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The Ghost of Recession Scares Markets

Fantasma de recesión

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[Leer en español]

Markets are panicking over the specter of recession that has become increasingly likely as the Federal Reserve (FED) tightens monetary policy to reduce rampant inflation that has surpassed 40-year records in the United States.

Inflation functions as a hidden tax on consumption, mainly affecting the poorest. With inflation accumulating 8.6 % annually for the month of May, FED bankers fear that it could get out of control and become endemic in a society that is used to an inflation rate of 2 % per year.

To control the rise in prices, the FED raised the interest rates at which it lends to commercial banks aggressively, not seen since 1994. The direct impact of this increase for Americans is that the cost of their credit cards will become more expensive, as well as the cost of new loans for housing, buying cars, studying, or even investing.

The European Central Bank limited the FED and raised interest rates to reduce the inflation impacting the Eurozone, which has accumulated 8.1 % annually for the month of May, largely driven by the rise in the cost of energy as a result of the cuts in gas and oil flows from Russia.

The specter of recession is increasingly scaring the markets and if it materializes it will come at the cost of impoverishing thousands or even millions of Americans (Image: EFE).

With these increases, the main Western Central Banks have given a signal to the market that they are willing to carry out a recession in the economy in order to contain inflation. Financial markets have been the first to react, with major financial indices losing value as expectations of a recession intensify.

Financial markets have been followed by commodity prices, which are plummeting rapidly in anticipation of a drop in global demand. The CRB index, which tracks the aggregate price of the main commodities on the market, fell by 16% in less than a month.

Even the price of commodities (strongly affected by the war in Ukraine) has fallen. Oil, whose price rose astronomically at the beginning of the Russian invasion, is back to around $100 a barrel. The price of natural gas fell 34% in less than a month, despite Russian supply cuts. Wheat futures, scarce because of the war, are now below their price prior to Russia’s invasion of Ukraine.

The price of commodities have fallen suddenly in the world, anticipating a contraction in economic activity. (Image: EFE)

This drop in commodity prices is not because there is suddenly more supply to cover the shortages of the past few months, but as an announcement that markets anticipate a dramatic drop in demand, foreshadowing a recession.

Although the Biden administration insists on denying that the U.S. economy is close to falling into a recession and points out that there are indicators that remain solid, such as consumer spending. Other indicators such as U.S. industrial production and retail sales have been falling since May.

A drop in demand also necessarily implies a decrease in investment and in the use of the economy’s capacities, so that the productive activity itself begins to slow down, an effect that can be triggered by costing thousands or even millions of Americans their jobs.

Despite the White House’s refusal to acknowledge the current economic situation in the country, the FED seems to be willing to carry out a recession in the economy to contain inflation. How deep will the fall of the American economy be? Only time will tell.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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