Simple economics to remember why recession cannot be escaped

by Foufou190

So I read things here that I agree and disagree with and I never claim having the absolute truth about the future. This being said I want to make a simple purely economic point for those who obviously never heard about this word:

The Fed cannot prop up the market with cash for a long period of recession, no matters it is the one of stocks, oil, pork futures (to cite this piece of art we saw a few days ago) or whatever else by injecting money in it.

This is simple economy, the last few big financial crisis were caused by either:

  • an offer shock, where offer falls (e.g. oil price is suddenly sky-high) causing a raise in prices so people having still the same amount of money they buy less, so the activity falls
  • a demand shock, where -guess what- demand falls (e.g. when people anticipate lower income) causing prices to fall so producing is less profitable, so activity also falls

Our corona crisis is both a demand and an offer shock, so the activity is absolutely dying for both reasons at the same time, which is extremely rare and grave.

Then, you can do whatever you want, a fall in activity will create a vicious cycle which is the recession cycle :

Less activity -> more unemployment -> less income -> fewer purchases -> less activity …etc

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Notice that we already entered it.

These are extremely basic economics, and this cycle is how a housing bubble popping in the US can cause a systemic collapse 2 years later in Greece, it’s just what links everything together.

The point is don’t think we will be out of this after we beat the ‘rona, you cannot cancel the cycle with cash, it can last only after very long years even without any other bad event happening, so it is not a question of the ‘rona being beaten fast or not, the problem is very much deeper.

So the US stock market can of course be pumped with cash, but it cannot escape the global recession making balance sheets looking like balance shit for ever. After months, maybe years it falls in every scenario, it’s just how recession works and the history of economy since people are trading, you think Trump is the first to artificially pump the market ?

I am not a basic bear and I do hold stocks to surf the wave, but it is a golden retard thing to think the recession can be “canceled” in the US, when it’s just simple and global chain reaction.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.