Americans Are More Pessimistic Than Ever: 81% of Them Believe in a Recession by the End of 2022.

Economists feel the same way.

Credible voices are increasingly predicting a recession in the United States. While full employment is back and the consensus among economists is for growth this year to be close to 3 percent, the prediction sounds alarmist. What's even more surprising is that a majority of Americans agree with this view.

According to a recent poll, 81% of Americans see this scenario materializing even before the end of 2022.

For months now, the worst inflation in 40 years has been reducing their purchasing power:

And since the recent sanctions against Russia, Americans no longer believe that soaring energy, food, rent, and transportation prices will dissipate in the summer of 2022.

Fed shifts monetary policy to try to curb inflation

By announcing a long series of interest rate hikes, the Federal Reserve is trying to break inflationary expectations that are fuelling a spiral of wage, cost, and price increases. Its leaders maintain that demand and hiring are strong enough to withstand these multiple turns of the screw.

However, even in a country that does not depend on Russia for gas, oil, wheat, or steel, forecasters see growth dipping below 2% in the first quarter of 2022 at an annualized rate. After a spectacular 7% growth in the last quarter of 2021, the deceleration is going to be brutal.

The Fed and the Biden Administration are accused of having gone too far in flooding America with liquidity, to the point of creating too much demand. At first, the magic potion of zero interest rates and free government money, combined with vaccines, certainly made unemployment disappear and consumption rebound. But this hard drug also triggered an alarming inflation rate of nearly 8 percent.

The battle against inflation must now be waged in the context of the return of the Cold War. The sanctions against Russia are causing a resumption of price increases for raw materials and prolonging the disruption of production chains. Worse, we must resign ourselves to a rise in unemployment, which will hardly be cushioned by budgetary spending, given the 30% jump in public debt over the past two years:

Disinflation has always ended badly since the early 1950s

Larry Summers, Bill Clinton's former Treasury Secretary, does not mince words:

“I believe that the Federal Reserve has not internalized the enormity of its mistakes of the past year, that it is operating in an inappropriate and dangerous framework. My recent research with my Harvard colleague, Alex Domash, shows that conditions of high inflation, overheating and low unemployment are usually followed, and quickly, by a recession.”

Larry Summers' words sound like an “I told you so”.

By predicting last year's surge in inflation, Larry Summers has made many enemies on the left of the Democratic Party. He does not believe in the “soft landing” scenario sought by Jerome Powell, the central bank governor. The Fed boss hopes to calm demand and defuse the inflationary spiral, without a contraction of the economy.

Economists on the left, such as Paul Krugman, consider this path possible. According to them, inflationary expectations are not yet too high. Moreover, wages are not indexed to prices, as they were in the 1970s. The stagflation scenario of the 1970s in America can therefore still be avoided.

Another Larry, the very Republican Larry Lindsey, former economic advisor to Presidents Reagan and Bush Sr:

“Demand is too high. This comes from the March 2021 stimulus package, at which point inflation took off.”

This Fed veteran reminds us that history is littered with failed soft landings:

“We're going into a recession in the next quarter. There has never been a significant disinflation since the early 1950s without a recession.”

The Fed's monetary policy has made a recession inevitable

Bill Dudley, New York Fed boss from 2009 to 2018, agrees with both Larry's verdict, judging that “the Fed has made recession in the United States inevitable”. Now a professor at Princeton, he rejects Jerome Powell's arguments to exonerate himself. His “innovative” policy, set out in August 2020, consisted of maintaining a zero interest rate as long as inflation was not permanently above 2%. It was supposed to combat underemployment and inequality while stimulating demand and hiring.

The experiment went awry as Dudley observes:

“With unemployment very low (3.6%) and inflation well above the Fed's 2% target, in order to restrain inflation sufficiently, the Fed is going to have to push unemployment higher. Yet the Fed has never achieved a soft landing when it has had to push unemployment significantly higher.”

Over the past seventy-five years, every time U.S. unemployment has risen by 0.5 percent, a recession has followed. That's probably why more and more Americans are expecting a recession in America by the end of 2022. It seems inevitable because there always comes a time when the bill must be paid.

The time to pay the bill for the Fed's nearly two years of monetary policy seems closer than ever.