September 18, 2019 - Douglas Myser

Trade war may cause recession. If a recession is coming, what should we do ? Not what President Trump and his economists are thinking about. While there is no certainty that a recession is in the offing, a number of Wall Street economists see warning signs--especially an inverted yield curve for bonds, which means that short term rates are higher than long tern rates. This is not an infallible indicator, but it has often preceded a recession. And now the news that Saudi old fields have been damaged, causing the drumbeat of war to rise. Whoever damaged those facilities, the result is the biggest disruption to the oil markets ever. While markets like certainty, this event has the potential to surpass the trade war with China as a bigger potential recession event in recent memory. Together, both of these events, especially if war does break out, spell disaster for the markets and economy. Trade war may cause recession.

The economists also note that the current economic expansion is unusually long, now more than 10 years. There is no economic law saying that expansions die of old age, yet neither is there any reason to believe that the business cycle has been repeated. We are going to have a recession sooner or later. The Federal Reserve is doing what it can to forestall a recession--it has already cut short term interest rates and is likely to do so again at its next meeting. But that can only do so much when the world economies are slowing rapidly, and contagion is a real possibility. Add to this the disastrous effects of this administration's trade policy, which is weighing heavily on the stock market, and you have a recipe for recession that seems unavoidable. It's worth remembering that the Great Depression was aggravated by the Smoot-Hawley Tariff Act that raised tariffs on U.S. goods, provoked foreign retaliation and accelerated a worldwide chain of decline. That's a key reason why presidents of both parties have supported open trade instead of protectionism--until Trump

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