A deep recession is an inevitable outcome of Biden and Trudeau economic policies

Claims of a "soft landing" are a head fake

For the past few decades, low interest rates and the “just in time” approach to manufacturing saw a global economic expansion that seemed unstoppable. Left wing economists embraced Modern Monetary Theory (MMT) that suggested there was no practical limit to how much governments could borrow as long as inflation remained subdued. The Biden administration bought into this nonsense in spades.

As the global pandemic exposed the risks in long supply lines in a “global economy” businesses shifted from “just in time” to “just in case” and saw the risk in low inventories so they began to add inventory to protect against shortages. That rise in inventory manifested itself as a a rise in GDP, since inventories are added to final sales in the calculation of GDP. The result was rosy economic statistics despite the emergence of higher inflation. Labor participation levels fell and “unemployment” measurements showed low unemployment, millions of jobs remained unfilled, and Biden’s administration kept spending and borrowing. Economists supporting the administration pointed to the “favorable” data as evidence that a “soft landing” from efforts to curb inflation with rising central bank interest rates was a possible or even likely outcome. Thirty-something talking heads on CNBC, Bloomberg, CBS or Canada’s BNN used terms like a “Fed-pivot”, a “Fed-put” and projections of an abatement of inflation to support their view that stock markets were already discounting the coming slowdown which they argued would be mild and short in duration.

Inflation raises the money value of inventories and as those higher values are reported on corporate balance sheets, higher profits are reported - so-called “inventory profits” - an illusory change to net income as any rise in asset values less debt manifests itself as higher income. But the rubber eventually hits the road.

To maintain profit margins, businesses are compelled to raise prices to pass on the higher input costs. Those higher prices get reported in lagging indicators like the Consumer Price Index (CPI) and central bankers see inflation rises after the fact and not in advance. Workers find household budgets stretched by rising prices for food, energy, transportation, and housing costs (as mortgage rates rise and rents rise in parallel) and find they need higher incomes to make ends meet. This is a pretty classical wage-price squeeze that perpetuates and exacerbates inflation.

Ultimately, rising rates will slow economic growth and demand destruction (the goal of the Fed) will occur. When it does, in the face of slowing demand, inventory levels will start to fall, people will get laid off from work, and the downturn will accelerate. The decline in inventories will be recorded as lower GDP and lower profits. There will be short term abatement in energy prices as demand for fossil fuels slows and that abatement will flow through CPI and governments will start to claim a win in the battle to curb inflation. They will be a day late and a dollar short.

Underlying the high inflation globally is a deep and growing shortage of fossil fuels. At US$80 a barrel and approximately 100 million barrels a day world consumption of oil amounts to US$3 trillion annually or about 2.2% of the $130 trillion global economy. Upgraded to gasoline, diesel fuel, home heating fuel, asphalt and petrochemicals the final price of a barrel of oil to end users is about US$160 a barrel (diesel fuel for example is over US$4.00 a gallon, a barrel of oil comprises 42 gallons, and while it is not all upgraded to diesel it is a reasonable proxy for most end uses). In rough terms, oil alone comprises over 4% of global GDP. Energy from all sources comprised about 13% of global GDP in 2022 according to Bloomberg, up from 6.5% in 2021. Global inflation in 2022 was an estimated 7.4%. Try to argue that energy is not the primary cause of the inflation we saw in 2022.

You don’t have to be an economist or a financial genius to see that energy inflation is the primary driver of world inflation and will not ease permanently until there is a dramatic and sustained increase in the global supply of energy and most of that supply has to come from fossil fuels (which today provide about 80% of the world’s energy needs).

Biden continues to pretend CO2 causes climate change and limit development of U.S. oil & gas with restrictive policies, pretending otherwise by recently approving oil development in Alaska which is years from adding materially to U.S. production. Justin Trudeau is doing the same in Canada, spouting nonsense about developing hydrogen (at least a few decades away at best) while suppressing oil and natural gas development and curbing pipeline construction witht the toxic Impact Assessment Act, often referred to as the “no more pipelines” Act.

Canada and United States are among the very few jurisdictions capable of adding meaningfully to world fossil fuel supply and under Biden and Trudeau they refuse to do so. The result will be cycles of recession (giving short term relief from inflation at the expense of people’s livelihoods) followed by higher energy prices in any post-recession expansion, resurgent inflation, and another cycle of interest rate tightening. This scenario played out in the 1970’s with peak interest rates over 20%, wage and price controls, a deep and persistent recession, and economic damage to millions. I see the current environment as even more alarming with worse to come.

Source: Globe and Mail

Buckle up kiddies. It will be a bumpy ride and the only way to smooth out the bumps is to get Trudeau out of office in Canada and Biden in the U.S. and elect governments that understand the inevitable result of nonsensical climate change policies is economic chaos and are willing to redirect efforts to bring global energy supply into balance with likely demand. The longer the electorate waits to change horses in Washington and Ottawa, the worse this gets.