Are we edging toward a cliff or are we getting pushed to one? Or is there no cliff at all and we’re all suffering PTSD from 2008?
These are the questions from the daily deathwatch on the economy. We have heard the tolling for years – “booms can’t boom this long” – but the warning bells are eye-twitchingly loud these days.
Certainly, the two-year Treasury rate rising above the 10-year is capturing most of the attention. That focus makes sense because that inversion last reared its snarling head in 2007.
How important is that? Well, of course, all sorts of people are saying that this inverted yield curve preceded every recession since World War II. OK, not so much saying that as screaming it from the rooftops.
And if the doomsayers think that is significant, then the 30-year Treasury rate might have them jumping off the roof. It just hit its lowest rate ever, 2.018%, and likely to drop further.
That is all well and good but what does The Federal Reserve look at for as its main economic indicator? That would be the 10-year and three-month rate relationship – and that has been inverted since May.
The obvious concern is that those rates are gauges of how people feel about the long-term health of the economy. That apprehension can set up a self-fulfilling prophecy loop and prompt a recession. But for the past several years, the latest terrifying indicator has just been fodder for headlines. Is this one different?
No. The equities markets are likely to bounce up in the near term and we will just resume counting down the days before pumpkin spice lattes come back to Starbucks. (It’s early this year – trust us, people really care about this.)
Or maybe it is in fact the end of the world. That’s the thing – we’re going to be right one of these days.
We could just sign off here, but allow us to depress you even more. Here are some indicators that have us a bit anxious:
- Mortgage debt just broke a record high set in 2008.
- The New York Fed called the housing market “anemic” in a report this week.
- Consumer debt is at a record high, and consumers are buckling under the weight.
- China's economy is slowing down.
- But isn't the U.S. GDP doing great? Not so great, actually.
- But we have low unemployment! Where are those jobs though? Manufacturing might already be in a recession. Rural areas are not sharing in the happy times.
What does this all add up to? A precarious position. We can’t ever see the threshold of a recession as we cross it. Generally speaking, it’s only after we have had two consecutive quarters of contraction that we can call one. And then we can only guess what caused it.
Obviously, the housing bubble was the culprit in 2008. But we have asset bubbles all the time.
Plenty of pundits say that we have a stock market bubble, a real estate bubble and MarketWatch even declared an “Everything Bubble.”
Something always pops bubbles. We don’t know precisely what the needle was in 2008 (although we might have a pet theory that it was the gas price shock of 2007).
At the moment, we do have a perfect villain – tariffs. They are often blamed for precipitating The Great Depression. Most of us learned about the Smoot-Hawley Tariff of 1930 and how it deepened a recession into a depression.
But that tariff was only the last boot kick of the 1920s. Although that decade was remembered as the Roaring Twenties, the U.S. had regressive policies that set the stage for economic collapse.
For example, few know about the Fordney-McCumber Tariff of 1922, which made it difficult for governments to pay for post-World War I reconstruction and reparations. The Smoot-Hawley Tariff just sealed the deal.
In present day, we of course have renewed tariffs and a deepening trade war with China, which is rippling around the world.
Germany, the powerhouse of Europe, is already in recession, according to the two-quarter definintion. A Danish bank just introduced the world’s first mortgage with negative interest rates. That’s right – you pay back less than you borrow.
The last time we had crazy financial events was 2008, when we would have a new shock every day.
So, are we at the edge of a cliff? Maybe we have already jumped and just don’t realize it yet.
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at email@example.com.
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