Larry Kudlow: The American economy is in danger

So, I know we’re coming to Thanksgiving—which really is one of my favorite holidays—and Thanksgiving is the quintessential American history story that celebrates the first harvest for the early settlers. It’s a very inspiring and optimistic story. One of the reasons I love it, is because history is very optimistic, and I am an optimist who has always believed in the greatest founding spirit of the United States of America.

But I have to steer clear of this optimistic scenario for a bit. I’m talking about the economy. I have to tell you, I see a number of important indicators that are all indicating stagnation. I don’t like it, but that’s what I’m looking at. We may already be in a recession, but next year looks like an even deeper dip.

Now, there is a way out of this mess, and I’ll get to that in a few moments, but first some straight empirical facts. I start with a big drop in the leading economic indicator on the conference board.

This is a very old series, but it is a very accurate forecasting tool. It contains interest rate spreads, consumer and manufacturing expectations, stock prices, building permits for new homes, and other measures. There are 10 in all, and as you can see by the graph, the rate of change is very low.

Grocery inflation is driving Americans to restaurants to thank

Second, there is perhaps a more controversial indicator, called M2 – which is an inadequate measure of a country’s money supply, but still something to watch out for. Its pioneer was the great Nobel laureate Milton Friedman. This is a critical interpretation of economics and tells us about inflation and future growth.

You can see by this graph that, for 20 years, M2 has been growing modestly, and that had to do with average inflation of 2%. Not all, but it’s about low inflation. Then we get to the insanity of the last couple of years, with massive increases in federal spending that led to the Fed printing equally massive money.

This was the single biggest mistake by Joe Biden. It raised the inflation rate from about 1% to nearly 10%, and because of that real wages have fallen 18 months in a row. That’s the soft underpinning of Biden’s economy and now, as the Fed makes a belated correction of its past mistakes, American economy in great danger.

all of this It could have been avoided, but it wasn’t, and here we are now, with the risk of a severe economic downturn next year. One that may have started this year, but Milton Friedman has argued that inflation is too much money chasing too few goods – and a bit oversimplified, Uncle Sam invented money and then over-regulation, tax increases and of course the war against fossil fuel production all created long roadblocks In front of the production of goods.

Yes, we had the leftovers of the COVID supply chain, yes, there is Vladimir Putin invading Ukraine, but the bulk of this economic mess was domestically generated on the basis of big state socialism policies and large scale central planning. Besides the leading indices and money supply, just to add one more: the bond market has been turned on its head with short term rates now much higher than long term rates.

A very useful recession forecasting model that was developed years ago at the Federal Reserve Bank of New York and has a very high degree of accuracy. Essentially, when the 3-month Treasury yield exceeds the 10-year Treasury yield, the probability of a one-year recession rises higher and higher. Now, the 3-month bill is 4.30, and the 10-year bill is 3.80. This is a very alarming sign.

Now, there are a lot of other indicators I can point to: big downturn in housing, big slowdown in manufacturing, I don’t want to dig deeper into the weeds than I have to. There is no perfect model, but I will suggest that observing the leading economic indicators, the M2 and the Treasury yield curve gives everyone a good sense of where we are headed. So, inflation will slowly go down, but recession can be very difficult.

Again, we perpetual optimists should be able to do a lot better in the future in terms of economic policies than we’ve done in the last couple of years. You’ve heard this before, but first, we must open the spigots immediately to produce more oil and gas, to allow, to pipeline, to refine. All of this would lower prices and boost employment and economic growth.

John Kerry’s COP-27 Green New Deal, the plan for socialism, redistribution, climate offsets – he trying to bribe poor countries not to use oil and gas is just dumber than stupid. Joe Biden Shutting down coal plants across America – dumber than dumber. And the new EPA laws and taxes on clean natural gas are equal dumber Dumb, if that stupidity is possible.

Next, we need to re-impose work and work requirements on healthy people who receive government assistance. OK? This succeeded 25 years ago in reducing welfare spending and eventually led to a balanced budget.

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Also, we need to make Donald Trump’s supply-side tax cuts permanent. Then we need to rein in Biden’s regulatory assault on all businesses – a policy that has effectively strangled the economy.

At the end of the day, we had less money chasing more goods under those policies. Less money chasing more goods. Inflation will collapse, and the economy will pick up. We’ve done this in the past and we can do it in the future. It’s time to act as stewards of economic prosperity. Let us replace utopian socialist schemes which always cause stagnation and poverty wherever they are implemented. I know we can right this ship and I’ll say, Happy Thanksgiving – devour, devour, devour – this is my country.

This article is excerpted from Larry Kudlow’s editorial comment in the November 22, 2022, edition of “Kudlow”.

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