Recession? Nah, It’ll Be Fine.

“My God!  If they could market that in pill form, Switzerland would be plunged into a recession.” – Absolutely Fabulous

So you should save your money because a recession is coming.  A recession that’s caused by too many people saving money . . . ?

It was the middle of December.

I looked across the desk at my boss.  He had called me in to his office, asked me to close the door, and looked very uncomfortable. Not “Abraham Lincoln at a play” uncomfortable, but more “Pope in the woods without toilet paper” uncomfortable.  It was unusual to see him look uncomfortable, because this boss was an old hand, very calm.  I had worked for him for about 18 months at that point, and we had a great relationship, so he wasn’t going to fire me right before Christmas.  Unless he had figured out who what put the Gummy Bears™ in the paper shredder.

“Umm, John, the company is giving you a bonus.”

I perked up.  I liked the sound of a bonus, but didn’t like the “Umm” so much.  “Umm”, in my experience, is a verbal placeholder that means, “This is going to sound good, but really isn’t.”

“Great!”  I actually was enthusiastic, even given the “Umm”-modifier.  Bonus is a great word.

“Well, the board of directors voted on the bonus structure and the bonus pool back in October, about sixty days ago.  And they chose a specific number of shares for each employee.  And when they voted, the shares were worth seven times what they were today.  I just want you to know I value you, and the company values you.”

What was left were the unspoken words . . . “I hope you’re not insulted.”

No swimming pool this year . . . .

I wasn’t.  I could multiply my bonus by seven and see that someone, somewhere, liked me when the corporate board voted.  Sometimes it really is the thought that counts.  Except when I get deodorant for Christmas – that seems more like thought that indicates a passive-aggressive criticism about my hygiene.  And comments like this when The Boy introduces me don’t help:  “This is my dad, he doesn’t drink quite as much as his poor hygiene might indicate.”

When I finally cashed in that stock five years later, it was worth 15 times what it had been on the day my boss looked so upset.  By no means was it a life-changing amount, but I’m still pretty happy.  What changed to make the bonus worth so much more?

The economy.  That puny stock bonus was given to me in the middle of the Great Recession.  Five years after that, the company was worth a LOT more.  I sold my shares (I kept the certificates in my underwear drawer), paid my income taxes on the stock, and was certainly not insulted.

We sit at the start of 2020.  By 2030, I can assure you we will have gone through at least one recession, and probably more.  Right now, the United States is in the single longest economic expansion in its history, passing the 1991-2001 economy in duration by six months.

I hear the economy is so rough that Bill and Hillary Clinton shared a room on their last trip.

Doubling an all-time record?  It certainly won’t happen.  It cannot.  No matter how the Federal Reserve™ manipulates the economy, it can’t go that far unless they give everyone roofies and tell them that they have twice as much money in the bank as they actually do.  Besides, we shouldn’t go that long without a recession.

Why?

Let’s look at the economy as if it were a natural, physical system.  Generally, physical systems are not continuous; they operate in of cycles.  Trees grow leaves in spring, through the summer they gather nutrients, in the autumn the leaves fall, and in winter the tree is dormant.

Companies follow a cycle, too.  A company is founded.  It starts in business, sometimes growing, and in the end, it’s finally bankrupt or sold off and then it’s dead.  For example, the top 10 companies in the United States in 1917 were:

• US Steel
• AT&T
• Standard Oil of New Jersey
• Bethlehem Steel
• Armour & Co.
• Swift & Co.
• International Harvester
• DuPont
• Midvale Steel
• S. Rubber

What are the top ten companies today?

• Apple
• Alphabet (Google)
• Microsoft
• Amazon
• Facebook
• Berkshire Hathaway
• Johnson & Johnson
• Exxon-Mobil
• JPMorgan Chase
• Wells Fargo

How many of them are still in the top ten?

One, kinda.  Exxon used to be Standard Oil of New Jersey, so at least we know the Rockefellers are doing okay.  That keeps me up at night, worrying that the Rockefellers might have to drive their own cars.

How many of the top 10 companies today will be in the top 10 in 50 years?  How many in 100?

If it’s raining, that might be a drizzly bear.

I’ve shared this opinion before:  recessions are good for the economy.  Bankrupt businesses are good for the economy.  Are they painful in the short term?  Certainly.  But they provide a great service – they clear out the companies that don’t add value to the customers.  Eaton Rapids Joe (LINK) had a great post a while back that describes the impact on physical systems when they’re overly managed and constant.  He used the example of salmon streams that had been dammed, that no longer experienced spring flooding from snow melt.

From the post:

At one time it was commonly believed that dams would benefit salmon spawning.  It was believed that regulating the flow so that it was constant would be most beneficial.

The unintended consequence was that the constant stream cut a deep and narrow channel, just like a band saw.

The narrow channels intercepted very little sunlight…the driver of nearly all life on the planet.  The channel was devoid of pools and riffles, gravel beds of various coarseness, rocks to break the current and beds of seaweed.  They were a desert for salmon fry.

Before dams were installed across every stream, spring flooding would fill old channels with rock and gravel and would cut new meanders and channels.  The flooding would flush the silt out of gravel beds.  Stream beds were braids of old, crisscrossing channels.  Not only did they look like strips of bacon from the air but they intercepted huge amounts of sunlight and the gravel beds provided outstanding habitat for the pantheon of invertebrates that were the base of the food chain.

The Fed™ is trying to manage our economy like that salmon stream, making a nice, constant flow.

A decade is a long time without a recession.  Based on the past experiences of the 2001 and 2008 recessions it’s easy to come to the conclusion that the longer you wait to address a problem economy, the bigger impact it will have on people’s lives.  Heck, the longer you wait to address any problem, the worse it becomes.

Want a housing bubble?  This is how you get a housing bubble.

If the Housing Bubble had popped in 2004, the associated recession would have been much smaller than the nearly economy-ending Great Recession of 2008.  If the 2001 recession would have happened in 1998, it would have certainly pulled some of the inflation away from the Dotcom Bubble and perhaps avoided making the Spice Girls® celebrities entirely, and no one would know who Scary Spice, Posh Spice, Sporty Spice and whatsherface were.  I guess we’re safe now that they’re all Old Spice™.

We sit in the year 2020 with severe economic unrest a certainty in the next decade.  What year?  I’m not sure.  And I’m also not sure I’d trust anyone who says they know the exact timing.  But it is coming.  2020?  2021?

Don’t know.

This coming recession has had a decade to build up.  That decade has seen significant bubbles building in, well, everything.  One of the biggest bubbles is in corporate profits.  Let’s pick . . . insulin.  The price of insulin has doubled in five years.  Does it cost more to make insulin today?  Almost certainly not – the techniques to make this insulin have been known and perfected for decades – it probably costs less to make it.  Is it better insulin, somehow new and improved like the Super Bowl® without the Patriots™?  Nope.

Well, then, why does it cost more?  So Eli Lilly and Company® can increase corporate profits.

I like profits.  I think that profits are good for society for a number of reasons.  They allocate funds to effective businesses during competition.  If the McDonald’s® in your town sucks?  Go to the local Burger King©.  Effective management and good products are rewarded.  Bad management is punished, all without anyone having to lift a finger.  That’s the beauty of capitalism – everyone votes on which businesses get to stay in business, every day.

But Eli Lilly and Company™?  They are raising the price of Humalog® insulin because they can.  How do we know this?  They’ve recently introduced a new insulin with the same exact formulation as Humalog™, but with a new name, Lispro™.  But the price of this new rebranded insulin?  Half.  For the same exact stuff.

Eli Lilly and Company© didn’t do this in the past, but they do it now because investors demand not only profit, but profit growth.  How long is this sustainable?  Not forever.  But it’s a great example of how in 2020, instead of just a housing bubble, we have a bubble in corporate profits.  We have a bubble in money (which is the only way to get to negative interest rates).

Will Eli Lilly and Company™ start charging double the current price to bring the total to $1000 a bottle for Humalog®?

No.  They can’t.  There is a cap not on what diabetics will pay, but on what they can pay.  There is a maximum profit that can be obtained.  Period.  You can’t rent a house for $20,000 a month if the average wage is $15 an hour in your neighborhood, just like you can’t fight crime with a macaroni duck.

Obscure, I know.  But it felt right.

Without the cleaning that a periodic recession brings, junk builds up in the economy.  The average recession historically happens every three years or so.  When the recession of the Tumultuous Twenties® hits?

It will hit hard.

The outcomes are unpredictable.  The Federal Reserve© interest rate is ~1.5%.  Back in the 1990’s, it averaged 5.75%, so the Fed™ had the ability to lower rates to stimulate the economy.  That mechanism is gone.  What’s left, printing money?  Tax collections are down due to tax rate cuts.  This is a good thing.  But government spending is up, too.  Add them together, and we’re looking at deficits of a trillion dollars a year or more . . . forever.  We’ve already slipped into Modern Monetary Theory (The Worst Economic Idea Since Socialism, Explained Using Bikini Girl Graphs).

That means there’s a limit on how much more money we can print.

The trigger for this future recession will be blamed on some other event – the 2001 recession was blamed on 9/11, even though the stock market started to fall well before September.  Our minds like explanations, so we sometimes create them even when they don’t exist.  Maybe it’s the Great Internet Blackout of 2020 that caused it.

Mark my words:  This economy will be cleaned up by a recession, probably a big one that we will find difficulty in spending our way out of.

Don’t get caught in the flood.

And if someone offers you free money?  Smile and take it.