Owing to the recent bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet goes unnoted and unremarked, as if it were always part of the financial landscape. In essence, during the last 15 years the Fed has gifted the U.S. economy with a $4 trillion free lunch.


Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by attracting and equal amount of financing (from taxes or tapping the private savings pool).


Instead, we “bridge financed” these expenditures on real goods and services by using U.S. Treasury Bonds on an interim basis to clear the checking account. But these expenses were then permanently funded by fiat credits of the Fed when it did the ‘takeout’ financing. Central Bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing,” but plain and simply put: It is fraud. All that has been done is printing of currency from thin air in astronomical figures


What was being done was not stimulating the Main Street economy, but falsifying and inflating the price of financial assets. By contrast, the mainstream Keynesian delusion that the Fed has been stimulating GDP growth rather than speculator windfalls is rooted in the concept of “aggregate demand” deficiency.


Now, the Fed has boxed themselves into a corner and all of their options seem to be bad at this point. It was just a couple of months ago that Janet Yellen pronounced that the prospect of negative interest rates had to be considered by the Central Bank in accordance with various other Central Bank policies in other countries. Now, the Fed has announced that they are going to raise interest rates in June. Most people think of the Federal Reserve as an instrument of debt, which allows governments to operate beyond their financial means. How we got to increasing interest rates from charging negative interest rates in a short span of time is unknown.


Paul Krugman:

Mr. Krugman is a disciple of John Maynard Keynes. He believes in the principal economic theory that government can borrow money and go into debt because they have the availability of the printing press to produce more fiat money. There are numerous articles available about Mr. Krugman and his political and financial beliefs, but practically none that explain his analysis of the U.S. economy and the prospects of a coming recession.


However, in reading further about David Stockman, he has written an article entitled “What Comes Next– Krugman’s Fiscal Equivalent of War”. In it, he relates that Krugman was recently back in Japan for a meeting to dispense some desperately needed advice.


Japan is on the verge of a second recession despite the nation’s plunge into full frontal Keynesian stimulus. But since March 2013 — when Governor Kuroda began printing money — two things have happened. The Bank of Japan already has a bloated balance sheet and has exploded by two times and the flat-lining Japanese economy has continued undulating to nowhere.


Naturally, Krugman had a ready solution. He recommended that they take a lesson from America’s World War II playbook and declare “the fiscal equivalent of war.” What he did not tell them was that Washington’s spending binge between 1941 in 1945 did not prove in the slightest that you can borrow your way to prosperity. In the Washington case, Federal debt rose temporarily to 125 percent of GDP for the last year of the war, only because bountiful private savings and the wartime liquidation of business and household debt left massive financial headroom to accommodate Federal borrowing.


The above has drifted slightly away from the original intent of this article, but we hope that it will enlighten you, our readers, in understanding the liberal mindset, which has been responsible for this tremendous growth in the size and scale of the Federal Government.


Larry Kudlow:

Mr. Kudlow has written an article in National Review titled “The Fed is freaked out about the Financial Markets.” This article, dated May 19, describes a two-week stock market plunge in which the Dow Jones index dropped 1,437 points. The dollar went up. Oil plunged 21 percent. Raw-material commodities dropped. And credit risk spreads in the high-yield jumped market rose substantially. This was a global event, as stock markets around the world plunged into utter chaos.


Recently the Fed retreated in its policy statement. For the first time in a long time, it didn’t bother with a risk assessment between inflation and employment. The whole statement had a much softer tone. Putting it more starkly, it appeared that the Fed was freaked out by the financial markets that were turning against it. Central Bank policies are “data-driven.” But insiders suggest the Fed is looking at everything. It has hundreds of indicators– domestic, international, jobs, and inflation. In truth, it doesn’t know what its next move is going to be because it cannot read the markets.


In looking at the new GDP report for the fourth quarter of last year a mere seven-tenths of 1 percent growth was achieved and across 2015 real GDP grew by only 1.8 percent. It’s not a quite a recession but the expected anti-shock could push us into recession.


Business investment fell, commercial building fell, inventories fell and inflation came in less than 1 percent. Nominal GDP real output plus inflation registered a small 1.5 percent gain, which in normal times, GDP should be between 4 percent and 5 percent. According to most estimates, corporate profits are set to drop for the third straight quarter while business sales look to be falling for the fourth straight quarter. Add this to less than 1 percent economic growth, and the risk of recession is surely rising. The recession threat is a risk, not a fact. But for Fed policymakers to tell us the economy is healthy is a complete misreading of the situation.


Now, if the Fed were operating on a true price rule, it would keep the dollar where it is today for as far as the eye could see, and in turn that would stabilize gold and other commodities and avoid further economic disruption.


Thankfully there is a way out of this mess. Let the Fed keep interest rates and the dollar stable — no more tightening. Meanwhile the Republican Congress can pass a significant tax cut for large and small businesses. Push the rate down 15 percent for C class and A class taxpayers. Provide easy repatriation of US money overseas and permit immediate tax write offs for new business-investment expenses.


The Euro Zone:


You may not have heard of the term Brexit. This is an acronym that means the United Kingdom may leave the Euro Union. While this has not been decided, the impact of such a move could have significant consequences all over the world in terms of disruption of financial markets.



There were a number of other experts in the field of international finance that we consulted for this article but very few, if any, of them had any positions on the subject of a possible recession. While all of these people are very knowledgeable in their various fields, at least up until now, there has been little comment by any of them on whether we are going to encounter a recession in the next 12 months or anything about what caused the economy to get in that position from an analytical point of view.


Final Remarks:

There has been considerable discussion about whether or not the U.S. faces a coming recession. We hope that the information we have provided will assist you, our readers, in having some awareness of the issues that will ultimately impact this situation. It is clear that the stock market has been a primary recipient of the Monetary Policy of this country and that the Federal Reserve has taken some unusual steps to buy up the debt from the U.S.Treasury in order to try and keep the economy afloat. At some point, the economy must get stronger or a recession will surely be in our future. We can only hope that the coming election will reflect the voters’ point of view.