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It’s time to get ready for the next recession (and what might cause it)


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The next recession is likely to happen within the next two or three years. Many of you have already pointed it out.

 

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With the unemployment rate at 3.8% – close to a record low — it might seem an odd time to worry about a recession. But tight labor markets actually precede recessions, and in some ways contribute to their occurrence, as this chart of the unemployment rate, with recessions shaded in gray, demonstrates:

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There’s nothing wrong with a low unemployment rate. But as workers grow scarce, wages rise, which means companies need to charge more for products and services, which generates more inflation. The Federal Reserve responds by raising interest rates, to prevent inflation from getting too high. Higher rates, in turn, depress investment and spending, stress some borrowers and cause some loan defaults. This pattern, in itself, doesn’t necessarily cause a recession. But toss in external factors such as an energy shock, an asset bubble or bad government policy and the economy can easily contract for half a year or more, which is the traditional definition of a recession.

 

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Scott Minerd, chairman of Guggenheim Investments, told Yahoo Finance recently that excessive amounts of corporate debt—now at the highest levels ever, as a percentage of GDP–could induce the next downturn, as borrowers struggle to repay what they owe and some go bust. Others think a big swing in energy prices—either up, or down—could tip the economy over, either because soaring prices will disrupt business and household budgets, or plunging prices will wreck the US energy sector, which is bigger than it used to be. President Trump’s protectionist policies could stress the economy at the wrong time. One outlier theory is that a “retail apocalypse” involving bankruptcies, store closures and mass layoffs could become so severe that it brings down the whole economy.

 

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Many economists think tax cuts and spending hikes enacted by Congress during the last six months could end up being just the sort of policy mistake that does more economic harm than good. Those stimulus measures will boost growth this year, and perhaps next year as well. But by late 2019 or early 2020, the tax-cut stimulus may have worn off, with government spending due to fall from temporarily raised levels and federal debt swelling by more than $1 trillion per year. “We’ll have tightening monetary policy and tighter fiscal policy, and the Fed might even be behind the curve if inflation is rising faster than anticipated,” says Prakken. “That will create a significant period of vulnerability in 2020 and 2021.”

 

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45 minutes ago, TwinIon said:

I'm no economist, but it seems like the current growth is rather precarious.

 

No pede how could growth fueled by stock market yields fueled by the tax cut be anything but rock solid? I think rich people like GEOTUS know this shit better than us! 

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47 minutes ago, CitizenVectron said:

The presumption seems to be that rising wages (caused by tightening labour) causes this. But wages aren't really rising this time...so how will that affect it?

 

I’m pretty sure this year has seen aggregate wage increases.

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