Prepare for Turbulence

“The job of the central bank is to worry.”

– Alice Rivlin

“The central bank needs to be able to make policy without short-term political concerns.”

– Ben Bernanke

“… from the standpoint of the overall economy, my bottom line is we’re watching it closely but it appears to be contained.

– Ben Bernanke, repeatedly, in 2007

“Would I say there will never, ever be another financial crisis? You know, probably that would be going too far, but I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be.”

– Janet Yellen, June 27, 2017

“My good friends, for the second time in our history, a British Prime Minister has returned from Germany bringing peace with honor. I believe it is ‘peace for our time.’ Go home and get a nice quiet sleep.”

– Neville Chamberlain, September 30, 1938

Photo: Monica Muller via Flickr

The way we assess problems depends on our perspective. People can look at the same set of facts and reach quite different conclusions based simply on their circumstances. This is why it’s good at times to get away from your normal environment. Listen to a wide variety of opinions. Read books outside of your comfort zone. You’ll see things differently when you return.

I had that feeling on returning to the US from Shane’s and my honeymoon in St. Thomas. We’re now officially married, and we thank everyone for the congratulations and kind wishes. I saw a little bit of news while we were there but spent more time just relaxing with my bride and reading books.

Re-entering the news flow was a jolt, and not in a good way. Looking with fresh eyes at the economic numbers and central bankers’ statements convinced me that we will soon be in deep trouble. I now feel certain we will face a major financial crisis, if not later this year, then by the end of 2018 at the latest. Just a few months ago, I thought we could avoid a crisis and muddle through. Now I think we’re past that point. The key decision-makers have (1) done nothing, (2) done the wrong thing, or (3) done the right thing too late.

Having realized this, I’m adjusting my research efforts. I believe a major crisis is coming. The questions now are, how severe will it be, and how will we get through it? With the election of President Trump and a Republican Congress, your naïve analyst was hopeful that we would get significant tax reform, in addition to reform of a healthcare system that is simply devastating to so many people and small businesses. I thought maybe we’d see this administration cutting through some bureaucratic red tape quickly. With such reforms in mind I was hopeful we could avoid a recession even if a crisis developed in China or Europe.

Six months in, the Republican Congress that promised to repeal and replace Obamacare, cannot even agree on the process. For six years they discussed what to do, and you would think they might at least have a clue.

Tax reform? I’ve been talking with several of the Congressional leaders about tax reform, pointing out that without major tax reform this country is in danger of falling into a recession. No tinkering around the edges. Real change requires real change. There is now talk of having a tax bill of some kind ready to discuss in September and possibly pass in November, which, with this Congress, means that the process is likely to drift into next year sans a major push by the leadership. There is no consensus. No less an authority on the actual political process than Newt Gingrich wrote a very sharply worded column this week, declaring, “That legislative schedule is a recipe for disaster.” As Newt points out, if we are going to see any positive economic effect from tax reform, a bill has to be passed soon and implemented. Newt’s column was actually fairly discouraging to me. Knowing him as I do, I can tell you he wasn’t happy to have to write it. While I disagree with him on some of his tax-reform proposals, I agree that we need something significant and soon.

There has been some progress on the bureaucratic and regulatory fronts, but nowhere near what I’d expected. Appointments haven’t been made, and the bureaucracy is still in control of most of the levers of the economy.

I’d love to be wrong. Nothing would make me happier than having to eat all these words. But without significant changes, and soon, the economy will drift sideways and down. While second-quarter GDP growth will come in above 2%, the figure for the first six months of this year will remain below 2%. A host of indicators show a softening of the economy. For instance, , with a glut of more than 7 million previously leased cars clogging the auto market, new-car production is projected to continue to fall. Consumers are financially stretched, and credit card and student loan defaults have begun to rise. While there are bright spots, without major reforms the economy will drift lower, toward stall speed. Any outside shock – and several may be in the offing – could push us into recession.

And then we come to central banks.