I had a discussion with a friend the other day about how the coming recession would compare to the 2007/8 recession and to stagflation in the 1970s. I think the outcome is worth sharing, so here it is:
We agreed that the coming recession will be longer than the 2007/8 recession because many of the tactics used by the Fed to pull us out of that recession are of no use this time around. In fact, one could argue that tactics like quantitative easing contributed to the inflation we are now experiencing. To use a couple of clichés, we are out of ammo and the Fed is behind the eight-ball.
The true danger lies in whether or not we enter an inflationary spiral, which is what happened in the 1970s. If we do, then this will be a long, drawn out recession accompanied by runaway inflation. We’re talking years, not months, if a recovery is even possible.
Years are bad, not just because none of want years of rising prices, but because more companies will fail during a lengthy recession, leading to job losses. Even companies that survive will lay off people. The unemployed will not be able to pay their mortgages and houses will go into foreclosure. Rich corporations and investors will snap houses at depressed prices up, reducing the number of individual homeowners who can build wealth through home appreciation. Renters unable to pay their rent will get evicted. Homelessness will grow worse, but the new wave of homeless won’t be because of addiction, it will be because of a poor economy and high unemployment, and it will include children.
A Death Spiral
Combine this grim economic outlook with a food shortage that could last years, an energy crisis that shows no end, and the possibility of World War III, and the future looks pretty grim. We’re talking about a death spiral that will be difficult or even impossible to recover from.
While a death spiral is spiraling downward, an inflationary spiral sees prices spiral upward. It’s a self-perpetuating effect that leads to what they call “runaway inflation.”
An inflationary spiral occurs when workers demand more money so they can keep their spending power in the face of inflation. When their wages rise, companies have to increase their prices to pay the wages. The higher prices and the higher wages keep the inflationary cycle going. When the cycle repeats, as it does every year and then every quarter, you get an inflationary spiral. That constant more pay, more price hikes cycle is what makes stopping inflation so difficult. No one wants to be first.
It was easier to kick off an inflationary spiral in the 1970s when there were more unions to go on strike demanding higher wages, but it can still happen today. We’re already seeing organized labor protests overseas, and they will hit our shores soon enough. At the same time, we are also seeing a shortage of workers. People are refusing to work because employers do not pay them enough. Call it a silent strike. Many people who lost their jobs because of COVID never went back to work.
Employers won’t be able to jump start their businesses until they raise wages, which means they will also have to raise pieces, compounding the inflationary spiral. Pretty soon, that $10 combo meal I complained about is going to be $15. It may reach $20 before this is over.
Worst of Both Worlds
But back to our original discussion…. My feeling is that we will have the worst of both the 2008 recession and the malaise of the late 1970s, complicated by the politics of this era. We will see a long recession, a lengthy period of runaway inflation, and constant fighting and bickering by our politicians. The socialists will refuse to relax regulations and let the free market function, harming business and farmers. The environmentalists will refuse to let us drill for oil and build pipelines, which would solve several country’s problems. Throughout all this, Joe Biden will look increasingly confused and continue to wonder why his poll numbers continue to drop.
While the Republicans should win both houses in the mid-term elections, little changes will get done with Biden in the White House.
There will be no answer to our inflation problem, our recession, the food shortage, or the energy crisis because the two parties cannot agree and inspirational leaders are few and far between. Politicians think it is more important to win than their point than it is to solve our problems and save our country. They would rather attack the opposition than reach a compromise.
Conflict is Coming
The fighting won’t be limited to Washington. We’ll see protests in major cities, some of which will burn. We’ll see conflict between the political extremes expressed in blood on our streets. The police, assuming they are not on strike protesting their low wages and lack of support from City Hall, will be busy, but it won’t help much because soft-on-crime district attorneys will release the protesters. Police will get hit with bricks and protestors will die, and then it will start all over again as protesters protest the protests.
As financial stress rises, so will crime. It won’t just be individuals committing crimes. Individuals will join others, forming small gangs to commit bigger, more successful crimes. Existing, well-organized gangs will also get in on the action, looking for rich targets. This is where keeping a low profile and being the gray man can help keep you off their radar.
Civil War II
These United States, as we used to be called, are not so united any more. The most recent Supreme Court rulings that received so much media attention show the depths of the divide. We have people satisfied to live with rules as they were written, and others who have tantrums when they can’t get their way.
I don’t think the next civil war will be between the government and the people. (That would be more of a revolution than a civil war.) I don’t think it will be between the haves and the have nots. As resources grow scarce, the battle might be between the rural locations that have resources and the urban locations that want them.
What will be interesting is what happens when the conservative countryside stops sending food to the liberal cities because of “fuel shortages.” Or maybe they will cut off the water or gas pipelines when “the pumps fail” and replacement parts are back ordered for months.
In that scenario, how many will stay trapped in their cities to slowly die, convinced the government will save them, and how many will boil out of the cities like ants when you kick their anthill, stripping the countryside as they come? We’ll have to blow the bridges, knock down the Interstate overpasses, and keep them contained.
Is civil war likely? No, but it’s possible. I hope we avoid it, but either way, this country’s death spiral will be long and ugly. We’re seeing the cracks now as things begin to fall apart. Or maybe I should say, as we begin to tear our country apart.