The Ticking Time Bomb Of Recession: Some Reasons To Worry — John T. Harvey

All but one have been preceded by a decline in Real Gross Private Domestic Investment, which we have just observed.

One indicator is hardly definitive, and presently, the economy is strong, with fiscal flows very positive.

Nevertheless, private investment along with government spending drives and economy, and in the case of a net importer, it offsets demand leakage from a trade deficit. A trade deficit is offset by a fiscal deficit, but the targeting of the spending determines the multiplier with respect to ongoing demand, that is, how soon a dollar spent is saved and thereby neutralized. 

Recessions don't come out of nowhere. They result from lagging demand or unsustainable private debt. Neither is a significant issue at present. 

The question is why Real Gross Private Domestic Investment is trending down. The reason usually given is declining confidence in business conditions to yield profits that justify the investment. But that is not based on actual measurement but polling business leaders.

John Harvey offers several reasons that may pertain. First, the expansion although tepid, is getting long in the tooth by historical standards. Secondly, even if the expansion persists at the present rate, the results are unevenly distributed, leading to social issues and therefore political ones as well. So the basic outlook is  not all that promising without greatly increasing the fiscal deficit, which also involves political issues given the current state of misunderstand about this in the electorate.

It's looking like the business community that should be investing is concerned with the state of the world, which is becoming increasingly precarious, the deep political division in the US approaching an election cycle, and generally discouraging news from the bulk of the global economy suggesting a slowdown. But this is hardly definitive in terms of measurement.

Whatever the cause of causes this is resulting in a degree of uncertainty that is increasing liquidity preference, which is confirmed by the low yields and flat yield curve of US Treasuries and a strong dollar in the face of "fiscal profligacy." While some of the bond bull may be due to insufficient securities emission by the US government, that can be questioned since deficit spending must be offset by debt issuance, the fiscal deficit is high by historical comparison, and the Fed has reversed QE. There is a strong appetite for low risk places to park funds instead of an appetite to invest in expectation of profits down the road.

But there may be more, too. I have said previously that I think that the previous financial crisis was the first leg down, since the fundamental issues were not addressed then and continue. Nor was there any real, meaningful accountability in the sense of doing what is required to reform the system and excise the rot, which is still highly "profitable" in terms of extracting rent. And measures that were taken are already being rolled back. Does anyone think that this is a healthy system?

The world situation is also looking shaky, and the overwhelming sense is that there is no center of gravity. The US had provided a solid foundation in the aftermath of WWII, but that began to crumble away as long ago as Vietnam and the perceived need to close the gold window for international trade and go to a floating rate system instead of a fixed rate one. Now the pace is increasing. Even Mark Carney is suggesting that a new monetary order that is not dollar-centric is in the offing. And multipolarism is increasing geopolitically. The world seems to be in transition and the outcome is thus far unforeseeable.

There is an impending sense that the world is now in a Gramschi "interregnum," and it is unsettling.

"The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear." — English translation Selections from the Prison Notebooks, “Wave of Materialism” and “Crisis of Authority” (NY: International Publishers), (1971), pp. 275-276. Prison Notebooks Volume II, Notebook 3, 1930, (2011 edition) SS-34, Past and Present 32-33. Wikiquote

So while there is no good reason either to predict recession or to put a clock on it, the whiff is in the air and that could become a self-fulfilling prophecy. One indication of this is market volatility based on the latest news to come across the wire, or Bloomberg, as the case may be.

It's the whole ball of wax, and the wax seems to be melting.

Forbes — Pragmatic Economics

The Ticking Time Bomb Of Recession: Some Reasons To Worry
John T. Harvey | Professor of Economics, Texas Christian University