Since Joe Biden took office last year, the world has seen inflation, high gas prices, a top-down push to force the nation to adopt renewable energy, and a geostrategic crisis in Europe. The only thing Biden needs to fully reinvent the 1970s are bell-bottoms, disco, and a recession. Unfortunately, the latter appears to be on the way.
A recession takes place when the economy shrinks for two quarters (or six months) in a row. Despite numerous economic woes, the U.S. economy continued growing in the third and fourth quarters of 2021. But trillions of dollars of U.S. government spending in the name of COVID-19 relief (millions of which were squandered on fraudulent purchases of sports cars, luxury homes, and even allegedly used to finance a contract killing) drove up inflation to its highest rate in 40 years. To fight inflation, the Federal Reserve has indicated it will raise interest rates, which it has pegged at near-zero levels since March 2020.
The Fed’s return to tight-money policies alone had economists fearing a recession. Last month, George W. Bush’s economic adviser, Lawrence Lindsey, put the likelihood of a recession at over 50%. Lest one think this is partisan, so did Lawrence Summers, the Treasury Secretary under President Bill Clinton and an economic adviser to Barack Obama. The only question for many prominent economists is the timing.
Before the outbreak of military hostilities between Russia and Ukraine, economists had predicted a U.S. recession in 2023, 2024, even as late as 2025. Summers predicted a recession within “the next 30 months,” according to Forbes. Last December, Deutsche Bank’s chief economist Jim Reid said “the probabilities [of a recession] will build from 2023 onwards if history is to be believed.” At the same time, Chapman University economists predicted a recession would break out next year.
But the economy responds to world events, particularly a war and its attendant sanctions against an oil-rich nation. “It seems obvious that the odds of recession are now well above average here in the United States,” wrote Gerard MacDonell, an analyst at 22V Research, on Monday. “Recession risks are rising,” agreed Mark Zandi of Moody Analytics on Wednesday. He put the odds of an economic contraction at “[o]ne-in-three over the next 12-18 months.”
This darkens the inflation outlook, as inflation expectations threaten to become unhinged. They are already high. See 5-year breakevens. The Fed would have a Hobson’s choice, but would tighten more aggressively. Recession risks are rising. One-in-three over the next 12-18 months.
— Mark Zandi (@Markzandi) March 8, 2022
Others proved more pessimistic. The Bank of America’s Michael Hartnett forecast that within the “next six months, [Federal Reserve interest] rates shock morphs into recession shock.”
Worse yet, some believe the recession has begun. “I’m basically a data scientist, and I work in commodities, and I think we’re already in one,” Campbell Faulkner, senior vice president at OTC Global Holdings, told FOX Business last Thursday. “I just think because of the lags in the data, we’re not going to see it yet.”
What’s driving all this? Oil and inflation.
The war between Russia and Ukraine has caused already-rising gas prices to increase. Russia supplies 11% of the world’s oil, including nearly five million barrels of crude oil a day as of 2020. On Tuesday, President Biden announced he would ban all Russian oil imports to hold President Vladimir Putin accountable. While most Americans support the sentiment, it is a policy that will raise their prices and potentially lead to a recession.
If the U.S. and Europe ban Russian oil, investment banks Goldman Sachs and Barclays predict oil prices will increase to $200 a barrel — nearly a $60 increase. Rystad Energy predicts $240 a barrel. “Oil at $240 per barrel would trigger a global recession,” said Rystad’s Bjørnar Tonhaugen.
Increasing energy prices affect everything in the economy — but they fall hardest on average Americans. “It doesn’t matter if the price of gas is $5 or $50 for [Bill] Gates or [Jeff] Bezos, but for most of us, it’s a big deal,” Campbell Harvey, a professor of finance at Duke University, told WRAL.com.
Oil need not reach that price to trigger an economic contraction. “Nearly all post-war recessions have been preceded by oil-price shocks,” wrote economists at the University of Warwick in 2007, concluding that “oil-price spikes can be a source of recessions.” Spikes in the cost of oil in 1973, 1979, and 1990 all presaged recessions the following year. “Disruptions to oil markets and recessions have gone hand in hand throughout the post-war period,” concluded the Congressional Research Service in 2010.
“The Biden administration has to be more successful at convincing folks that they’re not out to crater Russian oil exports,” said former George W. Bush adviser Bob McNally, the president of Rapidan Energy Group. “As long as there’s a fear … that we’re trying to go and try and block all those exports, the economy is heading towards a recession.”
The oil price hike also need not occur in the United States to cause a U.S. recession. Moscow has threatened to withhold energy from western Europe, whose green energy policies have left them dependent on Russian fossil fuel imports. “My greatest fear is that these prices have risen so fast that you cause a recession in Europe and Latin America, that rolls on into the United States,” Andy Lipow, the president of Lipow Oil Associates, told CNBC on March 9.
Key Biden administration officials have said Americans could avoid spiking gas prices by purchasing electric vehicles (EV). Transportation Secretary Pete Buttigieg said on Monday, “Clean transportation can bring significant cost savings for the American people as well. Last month we announced a $5 billion investment to build out a nationwide electric vehicle charging network, so that people from rural to urban to suburban communities can all benefit from the gas savings of driving an EV.” The White House tweeted on Thursday, “When we have electric cars powered by clean energy, we will never have to worry about gas prices again. And autocrats like Putin won’t be able to use fossil fuels as weapons against other nations.”
When we have electric cars powered by clean energy, we will never have to worry about gas prices again. And autocrats like Putin won’t be able to use fossil fuels as weapons against other nations.
— The White House (@WhiteHouse) March 10, 2022
The Biden administration appears to be blissfully unaware that the lithium-ion batteries which power those electric vehicles require nickel — and Russia is a key exporter of nickel. While the administration may not know this fact, the markets do. Nickel prices soared 90% on Monday, to $55,000 per metric ton; the price then doubled again Tuesday, settling at more than $100,000 per ton. The price so concerned traders that the London Metal Exchange suspended all trading on nickel later on Tuesday. Analyst Adam Jonas of Morgan Stanley wrote that Monday’s price alone represents “a $1,000 increase in the input cost of an average EV in the U.S.” He did not say how much that would raise the consumer’s cost.
All of this ignores the concern economists first raised when they talked about recession: The Federal Reserve tightening interest rates. A temporary increase in the price of oil could force an even greater contraction, leading to a U.S. recession. “A surge in energy prices could require even more aggressive tightening than would otherwise have been the case, increasing the risk of the central bank accidentally tipping the economy into recession,” wrote Michael Strain of the American Enterprise Institute (AEI) last Thursday.
None of this is set in stone. As the old joke goes, “Economists have predicted 30 of the last five recessions.” But the signs are bad, and the poor and middle class will be the first to suffer from policies imposed by the rich and powerful.