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Monetary Peace's avatar

I agree with you that Larry is wrong about the cause, but I don't think he's wrong that we are heading into a severe recession.

The cause, I believe, will be the unwinding of a credit bubble and the associated liquidity crises that will ripple across the financial sector due to creditor runs and deposit hoarding. The rate of credit creation has already turned negative and asset markets are falling (Schularick 2012, Credit Booms Gone Bust). Credit can dry up far faster than savings and with more disastrous consequences (Kumhof 2015, Banks Are Not Intermediaries). The fiscal stimulus programs that Biden has been able to get through are poorly designed to offset a credit deflation (Werner 2005, New Paradigm in Macroeconomics), and there isn't much political appetite for a lot more of it. Quantitative Tightening doesn't help either, but that can be paused easily.

I don't have a crystal ball, either, of course. Just sharing my perspective. I'd love to be wrong. We'll all find out how it turns out in due time. For the better, I hope.

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Douglas Dowell, J.D.'s avatar

bleh bleah that's all folks. A polite way to say shut the front door Larry.

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