Who wants a recession in 2024? (part 2)

This past July, I did a post arguing that Donald Trump would be the primary beneficiary if there were an overly expansionary monetary policy. At the time, the internet was full of pundits denying that too much stimulus was even possible. After all, employment was down by over 5 million from pre-Covid levels. Here’s what I said:

I don’t expect a recession to occur in the next few years, but recessions are almost impossible to predict. It’s more interesting to think about the sort of policy mistakes (were they to occur) that might lead to a recession within a few years.

One mistake would be an excessively tight money policy, which could trigger a recession in 2022 or 2023. That’s possible, but seems quite unlikely at the moment.

A slightly more likely scenario would involve excessively expansionary monetary policy, which drove wage growth to levels inconsistent with 2% inflation over the long run. To get the inflation rate back on target the Fed would then need a tight money policy, which might trigger a recession.

Correct me if I’m wrong, but opinion seems to be shifting in my direction. In a political sense, the biggest threat to the Dems is now too much demand stimulus. Matt Yglesias recently linked to this Conor Sen tweet:

Since July, the evidence has gradually shifted in the direction of the Fed being a bit too expansionary. (Widening TIPS spreads, etc.) That’s not to say that the Fed’s overall policy under Covid has been bad—they succeeded in the very important goal of quickly getting the price level and NGDP back to the trend line. And much of the inflation is transitory. But now there is some risk of overshooting.

PS. I’m not claiming that I predicted any of this (I don’t predict, I infer market forecasts), rather that I warned that overstimulus was a potential concern for Dems.



21 Responses to “Who wants a recession in 2024? (part 2)”

  1. Gravatar of postkey postkey
    14. November 2021 at 13:43

    “Many introductory economics classes include lessons on the important roles of banks and the Federal Reserve (Fed) in the U.S. financial system and how these two entities are linked. While some textbooks provide sound descriptions of these topics, many miss some key aspects of how banks make decisions, inaccurately explain how the Fed implements monetary policy, and contain outdated descriptions of the linkage between banks and the Fed. This outdated link is often tied to the concept of the “money multiplier,” which is anchored in an obsolete explanation of how the Fed operates and influences banks. We recommend that textbook authors and teachers eliminate the use of the money multiplier concept in explaining the linkage between banks and the Fed. Instead, we suggest that classroom materials emphasize a contemporary description of how the Fed operates, focusing on changes in interest rates, not monetary quantities, as the mechanism through which Federal Reserve policies are linked with the banking system and the rest of the economy.”

  2. Gravatar of David S David S
    15. November 2021 at 01:34

    Good time to share another Yglesias twitter quote:

    “The Fed should declare victory and raise rates”

    I agree with that, but the timing has to be very careful. I don’t think the Fed will have good information to consider a change to its taper schedule until after January. I noticed that the 2022 Hypermind forecast pulled back just a tiny bit this week, for what’s that worth.

    Whatever happens in monetary policy, the political ramifications for Democrats are gruesome. I see two bad scenarios:

    -Fed sticks to schedule and things continue to run a bit too hot; Republicans win back House and Senate by yelling about inflation.

    -Fed sticks to schedule and things settle down a bit; Republicans win back House and Senate by yelling about the inflation that already happened–and making the completely implausible promise that they alone can restore 2019 price levels.

    Granted, if gas and food prices happen to drop next year that gives Democrats a good counterattack—but we’ll blow it by continuing to talk about Trump.

  3. Gravatar of Effem Effem
    15. November 2021 at 05:28

    The Democrats already have an uphill battle in 2022. Anti-CRT + anti-high inflation is a dream platform to run on for Republicans.

  4. Gravatar of Lizard Man Lizard Man
    15. November 2021 at 06:41

    If the Fed is going to let NGDP growth remain this high, Biden and the Democrats better move quick on those supply side reforms to tamp down inflation. But really isn’t that how politics and the economy should work? It seems far better than politicians trying to prop up demand.

  5. Gravatar of Brian Donohue Brian Donohue
    15. November 2021 at 06:57

    The worst part about a Trump revival is it will save huge swaths of the dying MSM for a few more years.

  6. Gravatar of Tom M Tom M
    15. November 2021 at 07:21

    The irony here is that the FED has actually done a great job at maintaining discipline.

    I can easily imagine a scenario where the FED, seeing inflation rise, reason from a price change and quickly move to a more contractionary stance. Thus confusing a price change due to a supply shortfall rather than a demand shortfall, and pushing the country into another ’08 recession.

    The hero we need, but not the one we deserve…

  7. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. November 2021 at 07:21

    re: “recessions are almost impossible to predict”

    Every one, except for Covid, was predicted.

  8. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. November 2021 at 07:22

    The money multiplier is still valid, it is the ratio of bank vs. nonbank purchases.

  9. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. November 2021 at 07:25

    I’ll let you know when to expect the next recession.

  10. Gravatar of Carl Carl
    15. November 2021 at 07:50

    What are the assumptions in the phrase “And much of the inflation is transitory”?

  11. Gravatar of ssumner ssumner
    15. November 2021 at 09:05

    Carl, The assumption is that much of the inflation is caused by supply bottlenecks. And that monetary policy slows NGDP growth to 4%.

  12. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    15. November 2021 at 16:31

    The O/N RRP facility is not just slowing growth, the Foreign O/N RRP facility is lifting the $’s exchange rate.

  13. Gravatar of Michael Rulle Michael Rulle
    16. November 2021 at 07:16

    Assuming we really do have a supply problem, seemingly caused by “bottlenecks” in our delivery system (but not in production or demand?—-I think that is implied in our current accepted analysis)——what is causing it? We can all speculate on the various ways it could be happening——but does anyone actually know what is causing it? And why now? My speculation—-which seems to be the general speculation—-is Covid has pulled labor out of the supply delivery chain. But not in production? And not in demand?

    Any ideas?

  14. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. November 2021 at 07:16

    Cyrpto just crashed.

    POSTKEY re: “we can readily see why the money multiplier no longer applies”

    It’s an intellectual conspiracy. Some people think Feb 27, 2007 started across the ocean. “On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market’s pullback a day earlier”.

    In fact, it was home grown. It was the seventh biggest one-day point drop ever for the Dow. On a percentage basis, the Dow lost about 3.3 percent – its biggest one-day percentage loss since March 2003. It’s cause, the drop in legal reserves.

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    16. November 2021 at 07:25

    The title “Who wants a recession in 2024” is a stupid question. But all you smart people can’t figure out why.

  16. Gravatar of Lizard Man Lizard Man
    16. November 2021 at 08:54

    @Michael Rulle

    What I have read is that demand for services in the US is down, and demand for goods is way up. But a very large proportion of goods bought in the US are made in foreign countries, where the labor pool hasn’t shrunk.

  17. Gravatar of Liberal Roman Liberal Roman
    16. November 2021 at 12:23


    Any comments on this twitter thread:


  18. Gravatar of Michael Rulle Michael Rulle
    16. November 2021 at 14:24

    @Lizard Man

    Thanks—It certainly is internally logical—In fact, you say it so clearly and simply I think will stick with your answer—-Walmart was either extremely fast “on the uptake” or perhaps the magnitude of the supply chain is less than presumed and discussed. If “transitory” comes true—which I am still an optimist for—then it will have been a short and shallow problem.

  19. Gravatar of nick nick
    16. November 2021 at 15:17

    Elaine Luria, a member of the 1/6 committee was just flagged by the U.S. state department for having investments in a Chinese state owned company. Somehow she still remains on the committee and American citizens remain locked up without due process and a speedy trial.

    Waterford, Ireland residents are 99.5% vaccinated. For the mathematically challenged, i.e., Sumner, that means less than 1/2 of 1% of Waterford residents are unvaccinated. Despite having such a high rate of vaccination, the city is experiencing a high volume of Covid Cases.

    It’s all one big “conspiracy” though, according to the “misinformation” conspiracy theorists like Sumner.

    According to Sumner’s logic, the whole world is spreading disinformation except the U.S. government. We can always trust the government and those academics with ties to Big Pharma, because history has shown that Governments are always good



  20. Gravatar of ssumner ssumner
    16. November 2021 at 15:58

    Michael, There are also supply problems in production–consider autos.

    Liberal Roman, His comment about the Fisher effect working only under central banks is due to the fact that inflation under the gold standard was unanticipated. Only anticipated inflation affects interest rates.

  21. Gravatar of Michael Rulle Michael Rulle
    17. November 2021 at 05:11

    Expected versus unexpected inflation is another one of those issues that can easily cause confusion. But, yes, interest rates are much more a function——in fact what else can they be?—-of expected inflation. Apropos to yesteryear——and old news——and repetitive on my part——it’s tiring reading the same junk I was reading 30 years ago regarding these confusions——not that I knew what they were talking about—but I like to believe that I was a least smart enough to realize it made no sense to me——even if I did not know why. We have recently achieved unexpected inflation and rates have risen—-but there is strong enough belief it is transitory——to keep it under control. For now.

    In sports and financial markets, predictions over and above what those markets already predict are bound to fail ——-as in no better than random——and low and behold it seems to be true. I like it unexpected predictions are small in number. It feels more stable.

Leave a Reply