Next Recession

[F. Joe Haydn]

     Since the Great Depression, all major US recessions besides the 1970s recession, which was rather odd and was caused by an oil embargo, have been caused by either the Fed raising interest rates or a bubble bursting. The Great Depression, the early 2000s recession, and the Great Recession were all caused by a bubble bursting. The early 1980s recession and the early 1990s recession were both caused by the Fed raising rates. Right now, there doesn't appear to be a bubble in the US economy, meaning a recession caused by a bubble popping is unlikely to happen any time soon. Also, if the Fed keeps rates low, then there's no chance a recession caused by the Fed raising rates will happen any time soon.

     So more likely than not there won't be a recession anytime soon, meaning that it won't matter if interest rates are near the zero lower bound. However, this is only the case if the Fed doesn't raise rates. If the Fed does raise rates, though, then a recession like the early 80s or the early 90s recession could occur. Raising rates would be even more inexcusable now, though, because at least in the early 80s and the early 90s inflation was high. Right now inflation is 1.6%, considerably below the Fed's 2% target. Unfortunately, the Fed has been raising rates recently, so this is more likely than anything else to cause the next recession.

[F. Joe Haydn]

We clearly need the interest hikes. Inflation is a dangerous cancer, and it's "benefits" are always more or less negligible. I don't say that because I'm some raging anti-inflation person on economics - I understand that interest hikes are far less deadly than inflation.

     It is true that very high inflation can be quite bad for the economy, such as the hyperinflation in the Weimar Republic and the stagflation in the US in the 70s and early 80s. However, inflation right now is nowhere near those levels. In fact, it is under the Fed's 2% target at just 1.6%. As for interest rate hikes, these too can have very bad effects on the economy. The early 80s and early 90s recessions were both caused by interest rate hikes. So why risk a recession when inflation is below average levels?

     And mild inflation does have benefits. It favors borrowers over lenders because when prices are high, money is worth less. Therefore, although the money borrowers pay back to the lenders is the same numerically, it is worth less than it would be if there was less inflation. Borrowers are often poorer than lenders. Thus mild inflation can help improve the economic circumstances of poor borrowers. Deflation, on the other hand, which can result from raising interest rates, benefits lenders.

     In the aftermath of the Great Recession, this reduction in the value of debt borrowers have to pay back is especially beneficial because of the high levels of household debt that caused the Great Recession. While it may be advantageous for individuals to pay off that debt, it is bad for the economy as a whole if everybody does it at the same time because to pay for the debt, the borrowers spend less money, which decreases demand in the economy. If the value of household debt is less expensive due to inflation than it was previously, then borrowers are more likely to start spending money again because they don't have to use as much of it paying down their debts. That's not to say that inflation doesn't also hurt the poor by making goods less affordable, but in the aftermath of the Great Recession higher inflation really can have positive effects.

[F. Joe Haydn]

You're literally advocating for the boom-bust cycle...

I'm not quite sure why you think I'm advocating for the boom-bust cycle theory. I didn't mention it or any part of it at all. Was it because I mentioned bubbles? Most if not all mainstream economists and economic theories certainly accept the existence of bubbles; they're definitely not exclusive to the boom-bust cycle theory. In fact, economists who denied the existence of the housing bubble such as Alan Greenspan were proven hugely wrong; and economists who spotted the housing bubble early on such as Dean Baker were proven hugely right. Anyway, I strongly disagree with the boom-bust cycle theory. On the contrary, I agree with Keynesian theories such as the financial instability hypothesis and the debt deflation theory.