Is This the Recession the US Needs to Have?

The world is now more in debt than it ever has been before. Between governments, companies and individuals, we owe $315 trillion to one another, which is roughly 300% of global GDP. At even a modest rate, that means 10% of all productive output for the entire planet is consumed by interest payments alone, which puts the global economy in a pretty vulnerable situation. Over recent decades, we've refined a system to smooth out natural economic booms and busts by pushing lots of money into the economy during bad times to get things moving again. What we arguably haven't got as good at though, is taking our foot off the accelerator during good times to make sure things don't go too far. The massive accumulation of debt this has resulted in is just one symptom of this problem, and controversially, it may not even be the biggest concern. We owe this debt to one another, one person's liability is another person's asset, and beyond that it's just numbers in a database. But this refusal to let the economy feel pain might be genuinely hurting our long-term prosperity. In the past, hard economic times cleared out unproductive businesses and offered an opportunity for economies to reallocate scarce resources to more promising areas. Today, in an age of meme coins worth more than centuries-old car companies, and endless businesses raising billions of dollars for no clear reason, it's understandable why more economists are calling for a bit of cold water to sober up the exuberance. It's understandable to see why we may not think that resources are necessarily being allocated in the most efficient manner. And oh boy, what luck, a trade war combined with the growing number of actual wars in globally strategic regions could be exactly that opportunity. But is this the recession that we need to have? Will it do any long-term good? And finally, will we be willing to let it get that bad? So as you've probably been following in the news in the past weeks, trade wars are on again, especially between China and the US. The US just rolled out a new tariff on Chinese goods, saying it's about trade imbalances and national security. And depending on where you get your news, those recent tariff hikes on China are either a brilliant geopolitical masterstroke, or a reckless move that could spiral into a global recession. Tariffs aren't just policy, they're market signals. But like so many issues today, they're distorted by partisan spin, a major risk to global economies, and your wallet. That's why our team relies on Ground News. They've built the only app and website showing us how stories are covered across the political spectrum, each source's credibility, and their financial backers, so we know exactly what angles are being ignored, and why. Personally, I love being able to switch editions and use their built-in translation tools to stay on top of global perspectives, because there are real financial consequences to missing the full picture. These narratives don't just shape public opinion, they shape policy, investment trends, and economic behaviour. But the best part? Ground News wasn't some new tool I had to learn, they're a better version of the doomscrolling I was already doing. One look at their blindspot feed, you'll see how many neutral outlets actually lean left or right, and why they avoid stories like these. Checking my biases to understand the broader economic landscape has never been easier. So I got you 40% off the same unlimited access vantage plan I've been using to track critical issues. Just click the link in the description below, ground.news slash explain, or scan the QR code on screen to bring the cost down to $5 a month. An admittedly really annoying feature of economics is the phrase, it depends. Ask an economist what 1 plus 1 equals, and they'll tell you, it depends if both of those ones are acting in their own rational self-interest. This also extends to hard and fast definitions on things as universally important as what a recession is. For modern industrialized and capitalist economies, that definition is typically something along the lines of a sustained period of weak or negative growth in real GDP, which may or may not be accompanied by a significant rise in the unemployment rate. Some institutions will draw a line and say that a sustained period is something specific like two quarters or six months, but even that varies a lot. It's a bit wishy-washy with lots of wiggle room and lots of variation, and that's partially by design because unlike saying bankruptcy, just the mention of recession will cause things to happen. Now another thing that's worth looking at is what negative growth actually means, because it's really not very intuitive. Growth is usually measured using gross domestic product, which is the sum of all final goods and services produced in an economy in a given year. Since the industrial revolution, it's been more or less the assumption that new technologies, more people, and more global cooperation would allow us to make more stuff in a given year than the year before. And for the most part, that's been true. Over the last 250 years, the global economy has produced on average about 3% more stuff every year than it did the year before. Now that might not sound like a whole lot, but through the magic of compounding returns over a long time period, the world today produces about 150 times more stuff every year than it did back at the beginning of the industrial revolution, all with a population roughly seven times larger. Which means the average global citizen today has access to about 20 times the goods and services of someone 250 years ago. Yes, of course, that's not spread evenly, but most people are doing much better overall. Now in that time, there hasn't actually been smooth, consistent growth. There were interruptions where in given years, we actually ended up producing less than the year before. Now some of these were pretty simple to understand. Huge natural disasters, pandemics, or other crises had a tangible impact on the industrial process that made it harder to make stuff. I'm assuming most of you watching lived through the global pandemic, which shut down factories and slowed shipping, which is a classic example of a supply shock. If you didn't live through that, I don't know what you're doing here. Go and watch bluey instead. It's much more interesting. Anyway, there have also been years where we produce less stuff than the year before without any clear reason as to why. A Martian watching over us from space wouldn't have seen any reason why the economy took a massive hit in 2008, for example. But these are the more common types of recession these days, and they are largely caused by a slowdown in market activity, which scares people and businesses into holding onto their money, which in turn leads to a slowdown in market activity, because businesses aren't going to make stuff if nobody is going to buy it, and people aren't going to buy as much if they may or may not have a job in the immediate future. This is why these are called demand-side shocks. Intuitively, these don't make as much sense. We have the capacity to make more stuff, but we choose not to. However, intentional or not, they do serve a very important purpose, which is relocating resources away from unnecessary, overvalued, or inefficient parts of the economy back towards areas with more promise, so that theoretically the economy can grow back bigger and stronger. The tech bubble popping in 2001 started with a significant correction in the stock market, but that fear did spread out more broadly into the economy as people lost their jobs with these companies and the businesses that in turn relied on the spending from those employees who also lost customers and so on. Now recessions are brutal, especially for average people who are mostly just unwilling passengers along for the ride. But from the perspective of a purely cold-hearted economist, this crash and the downturn in productivity that came with it did clear out a glut of really dumb companies writing off easy investor money that had little to no hope of ever reliably adding value to the broader economy. As these questionable businesses shut down, it left more investor capital, advertising space, and human talent to be used in businesses with more promise, which gave rise to the major tech companies we have today. Now whether they have been good for society as a whole is up for debate, but they are certainly highly productive. A similar sort of thing happened in 2008. That recession was kicked off by major structural issues in the way that home financing was handled, but it did shift the economy away from over-financialized real estate and made other types of investments more popular, which in theory gave opportunity to businesses that made things instead of just real estate. In Canada, and here in Australia, we never really experienced the full impacts of this recession because our banking system was far more heavily regulated and because housing had not yet become such a large speculative asset class. But not getting this big shake-up is largely cited as one of the reasons why our real estate markets are so out of hand today. Darwinism in the social sciences is always a bit ick, but a recession really is like a predator thinning the herd. Without them in complete isolations, the herd would grow too fast and exhaust all of the food in the area leading to widespread starvation and limiting the future growth of the group. Now the important thing to note here is that this doesn't mean that regular recessions are a good thing, or even a necessary evil, because there are more efficient ways to clear out the dead wood. Recessions don't only kill off underperforming businesses and re-motivate workers or else, they also kill off plenty of otherwise healthy businesses, especially new businesses that might only just be getting going and are still relying on investment. To stretch the analogy, there are plenty of young and even very fit and healthy wildebeests that can be eaten by predators if they just happen to be in the wrong place at the wrong time. Something like the housing crisis of 2008 for example didn't need to end up in a recession. With better economic policies around lending regulation and more of an incentive for people to invest into productive industries instead of just flipping houses, this didn't need to happen. Similarly with something like the dot com bubble. Speculative exuberance is very hard to control because as humans we are very stupid, but an extremely hot market can be cooled down in other ways that doesn't involve a spectacular crash which in turn takes the rest of the economic system out with it. So that's why recessions happen and a hidden good that they can do for long-term economic efficiency, but it's also worth addressing why they are so painful, or more specifically who they are really painful for. Just making less stuff than what was made the quarter before theoretically shouldn't be disastrous news. What's more is that it doesn't even necessarily mean we are losing any tangible wealth. Let's say an entire economy is encapsulated in just one business making widgets. If this business normally makes 10 million widgets every quarter, but for the last two quarters it's only made 9 million widgets, then by the most clinical definition this economy would be in a recession. But here's the thing, the economy doesn't automatically throw every widget into the incinerator at the end of every quarter. Goods can accumulate and some last a very long time providing wealth for their extended existence. In this example the economy might be making 1 million less widgets than it did the quarter before, but it still has 9 million more widgets overall. GDP is a flow, it measures how much stuff is made in a given time period. Wealth is a stock, it should be the accumulation of everything that's been made and has not yet been consumed. If someone builds a house there will be a big spike in GDP in the quarter it's built, because, well, houses are expensive and producing one is a big undertaking. But the next quarter, even though we can't record that house on our GDP figures, doesn't mean that the house isn't still giving a family a place to live. So then what is it really that makes the recession so scary in our modern economies? Well the first thing is that of course, not everything that we produce is a durable good that will last for a long time. Some goods are consumed relatively rapidly, like food, medicine, personal care products, and other general disposables. Beyond that, even things that can last indefinitely require a lot of maintenance just to keep standing. We actually made an entire video last year about how in our modern built-up world, just rust alone costs the global economy more than the entire nation of India produces in a year. So unfortunately, even for those long-term goods, we need to keep producing just to maintain them. Beyond that, the much larger category is services. Things that have value but are by definition consumed as soon as they are made. Accounting work, schooling, tradesmen fixing and replacing rusted out infrastructure. These are the things that have value but need to be repeatedly produced to maintain the living standards that they make possible. Most advanced economies actually produce far more value in services than they do in physical goods, so a slowdown in these does mean that immediate sacrifices need to be made by someone. Normally that's the people that were producing these services but end up losing their jobs producing services because no one was consuming services, and now they can't consume services either because they don't have a job. But beyond this, there is one other reason why we have become so worried about recessions, which leads us up to today. Most advanced economies in the world today are probably in a recession. Again, it really depends on exactly how that is defined. We have probably produced fewer goods and services over the last two quarters due to uncertainty around tariffs from the USA, which is simultaneously the world's largest consumer market and a major industrial power. For now, unemployment looks relatively low, but with endless news about layoffs, that is likely to be adjusted as more data comes in, because, oh yeah, as if economists weren't annoying enough on this issue already, the time it takes to collect and make sense of economic data on the scale of entire countries means that often those countries are in a recession for a year or more before it is officially recognized. So then what would this maybe session be correcting? Well, the idea is that just like the economy was overinvested in silly tech stocks in the 1990s and mortgage securities in the early 2000s, the world is now overinvested in globalization, which has made a lot of places a lot of money, but has come at the expense of workers who have had their jobs outsourced. Some have argued that instead of waiting for this to eventually collapse under its own weight, it's better to push it over. Now that might be a generous interpretation of policies that have for now for the most part been entirely walked back, but is the damage done? If recessions really are a necessary evil to rebalance the economy and make sure that weak, wasteful areas are culled, then this is less like a hungry lion picking off weak stragglers and more like a poacher machine gunning the entire herd. It's not just bad businesses and workers that are going to get taken out by this. Stability and confidence takes a long time to build up and it can be lost almost instantly. Businesses are not going to make major investments until they have certainty about which way these trade wars are going, but in the meantime that will have other consequences. The other reason that modern recessions are so scary is that debt pile that has been slowly building up. The world has a lot of it now, and while it's helped to inflate a lot of assets, it's also helped to inflate a lot of assets that aren't necessarily that productive. If cash is the lifeblood of the economy, we might be starting to get higher blood pressure, which means any little tremor becomes a lot scarier. All other things being equal, it is okay if a country produces slightly less stuff, but a lot of lending is predicated on the idea of a continually growing economy, and if it doesn't, those lenders are still going to want their money. Now one of those borrowers that looks a little bit shaky is the US federal government itself, the most indebted institution in the history of humanity in absolute terms. There was also the argument that this induced recession was a way to lower interest rates before a lot of old debt gets rolled over, but instead it's just scared those lenders by reintroducing the possibility that the US could default, which has actually made borrowing more expensive. Now heightened indebtedness is something that a lot of people are struggling with. A lot of people don't have any wealth to fill in these temporary debts. For the people that do, it's a little bit scary as the nominal value of their assets will drop, and if they are in directly impacted industries they can lose, for the most part it's either a buying opportunity or business as usual. But a lot of producers in the economy are making stuff so that they can consume stuff so that they can continue to make stuff, what a normal person might call living paycheck to paycheck. Even a small reduction in total output can hurt these participants disproportionately. Could this be spun as the recession that we need to have? Well, it depends. The economy arguably has some silly features at the moment. Is enacting policies that have a very high chance of inducing a recession the right way to fix them? Well, no. That's like inducing a coma to treat a headache. Probably a bit of an overreaction, not necessarily that well targeted, and likely to cause more problems than fixes. Now we have made an entire video on the exact mechanism of these, let's say, constantly fluctuating advanced trade negotiations. As always, we didn't want to repeat too much here, but you should be able to click to that video on your screen now. Thanks for watching mate, bye.