Market Insights

Who Do You Trust — Our Government or History? 

Gold Alliance disclaimer
Do you trust the government when they say we aren't in a recession? Take a look at history before making your decision.

When the Bureau of Labor Statistics reported an inflation rate of 1.7% in 2020, many consumers questioned its accuracy.

They knew that their dollars were buying less at the grocery store and the gas pump. They felt the impact of rising prices. But that wasn’t reflected in the official data and the narrative of our government.

The Fed’s response: too little, too late? 

The US inflation rate started soaring in early 2021, but our government still ignored the concerns and claimed it was temporary. Here’s President Biden in July 2021: 

“Our experts believe and the data shows that most of the price increases we’ve seen [were] expected and [are] expected to be temporary.”  

Federal Reserve Chairman Jerome Powell also pooh-poohed fears of inflation: 

“As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal [2%].” 

Inflation erupted in full force in the second half of 2021, but the Fed waited until March 2022 to react, raising the federal funds rate a paltry 0.25% while Chairman Powell assured the public that “the economy is very strong and well positioned to handle tighter monetary policy.”  

But faced with the harsh inflation reality, Secretary of the Treasury Janet Yellen — who had initially called the risk of inflation “small” and “manageable” — seems to comprehend that official did not “fully understand” the shocks that “shook the economy so badly.” And Fed Chair Powell recently said: “We now understand how little we understand about inflation.” 

So, after realizing inflation is much worse than the Fed hoped, we’re now two 0.75% rate hikes further into the Fed’s fight against inflation, and Powell has told Congress that the Fed is determined to bring down inflation, which will likely mean more rate hikes. And more rate hikes, based on our history, will most likely slow the economy and send us into a recession. 

But never fear! The Fed and the White House are back to predictions again, and their latest prediction is that a recession won’t happen. James Bullard, President of the Federal Reserve Bank of St. Louis, said in mid-July that he is “a little skeptical that we’ll get into a recession.” He believes that the economy is strong and that the Fed has the right policy to bring inflation down to 2% in 18 months. 

Biden is on the same page, telling reporters on July 25 that “We’re not going to be in a recession.” 

That begs the question: If our government doesn’t understand inflation, can we trust them to understand recession? 

The historical link between inflation and recession 

I’ll let you answer that question for yourself. Outside of the Fed and the White House, however, more and more economists and analysts are warning of a recession. And if we look at the historical link between high inflation and recessions, the data suggests that a recession will follow the Fed’s heavy-handed approach to monetary policy: Since 1975, the economy has entered a recession within 18 months of inflation rates reaching 5%.  

Chart showing what happens to the economy after periods of more than 5% inflation.

The reason is very simple: Consumer spending is needed in order to keep the economy going and avoid a recession. But inflation is hurting Americans’ pocketbooks. Consumers need to put a huge chunk of their disposable income towards essentials like gas and food, so they have less money to put towards other increasingly expensive products and services.  

Since consumer spending makes up about 70% of GDP, falling disposable personal income means that consumers have less money to spend the economy out of recession. 

According to the Bureau of Economic Analysis, real disposable personal income decreased 7.8% in the first quarter of 2022, which followed a drop of 4.5% in the fourth quarter of 2021. 

A chart showing the downward trend of disposable income in the US since the second quarter of 2020.

Just how severe is the collapse? It’s worse than in 2008: 

This chart shows the Real Disposable Income of US households from January of 2007 to January of 2022.

So, if demand is going to save the economy from a recession, it’s not going to come from consumers. 

Are we already in a recession? 

A rule of thumb is that “two consecutive quarters of decline in a country’s Gross Domestic Product constitute a recession.” GDP dropped 1.6% in the first quarter of 2022 and 0.9% in the second quarter, so following that definition we’re already in a recession. 

The Fed’s James Bullard chooses to dismiss that: “We’re not in a recession right now. We do have these two quarters of negative GDP growth. To some extent, a recession is in the eyes of the beholder,” 

Perhaps the Fed actually thinks that we aren’t in a recession or headed towards one. Just like they thought inflation was nothing to worry about until they could no longer dismiss it. Either way, choose who you trust and decide whether you need to take action.