We are in a recession. What caused it? No, not COVID-19. There is but one cause for all recessions and depressions.

RECESSION
[rəˈseSH(ə)n]
noun
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. Recessions generally occur when there is a widespread drop in Spending.

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The measure of Spending is Gross Domestic Product (GDP), the formula for which is:

GDP = Federal Spending + Non-federal Spending + Net Exports

Spending is related to the supply of money in the economy. All recessions are caused by reductions in money supply growth, but they may be triggered by many different factors. As you will see, understanding the difference between “caused by” and “triggered by” is important.

Red line =Annual percentage changes in Federal Deficit Spending. Recessions = vertical gray bars. 

The above graph shows that recessions (vertical gray bars) tend to occur following periods of reduced federal deficit spending growth. Recessions are cured by increased federal deficit spending growth.

The graph below is a close-up view of the period following the 2008 recession. It shows a 2009 – 2020 decline in deficit growth, which made the 2020 recession inevitable.

The line shows federal deficit spending growth.

Here is the same graph, with the addition of Gross Domestic Product.

Blue line = Gross Domestic Product

After the federal deficit spending to cure the 2008 recession started to decline, GDP growth had leveled off. We experienced a severe GDP decline in 2019 — well before COVID — when we already were on our way to recession.

In the Alps, snow often becomes so deep that dangerous avalanches are imminent. So, to forestall an unexpected and potentially fatal avalanche, cannons are fired at the snowpack, to trigger a controlled avalanche.

It is not the cannons that cause the avalanche; the cause is the unstable snowpack. The avalanche, which eventually would have occurred with or without the cannons, was triggered by the cannons.

The uptick in the end-of 2019 federal deficit growth was the government’s response to the anticipated and realized GDP reduction. Sadly, it was not sufficient to prevent the recession.

Summary:

  1. a recession is a fall in GDP in two successive quarters,” and
  2. GDP is based on spending, and
  3. Because of reduced deficit spending growth, GDP began to fall in 2018, and seriously to fall in 2019, so
  4. We were about to have a recession before COVID. The pandemic did not cause the recession. COVID merely was the “cannon fire” that triggered an already imminent recession.

Outside events — pandemics, weather, stock market disruptions, oil shocks, earthquakes, wars, etc. — do not cause recessions. They only trigger recessions that were destined to happen, because the economy lacked money. Ultimately, all recessions are caused by lack of money in the private sector.

The subprime mortgage crisis was a trigger for, not the cause of, the 2008 recession. Federal deficit growth already was declining.

 

The 9/11 attack and technology speculation were triggers for, not the causes of, the 2001 recession. Federal deficit growth already was declining.

 

An oil shock was a trigger for, not a cause of, the 1990 recession. Federal deficit growth already was declining.

 

Inflation and oil shortages were triggers for, not causes of, the “double-dip” recessions of 1980 & 1981. Federal deficit growth already was declining.

 

Oil price increases were a trigger for, not a cause of, the recession of 1974. Federal deficit growth already was declining.

The real cause of all recessions is Congress’s and the President’s failure to pump enough stimulus money into the economy via deficit spending. Prior to recessions, federal deficit growth declines.

All of the above recessions were cured by increases in federal deficit spending.

Even in those cases where recessions were triggered by oil shortages, the U.S. government could have deficit-spent to purchase oil, then sold it at a loss in America, to prevent the inflationary results. Because all inflations are caused by shortages of key goods, purchasing and redistributing scarce items is how a Monetarily Sovereign government always can prevent/cure inflation.

Back in April of this year, we wrote:

“The economy needs at least $7 Trillion net added from the federal government. But, our Congress is spending far too little and spending way too late. Unless Congress and the President deign to see the light, we have no way to prevent a depression.”

“The $3 trillion rescue package helped avoid the catastrophe that is certain unless at least $7 trillion is pumped into the private sector.”

That was then; this is now, and Congress still is reluctant to do the deficit spending necessary to prevent a depression.

The Democrats proposed an additional $3.4 trillion package, and when the Republicans objected, the Democrats attempted a compromise by lowered their proposal to $2.2 trillion (The HEROES Act).

Neither proposal would have been sufficient to cure the recession, but they would have moderated the suffering.

However, the Republicans still objected, and instead resorted to the old political ploy of claiming the fault was the Democrats’ for not compromising.

Now, families are starving, and Congress is at a standstill, which will continue through the January inauguration. Even then, unless the Democrats win Georgia’s two Senate seats, Republicans may prevent any further stimulus, and the nation will fall into a depression.

The reasons given for the Republican obstruction is that the deficit is “unsustainable,” “unaffordable,” “imprudent” and/or are “socialism.” All those reasons are false.

The federal government, being Monetarily Sovereign , has the unlimited ability to spend. It prudently can “sustain” or “afford” any size deficit, as it has proved for the past 80 years.

Further, socialism is not just federal deficit spending. Socialism is ownership and control over resources. When the government merely spends, that is not ownership and control. Medicare, food stamps, unemployment compensation,  and all federal purchases from the private sector do not constitute socialism.

Even further, socialism in itself neither is bad nor good. When socialism devolves to a dictatorship, as happens with communism, it is bad. But we have a great deal of socialism in America that is good.

The military, federal agencies like NASA, the FBI, the CIA, the White House, Congress, our court system, roads and highways, most dams, public beaches, public libraries, public parks, West Point military academy, and many others are examples of “good” socialism.

The word “socialism” is used as a pejorative to confuse the public.

Bottom line: Today’s recession is wholly unnecessary. While the politicians blame it on COVID, they merely are finger-pointing. The blame for today’s recession, and indeed for all recessions and depressions, lies squarely with Congress and the President.

It is they who determine the private sector’s money supply, which is the true driver of recessions and depressions.

If Congress and the President can agree on spending an additional $5 trillion – $7 trillion in stimulus money, depending on where the money is spent, the recession would end. The economy would grow, businesses would survive, and the populace would thrive.

Congress and the President have all the power they need if they are willing to use that power to save America rather than using it to put the other party at a political disadvantage.

I fear, however, that if the Republicans maintain control over the Senate, Mitch McConnell has demonstrated he has no interest in helping the American economy and people, but rather seems solely concerned with preventing whatever the Democrats wish to do.

That attitude will lead to a depression in which only the rich will survive unscathed.

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all or a reverse income tax
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

2 thoughts on “We are in a recession. What caused it? No, not COVID-19. There is but one cause for all recessions and depressions.

  1. Of course it is not just the reduction in federal deficit spending, it is also the corresponding run up in private debt, which keeps the economy moving until the private sector can no longer sustain its debt burden and cuts back on spending to deleverage. The GFC was particularly prolonged due to the massive amount of debt accumulation from the housing bubble, and the long deleveraging period, which was largely due to Obama’s decision to bail out mortgage lenders and not homeowners, leaving all of their debts in place. It’s really the combination of the run up in unsustainable private debt brought on by cheap money policy and reductions in federal spending that lead to recessions.

    Due to the lagging effects of private debt accumulation, there is no clear threshold for deficit reductions that will cause recessions; however, I believe historically deficits that drop below 3% of GDP on average are more likely to lead to recessions, especially given current balance of trade.

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    1. Yes, recessions require a trigger, and you mentioned one.

      Using the avalanche analogy, you could have a warm day, a loud noise, or a snowmobile, and nothing would happen unless there is an excessive snowpack. But once there is an excessive snowpack (the cause of avalanches) any of those triggers could set off the avalanche.

      Similarly, you could have a housing bubble or massive private debt without a recession, so long as the government was running sufficient deficits, but as soon as deficit growth was negative, any of those triggers could set off the recession.

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