Are we in a recession?

Let me be very blunt.

When people ask, are we in a recession yet, the mainstream will have you believe we’re not.

The truth is that we are.

Yes.

We are in a recession.

And in a few days the inevitable will happen reaffirming that point.

The Bank of England will raise the Bank Rate.

How much? Only the Bank know.

But if you ask us, anything less than half a percent is further testament to the ineptitude of the current Bank of England’s Monetary Policy Committee.

We told you a recession was coming

You do not need me to tell you that the Bank of England has been slow to respond to the current and pressing problem of inflation.

A major part of the problem has been excessive quantitative easing (QE – the creation of money out of thin air with which to purchase bonds) since 2008 and – in particular – over the last two-and-a-half years.

A brave approach would have been to hike the Bank Rate in steps of 1%.

Yes, it would have crashed demand, but that’s exactly what is needed to bring inflation under control.

That is essentially what the Federal Reserve did under the chairmanship of Paul Volcker at the end of the 1970s and the beginning of the 1980s – when that central bank dealt with inflation in the United States.

Now, we have the double-digit inflation that we’ve been telling you about now for over a year.

In fact, over a year ago I said that the Bank of England needed to raise rates fast to get inflation under control.

I think that Bank Rate needs to get to 5% or 6% before the problem gets out of control.

That might seem like a massive leap from the current Bank Rate of 1.25%. However, it’s necessary to avoid inflation heading closer to 20% – by which time we’ll really have problems.

Either way, this is all coming to a point. It’s all leading to something else we’ve been saying is necessary to stabilise the economy…

The recession we have to have

In November last year I wrote to you saying,

In mid-1990, Australia was in the depth of a deep recession that lasted the better part of a year. Unemployment shot up into double digits, there were failures in the financial industry…and even a commercial property bubble bus that the Reserve Bank of Australia estimated cost the economy around $9.2 billion.

It was (according to the Australian Treasurer, Paul Keating), “a recession that Australia had to have”.

Well that’s exactly what the UK has to have now.

I went on to say in November last year that,

I expect that soon enough rates will rise, high – indeed, really high to the extent that unemployment will shoot higher and that recessions will come. They’ll be deep, long and tough because that’s what’s needed to right the troubled ship that is the global economy.

We’re at the start of all that now.

Unemployment will rise. It is inevitable.

The country will be in a recession. It is inevitable.

And this will be the outcome in much of the world. The United States is already in recession, and official interest rates are at least ratcheting up faster than here.

Also, don’t forget that by the time a recession is officially announced, that six months will have passed of being in a recession.

Official recessions require two consecutive quarters of negative growth.

That means by the time its official, six months have passed of a recession. This is why reactionary monetary policy is half the problem with central bankers.

So, recession is coming, rates are rising. These are inevitable facts of our world right now.

Rising rates and a recession can be good

The bad times will not last forever.

As we did in the  1990s, we will come out the other side of these periods.

Well we should come out the other side. There are still problems that we need to address.

For instance, there is the expectation of wages rising at pace with inflation. This is one of the great fallacies of modern times.

That’s why militant unions demanding massive pay increases during these periods doesn’t actually help at all: it worsens the problem and hinders the solutions. It will lead to more unemployment.

It ends up driving unemployment up when employers can’t stay solvent without cutting staff. The expectations of wage growth are out of sync with the realities of the state of the actual economy.

Nonetheless, recessions sound bad, and long protracted ones sound really bad.

But recessions can be good, if it helps realign an economy and gets everything back into a frame of normality again.

So, are we in a recession? Yes. Is it all bad? No. It will present opportunities. Is the time to move now? Not necessarily. But get ready, be prepared and keep one eye on the thing no one’s actually talking about right now… the recovery out of this mess.

Until next time…

Sam Volkering
Editor, Exponential Investor