• Thu. Jun 13th, 2024

The Federal Reserve issued warnings to prepare for its impact

Jul 2, 2023

Janet Yellen recently expressed her lack of concern about a potential recession, while the Federal Reserve issued warnings to prepare for its impact. In a previous discussion, I touched upon the notion of gaslighting, suggesting that policymakers deceived Americans into overspending and accepting lower wages, which could leave us ill-prepared for a crisis. Last week, Yellen’s remarks at a Bloomberg News conference in Paris raised eyebrows. While she advocated for increased spending and used taxpayer funds to incentivize poorer nations to join the fight against climate change, a new Federal Reserve publication admitted that the economic situation could deteriorate significantly.

Yellen stated that she believes the likelihood of a recession has decreased, citing the resilience of the labor market and a downward trend in inflation. However, I have previously mentioned that the labor market might not accurately reflect the true employment situation due to the large number of individuals reliant on government benefits since the pandemic, approximately three million since 2019. Additionally, the official unemployment rate only considers those actively seeking employment, thus excluding many able-bodied individuals on government disability. Consequently, cities across America witness an increase in able-bodied young men who are neither unemployed nor retired but rather spending their time idly on street corners.

Regarding inflation, I have noted that core inflation, which excludes energy and food, has remained stagnant for the past six months. The decrease in headline inflation can be attributed to plunging energy prices, which typically occur during a recession, along with disrupted supply chains that are currently operating at reduced capacity—an alarming sign in economic terms. Yellen, with her extensive knowledge as a former Fed chair and her academic background, should be aware of these nuances. However, her role seems to involve promoting the Biden administration’s economic agenda, regardless of the potential consequences.

While Yellen was presenting an optimistic view, the Federal Reserve released a new paper indicating that we should prepare for an impending economic downturn. The Wall Street Journal summarized the paper’s findings as “brace for impact.” The study revealed that distressed firms, defined as those with a high risk of default, experience more significant declines in investment and job creation during periods of contractionary monetary policy. In fact, current monetary policy measures are the most contractionary since the 1970s in terms of interest rate hikes and money supply growth. Furthermore, the proportion of distressed firms has already reached levels similar to the peak of the 2008 financial crisis. To put this into perspective, there have only been three instances since the 1970s that have exhibited such distress, even when accounting for full-blown recessions. It’s important to note that we are still in the early stages of this tightening cycle, which typically takes one to two years to fully manifest its impact. Therefore, we are currently experiencing only the initial indications of the storm to come.

To truly comprehend what lies ahead, it is crucial to read between the lines and decipher the truths amidst the misleading information we are being presented with. These subtle hints of reality suggest that we are currently in a period of relative calm before an impending storm. It is imperative for individuals to prepare themselves for what lies ahead. We will continue to monitor the situation closely and provide updates.

Until next time, stay informed and stay vigilant.

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