Three Things I Think I Think – Government Bankruptcy, Misery & the Return of the 70s

Here are some things I think I am thinking about:

1) The US Government Still isn’t Bankrupt. 

Kim Dot Com, a New Zealand based technologist wrote a viral thread on Twitter claiming that the US government is bankrupt. A lot of it is based on basic errors and fallacies of composition so I made another Three Minute Macro video on this topic to help provide some clarity. This will be old material for regular readers, but the 3 minute format is a nice succinct refresher.

2) Are we already in a recession? 

There was an interesting poll going around showing that many people already believe we’re in a recession. We’re obviously not in a technical recession, but my theory for this poll, aside from political bias, is that a lot of people actually feel like this is a recession because of inflation. The basic thinking is that high inflation, even with low unemployment, has such a disproportionate impact that people still feel worse.

The best way to visualize this is the so-called “misery index” which calculates the unemployment rate and the inflation rate into one index thereby quantifying how much “misery” we feel in the economy at times.

If we look at current readings we can see that we’re at levels that are largely consistent with recessionary environments like 2020, 2009, 1991 and the late 1970s. When inflation is high it doesn’t even matter if you have a job because you still feel like you’re going backwards in many ways.

3) Are we Returning to the 70s? 

Speaking of the 1970s – I mentioned on Twitter that I don’t think inflation has ever been harder to predict. For instance, compare the moreflation vs lessflation arguments:

Moreflation:

– Ukraine War

– China shutdown

– Booming commodity prices

Lessflation:

– Fiscal tightening

– Rising rates

– Soft housing

– Inventory restocking

– Rising recession risk

These things could go either way. For instance, let’s assume the war in Ukraine gets worse and worse and oil prices surge to $200. In that case it’s almost impossible to think that inflation comes down materially. On the other hand, there are tons of recession signals flaring up all over the place that would be consistent with collapsing demand. I’ve been saying this a lot in recent years, but I feel like the range of outcomes here remains SO wide. I like to think I feel confident about making inflation predictions, but not in this environment. There are just too many anomalous things that could push the needle really far in one direction or the other.