Discover more from Super Macro by Christian Whiton
RECESSION: Democrat Policies Tank Economy
Prolonged stagnation, fiscal crisis possible
The year of disasters for Joe Biden and the Democrats who control Washington just got officially worse. The Commerce Department announced this morning that the economy shrank by an annualized 0.9% in the second quarter which ran from April through June. Coming on the heels of a 1.6% annual contraction in the first quarter, that confirms two successive quarters of economic decline—the standard definition of a recession.
The development makes official the economic misery that most Americans have been feeling since Joe Biden became president: out-of-control inflation, declining real wages, and a workforce disrupted by big government.
The news is also the latest reminder that our economic and political elite are clueless and dishonest.
The economic disaster began because Joe Biden and his fellow big spenders have adhered to something called Modern Monetary Theory that said the government could spend as much as it wants and run up national debt without consequence. That theory has been put to the test since the 2020 government shutdown of the economy. Since then, the federal government has spent about $7 trillion more than it would have under its previous bloated budget plan and permanently enshrined annual budget deficits in excess of $1 trillion.
The Federal Reserve funded most of that growth by doubling its holdings of debt instruments from just over $4 trillion in early 2020 to just under $9 trillion today—primarily by creating dollars out of thin air to buy up newly issued government debt. Economic growth ended as soon as unsustainable spending was curtailed and inflation has raged.
Recall that the geniuses of Washington and Wall Street assured us there would not be inflation. Then they said it wouldn’t be bad nor would it last long. But it is bad and it is persistent.
We received the same clueless or mendacious predictions about the overall economy. In June, Joe Biden said of the possibility of recession: “First of all, it’s not inevitable.” The same month, Democrat House Speaker Nancy Pelosi falsely stated that the economy had improved. This month, Treasury Secretary Janet “from another planet” Yellen pushed the envelope from spin to outright lying when she said, “This is not an economy that is in recession”—something the statisticians of her own administration were undoubtedly already telling her was not true.
Yesterday, clueless Fed Chairman Jerome Powell—one of many establishment poodles first given his job by Donald Trump because he “looked the part”—denied there is a recession. The “independent” Chairman Powell, who acts like he is a deputy assistant secretary at the Treasury Department taking orders from Joe Biden and Yellen, echoed laughable White House propaganda about the job market somehow negating the recession, even though he knows employment is a lagging indicator.
It wasn’t just the government elite who were wrong or lying. The other people you indirectly pay to be right, economic analysts at big Wall Street firms, were mostly wrong. Overall, the big banks forecasted economic growth despite access to all of the information the rest of us have and confirmation of a slowdown from their own business activities. (Luckily readers of this page knew recession was coming due to numerous warnings. Examples: March 14, May 26, June 16, July 1.)
The recession announcement isn’t just news because of the economic pain it reflects. It also foretells political turmoil and possibly a government spending crisis.
The economy is routinely the issue that voters care about the most. Recessions during the first terms of presidencies doomed Gerald Ford and George H. W. Bush. To hold the White House, Democrats must now hope to pull a Ronald Reagan, who won a landslide reelection in 1984 after a steep recession in his first term.
The problem for Democrats is that Reagan had laid the groundwork for a return to rapid and sustained economic growth. He cut taxes and regulation while giving Federal Reserve Chairman Paul Volker the political cover to tighten monetary policy dramatically. Volcker’s tightening, which brought the prime interest rate to as high as 20% (it is 2.5% today), deepened the recession but controlled inflation. Then, from that reset, Reagan’s tax cuts and unabashed support for free market capitalism created a booming economy—Seven Fat Years of growth that changed America and the world.
Have Democrats created the political and economic circumstances for such a recovery? Reagan cut taxes and regulations. Democrats have tried repeatedly to increase them and succeeded through creating inflation—a tax on all Americans’ wages and savings. Democrats also want to use their religion of climate change alarmism as a justification to regulate every facet of the economy, starting with raising energy prices further.
This reality should call into question claims by Washington and Wall Street that any recession will be short and shallow. A Republican Congress can put a limit on some of the Democrats’ biggest schemes for transforming the economy, but Beltway Republicans seldom even call for balancing the budget or controlling federal spending—a likely prerequisite along with tighter monetary policy to taming inflation. Sustained economic prosperity will probably require a Republican president who is better than his party’s congressional luminaries. Until then, the safest bet is for “stagflation”—low or no economic growth and persistent inflation.
Furthermore, higher interest rates, out-of-control federal spending, and threats to the dollar’s global dominance because of dumb sanctions on Russia have an outside chance of sparking a fiscal crisis for the government—spending cuts made out of necessity rather than prudent choice. (Expect defense spending to decline no matter who is president.)
Joe Biden and his fellow Democrats sure know how to go out with a bang.
Christian Whiton was a senior advisor in the Bush and Trump administrations. He is a senior fellow at the Center for the National Interest and a principal at DC International Advisory.
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