The Atlanta Fed Just Forecast a Recession

Written by Luke Burgess
Posted July 6, 2022

It’s official. The Atlanta branch of the Federal Reserve now says it believes that the United States economy is in the midst of a recession.

Last week, the Atlanta Fed revised its second-quarter GDP forecast into negative territory.

On Thursday, the bank lowered its second-quarter GDP growth forecast from +0.3% to -1.0%. Then on Friday, the bank lowered its forecast again to -2.1%.

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The U.S. Bureau of Economic Analysis recently revised first-quarter GDP growth down to -1.6%. So a GDP decline in Q2 would officially mean a recession in America.

Most analysts have been predicting a recession for months, but many on Wall Street have said they don’t believe a U.S. recession will begin until next year. But it's more likely they were all simply being intentionally overoptimistic.

The Bureau of Labor and Statistics is scheduled to release initial GDP data for the second quarter on July 28. We will know then.

There are multiple factors that could trigger an economic recession, but it’s no secret that inflation and the Federal Reserve's interest rate hikes are the clear culprits.

Fed Chairman Jerome Powell recently said at a European Central Bank forum that America’s central bank is “strongly committed” to bringing down inflation.

“The way to do that,” Powell said, “is to slow down growth, ideally keeping it positive.”

To that end, the Federal Reserve has instituted multiple rate hikes in the past several months. Since March, the Fed has increased its benchmark rate by 1.5 percentage points and signaled for more hikes through the remainder of the year and maybe into 2023.

The Fed’s plan to control inflation is to slow economic growth. But rapid economic growth isn’t the cause of the inflation the country is experiencing today. So it doesn’t make much sense that slowing economic growth would be the best solution.

It makes much more sense to me to first identify the root cause of the inflation and from there begin to create a solution.

So what is the root cause?

That depends on who you ask.

If you ask the Fed, it'll tell you the root cause of inflation (and thus the recession) is rapid economic growth.

If you ask the Biden administration, it'll tell you the root cause is Russia and the greedy oil companies jacking up prices for profit.

If you ask the conservatives, they’ll tell you the cause is Biden’s COVID spending.

But I can show you the true root cause of all our economic woes right now. It’s a chart I’ve shown you many times over the past several months.

U.S. Dollar Supply
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In 1997, The Notorious B.I.G. recorded the now-classic East Coast hip-hop track "Mo Money Mo Problems." The chorus is one of the most well-known in rap. Even if you’re not a hip-hop fan, you’ve heard it:

I don't know what they want from me
It's like the more money we come across

The more problems we see

The lyrics explain how money and success can lead to problems, but they could just as well explain the economic theory behind the inflation/recession problem we face today.

It all starts with a simple supply-and-demand concept in what economists call the quantity theory of money (QTM).

The quantity theory of money states that the value of money (and price levels for goods and services) is directly proportional to the amount of money in circulation — aka money supply.

In other words, the more money that's created, the less valuable existing money becomes.

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In response to the COVID-19 pandemic, the U.S. Federal Reserve intervened to help curb economic damage. That support included emergency rate cuts down to 0% from 0.25% and the largest expansion to U.S. money supply in history.

In the first three months of the pandemic, the Federal Reserve jacked up the supply of U.S. dollars by 15%.

In total, the Fed has increased the U.S. dollar supply by more than 40% since the beginning of the pandemic.

I think it’s important to note here that the Federal Reserve has created this exorbitant amount of new money under BOTH the Trump and Biden administrations.

Conservatives really want to put the inflation blame on Biden and, yes, he is partly responsible. But the money printing took place under BOTH Trump and Biden.

In fact, if we’re counting, there was much more money created during the last year of the Trump administration than the entire time Biden has been in office.

From the beginning of the COVID pandemic to the end of Trump’s presidency (about 11 months), the supply of U.S. dollars increased by about $3.9 trillion. That increased the money supply by about 25%.

Compare that with the supply of dollars created since Biden took office (about 18 months), which is about $2.4 trillion, or a 12% increase in USD supply.

Either way, if one administration is responsible for the inflation and resulting recession we’re likely experiencing right now, both of them are.

Until next time,
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Luke Burgess

Luke’s analysis and market research reach hundreds of thousands of investors every day. Through his work with the Outsider Club and Junior Mining Trader, Luke helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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