Brewing an Economic Recession: Your American Starter Pack
Above is my initial sketch, depicting America trying to solve its inflation problem by instigating global wars. Notice the Rifle slung on the back of the Eagle – America is all about its weapons.
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2020 was a tumultuous year for many people across the world.
The widespread impact of Covid-19 was severe, not just in terms of how darkly prolific it was in testing and crippling healthcare systems, but also in shutting down businesses and causing people to lose their jobs.
The future was tainted with uncertainty and as far as black swan events go, the pandemic was as eye-opening as it was unprecedented.
Unsurprisingly, global economies were shaken and the stock market took the brunt of nervy investors and institutions. Particularly in the US, a combination of political dawdling over how Covid-19 should be handled, skyrocketing infection numbers and a largely bleak sentiment that descended upon the country, sent America spiraling into a recession in 2020 – bringing other stock exchanges along with it.
However, America’s rebound from the 2020 recession was just as swift as the way it hit them – lasting a mere two months. Trillions of dollars were being printed and pumped back into the economy to ensure businesses remain afloat and to provide financial aid to its citizens, and the new money was seen as a much-needed intervention to prevent a worldwide economic meltdown – such is the US’ influence.
Infinite money glitch
The Fed’s pandemic stimulus money contributed to a stunning $6.55 trillion that was spent by the government in 2020, with tax receipts and variant revenue pegged at $3.42 trillion – leading to a record deficit of $3.1 trillion.
What’s even more startling is that in 2020, 40% of US dollars in existence were printed in a 12-month period and as of October 2021, this ballooned to 80% of all US dollars in existence that were printed in the last 22 months. To put that into perspective, the money printed grew from $4 trillion to $20 trillion.
The government is creating new money for quantitative easing, spending future tax payments and with the increase in the yield on 10-year government bonds (0.5% to 1.7%), rising interest rates equal lower bond prices and a potential fall in stock prices. Such is the vast volume of new money being printed, this creates a demand-pull inflation effect, which happens when too much money is chasing too few goods. While the Modern Monetary Theory (MMT) assumes that a government can solve economic difficulties by printing money until it hits inflation – when taxes need to be increased in order to control that money.
The Fed’s argument is that the quantitative easing did not cause an inflation according to a metric called the Consumer Price Index (CPI) – which measures the average price changes over time of a fixed basket of consumption goods and services commonly purchased by resident households. When CPI increases, inflation occurs – but this did not happen during the period of money printing – however, stock and bond prices were inflated – just not declared due to a fixation on definition.
Of course, it was also apparent that the Federal Reserve’s money-printing solution would result in long term ramifications. Covid-relief funds – in the trillions – will fall directly into the hands of consumers so CPI-measured inflation is likely to occur. The consequences of which, while batted away and swept under the carpet in the early days of the pandemic, are beginning to show signs of unravelling – with a besieged economy expecting high inflation rates and teetering on the brink of yet another recession – this time far more severe than it has ever known.
When the US economy is under pressure, the world, too, awaits with bated breath. A recession is often defined to be “two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP)”. However, not all economies apply the same set of definition, while various indicators and factors can be identified and considered that lead to an assessment by the country’s government.
Of war and monetary gains
Certainly, the above are clear signs that point to an incoming recession, but it cannot be attributed to just the Fed’s actions and the corresponding economic repercussions. In fact, there are other apparent yet subtle indicators that support the recession thesis.
These indicators are gleaned from the array of actions taken by the US, which can be perceived to prepare Washington for an unavoidable official declaration. The various policies and initiatives, communication narratives and economic partnerships, have all been put in place to defend the US against negative public sentiment (both at home and abroad) as well as cushion potential shockwaves that could reverberate across the world.
One of the standout examples of the US’ powerful leverage and stranglehold on the global economy, is its seemingly bottomless coffers to spend big despite a massive debt bundle hanging around the country’s neck – a staggering $28.43 trillion by the end of 2021.
Despite the need to diversify and keep its expenditure in check – partly due to the pandemic as well as its debt situation – the US’ military spending continues to be the highest in the world.
Also, as we take a deeper look at the colossal spending, at the various international policies enacted by the White House and statements regarding border and international conflicts, there appears to be a pattern whereby a measured stance is taken by the US towards the idea of enabling hostility and backing allied nations.
USA to instigate ‘Russia versus Ukraine War’?
For example, the recent urging for Russian forces to pull back from the Ukrainian border was followed by its declaring that some of the toughest sanctions will hit Moscow if an invasion actually takes place.
USA to instigate ‘China versus Taiwan War?’
The US’ somewhat taut relationship with China and its support for Taiwan in a decades-long impasse, has also at times, signaled a possible breach through diplomacy and into full-fledged war. When 25 Chinese fighter jets and warplanes flew in intimidating formations off the southern end of Taiwan on 1 Oct 2021, China’s National Day, the US warned China of its “provocative military activity”.
In fact, it wouldn’t be incredulous to hypothesize that international conflicts and the potential outbreak of wars could actually benefit the American economy. With the perpetuation of fear regarding a potential world war, with news sites publishing antagonistic remarks by world leaders, it is understandable that traditionally neutral or smaller nations would purchase extra weaponry and systems from the US. This would contribute to the US’ reputation as the world’s top arms exporter, having increased its global share to 37% in the last five years.
With more funds, the US can continue to build its standing military personnel and associated infrastructure, creating more jobs at home and creating a perception that the incoming recession is a manageable side effect of a larger economic and global policy initiative.
Domestic smokescreen
Multiple social issues in the US have also been placed in the public spotlight, seemingly like a purported diversion from the perils of a country grappling with both an incoming recession and a continued military spending spree.
A set of findings by the Pew Research Centre found that the top issues faced by Americans in 2021 include, in order of the most important: The affordability of healthcare, the federal budget deficit, violent crime, illegal immigration and gun violence.
When it comes to the perspectives of Democrats and Republicans, it’s often been a tug of war with regards to labelling issues that are the most crucial. It’s either the Democrats’ fixation on highlighting gun violence or the Republicans’ focus on illegal immigration – both of which might just serve to dilute an individual’s attention even more.
The controversial Texas abortion law – which bans abortion after six weeks – has divided the nation and sent ripples across a country invested in individual constitutional rights. A potential overturning and challenge to Roe v Wade – which represents abortion as a constitutional right in the US for nearly half a century – could cause further disaffection and grievances among the people.
Also, the rampant shooting cases in America, increasing at a frightening pace, has also not met with an iron ruling on gun control and usage despite the high fatality rate – leading to even more discontent among US citizens. To put this into perspective, guns claim tens of thousands of American lives in the form of shootings, suicides, police shootings and domestic violence. Despite this, Americans own approximately 393 million firearms, with roughly 120.5 firearms for every 100 residents – the highest gun ownership rate in the world.
When viewed as a whole, the concerns above can lower the US citizens’ focus on economic difficulties and filter their attention towards various other issues.
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Big Bear (Russia) telling Baby Bear not to go to Europe which doesn’t want it; American Eagle telling Black baby Bear (Taiwan) to fight against the Dragon (China). And obviously Inflation and Recession in the background.
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The American influence
The US’ influence on the global economy is common knowledge, especially with the US dollar’s position as the world’s reserve currency. There’s also a perceived notion that any positive analysis of America’s initiatives and attempts to right the economy, and to a certain extent “save the world” from a dire economic meltdown, are simply attempts to mask any potential issues down the line, the prospect of a historically high inflation rate and an inevitable plunge into economic recession.
In terms of military expenditure, the US continues to lead the pack with $778 billion spent in 2020. China was a distant second with $252 billion while India was third at $72.9 billion. In the short to long term time frame, the US’ continued outlay on its military assets can be perceived as a quick fix to unemployment problems (since it creates jobs), and this will go some way to support economic indicators that the US government uses – which may delay the official declaration of an inevitable recession. Some of these metrics include Nonfarm Payrolls and Industrial Production which could be positive indicators due to high military expenses.
One would however question if such a massive scale of military spending is overly excessive, especially with a debt problem that is deemed arduous to erase. Why then would the US government persist with being the highest military spender despite its debt problem?
The answer is rather straightforward, as since the US depends on its military ecosystem to thrive and to do business with other allies, the large spending is needed to maintain America’s relevance as a world superpower and investing in yourself is one of the strongest messages you could send out.
Also, the US’ debt is ballooning not just due to military expenditure, but also in response to the COVID-19 pandemic that has taken budget deficit to levels not seen since World War II.
This expansion follows years of debt accumulation that will now be even more difficult to reduce.
Former President Donald Trump’s budget legislation, coupled with the growth in entitlements and higher interest rates, will ensure that the US debt is on track to nearly double by 2029 – close to the size of the entire US economy.
The abovementioned initiatives and hypothesis, when put together, all point to an economic recession in the making, especially with the build-up of debt, a potential high interest rate and the possibility of tension in other parts of the world.
Programmed for immunity
The US does seem to be immune to a complete meltdown in terms of economic consequences despite its gargantuan debt. In fact, conflicts elsewhere, from skirmishes to a full-blown operation attack, even if it does not affect the US, could justify a bigger outlay in terms of military spending.
What’s more, the US is confident that it is immune to economic threats. In fact, the high demand for the US dollar has helped the nation finance its debt – placing a premium on holding low-risk, dollar-denominated assets such as US Treasury bills, notes, and bonds.
Besides, there has been consistent demand from foreign central banks to add to their dollar reserves, and this in turn has enabled the US to borrow money from these banks at relatively low interest rates.
Rightly so, the US’ perceived recklessness with its debt issues should have been a red flag for economists and the world’s major financial centers, but if you were to probe deeper, the bulk of US’ debt is held by investors. They include domestic and foreign investors, as well as both governmental and private funds.
What’s startling is that foreign investors, mostly governments, hold more than 40 percent of the US’ total debt. China and Japan are two of the largest countries who hold part of the debt, with each having more than $1 trillion. For most of the last decade, China has been the largest creditor of the United States.
It does appear that America’s unique position has afforded it an immunity necklace, one that could withstand even the roughest of recession and inflation waves.
The interdependence between nations has never looked more apparent with how the debt is “shared”, especially with the way the US has crafted itself as the go-to economic linchpin. Indeed, the fear is that withdrawing support for Washington could possibly result in an economic catastrophe.
Closer to home in the US, the Federal Reserve’s purchase of US debt has accelerated. Since March 2020, the Fed’s balance sheet has almost doubled to $8 trillion, renewing concerns among economists about the Fed’s independence and its rather blatant support for a particular party.
Once this support stops however, the economic recession is but a pipe dream. The US economy on the other hand, remains unyielding.
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Text source: Herbert R. Sim
