2023 Economic Outlook, Part One


This is the first part of an expanded version of my remarks at the LP Mises Caucus podcast on January 1.  Gene Epstein and I discuss the US economy beginning at the 2-hour 17 minute mark.

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The business cycle or the boom/bust cycle is caused by the Federal Reserve driving interest rates below what they would otherwise be in a free market.  Artificially ultra-low interest rates create an unsustainable boom that plays out in the economy where housing sales and prices, auto sales, consumer credit and capital investment are affected by a “frenzy” of activity that cannot last forever.  Hence the boom phase of the cycle is a direct result of “easy money.” 

The stock market, commodities and other assets also benefit from the Fed’s money creation.  When the economy “overheats” and price inflation accelerates like it did in 2022, the Fed begins to raise the fed funds rate, which it controls by buying and selling government securities, to dampen the rise in consumer prices.   

The following charts illustrate how the Fed’s actions unfold in the economy.  For a short explanation of the business cycle see Murray Rothbard’s The Case Against the Fed and other essays by him and others.    

The Fed has created trillions of dollars since the Great Recession.  This chart reveals the Fed purchased $8 trillion of Treasury securities and mortgage-backed securities.  How?  By having an unlimited checking account!  Recently the Fed has begun reducing its holdings of debt.

When the Fed buys and sells debt, it can then manipulate short term interest rates, the fed funds rate. The long-term chart shows the rate rising sharply in the past year, after being near zero for several years since the Great Recession. 

And when the Fed begins to raise rates, typically the yield curve inverts, that is, short term rates go above long-term rates. An inverted yield curve is an excellent predictor of a recession.  And the yield curve of the 3-month T-bill and the 10-year T-note has a good track record. The gray vertical bars are periods of recession. 

The economic implosion in 2020 because of the Covid lockdowns was not a typical recession although the bust phase of the cycle was upon us because the yield curve inverted in 2019.  When the economy was in a free fall early in 2020, the Fed reversed course and flooded the economy with trillions dropping interest rates to nearly zero and setting off another bubble in housing and other sectors.  In short, the Fed delayed the inevitable recession until now.

A recession begins from a few months to a year or more after the yield curve inverts.  Thus, if history is a guide, a recession should begin sometime in 2023.  The exact timing is impossible to know.  Whether the recession will be “mild” or severe depends how high the Fed raises the fed funds rate. 

In Part Two I will review the specific sectors of the economy and how they should perform during the recession.

Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle.  Sabrin’s autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022.

Murray’s Newsletter is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

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2023 Economic Outlook, Part Two