Northern Michigan Economist Weighs in on Latest Economy News
The Bureau of Economic Analysis announced Thursday that the US economy shrank for a second straight quarter with a decline in gross domestic product.
This comes after the Federal Reserve raised its benchmark interest rate by 0.75 to tame high inflation.
“It will help,” said Northwood University Senior Vice President, Emeritus Dr. Tim Nash. “Inflation is caused by when the Federal Reserve, the monetary authority of the country, increases the money supply at a faster rate than the production of goods and services.”
“What’s happened in the last couple of years, from the Trump to the to the Biden administrations, we’ve increased the money supply. The Fed balance sheet has gone from a little over $4 trillion in the in 2020 to roughly $9 trillion today,” said Dr. Nash. “The money supply is more than doubled, and on top of that, both presidents have injected trillions of dollars into the economy through government spending to fight the pandemic.”
Dr. Nash says that’s driven inflation up to almost 9%.
“This is something that economists like myself have been warning about for more than a year now,” he said. “We should have been reducing that money supply to get the prices down starting over a year ago. Because we waited a lot longer to deal with that, the reality is it’s going to take longer to bring those inflation rates down.”
The Federal Reserve has set a goal to keep inflation at 2%, but Dr. Nash said that it could take a year until we see that.
“We’ll start to see a stronger economy when we get the inflation below 4-5%, but my guess is we’re not going to see that until the end of the year,” said Dr. Nash. “We’re not going to see 5% inflation until the end of the year. Hopefully it’ll be a little bit sooner. But, you know, it’s just hard to tell.”
With the US economy shrinking for a second straight quarter—leaving many to wonder if we’re headed into a recession.
“I was looking through one of the principles of economics textbooks that I used to teach principles of economics to students with and the Richard Stroup definition is two negative back to back quarters in GDP,” he said. “With today’s news, technically, we’re in a recession.”
But the definition of recession could depend on who you ask.
“Others may say a more broad based view is the National Bureau of Economic Research is a view of a recession, which they argue is widely based across the economy, a decline in the economy,” Dr. Nash said. “The problem with the National Bureau of Economic Research is that they usually declare a recession about six months after it’s already started. But that tends to be a more thorough analysis in some people’s minds.”
Dr. Nash says the question now is how deep of a recession are we in?
“I think that there’s a chance that we can have a relatively mild recession if we continue to reduce the money supply, bring interest rates up to bring inflation down, which means you’re going to have discourage people from buying things and driving prices up ,” he said. “Simultaneously, we’ve got to stop the high level of government spending. Between the Trump and the Biden administrations, we put trillions of dollars in the economy, and I just don’t think that spending more money is good at a time when you have a recession.”
Dr. Nash says if the US continues its ways, we could have a long and difficult recession.
“We’ll have to see what happens in the next couple of months,” he said.