The Cycle That Triggers a Financial Crisis
Recessions often come from excess.
They tend to be preceded by periods when growth is very strong and widely expected to remain so for the foreseeable future.
Thereafter speculative excesses develop which are fuelled by rapidly rising debt.
This leads to the potential for inflationary pressures to mount in consumer prices and/or asset prices.
The US Federal Reserve responds by raising interest rates, which then triggers a financial crisis, followed by a credit crunch and a recession.
Oddly enough, all the fear prevalent during this most hated of all possible bull markets has reduced the likelihood of a boom, which reduces the likelihood of a bust.
But it’s always possible that fears of a recession could cause one.
The Next Recession
So, could the stock market’s “flash crash” during December cause a “flash downturn” in economic activity in the month or two that follows?
Surely the topic of "the next recession" is always a great piece for the financial media to cover because bad news tends to grab attention.
For example, CNBC recently posted a story entitled: “Five financial heavyweights weigh in on whether the next recession is nearing.”
The stock market has bounced nicely to create some equilibrium but there is more work to do.
And there are a few things which may be helping bring the fever-pitch focus down on "the next recession" chatter:
Also published recently was a piece in the WSJ with the following headline: “Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff.”
It suggests Fed Chairman Jerome Powell is preparing to back off yet another portion of his not so smooth 12/19 statement about the pace of quantitative tightening (QT).
He said: “So we thought carefully about this, on how to normalize policy, and came to the view that we would effectively have the balance sheet runoff on automatic pilot and use monetary policy, rate policy, to adjust to incoming data.”
My hunch is that his next statement will be far less dramatic.