Larry Kudlow: The American economy is at risk

So I know we’re coming up to Thanksgiving – and it’s really one of my favorite holidays – and Thanksgiving is a major American historical story, celebrating the first harvest of our first settlers. This is a very inspiring and optimistic tale. One of the reasons I love it is that history is so optimistic, and I am an optimistic person who always believes that the spirit of the time when I founded the United States of America was the greatest.

But I have to take a step back from this optimistic scenario. I’m talking about the economy. I have to tell you that I see a number of important indicators pointing to a recession. I don’t like it, but that’s what I’m looking at. We may already be in a recession, but next year looks like an even deeper recession.

Now there is a way out of this mess, and I’ll get to that in a few minutes, but first some simple empirical factoids. I start with a big drop in the conference board’s leading economic indicator.

This is a very old series, but a highly accurate forecasting tool. It includes interest rates, consumer expectations, manufacturing, stock prices, building permits for new homes and other measures. There are 10 in total, and as you can see from the graph, the rate of change is going down completely.


The second is perhaps a more controversial indicator called M2 – it’s an inadequate measure of a country’s money supply, but it’s still something to keep an eye on. It was developed by the great Nobel laureate Milton Friedman. It is a monetary interpretation of the economy and tells us about future inflation and growth.

You can see from this chart that over the 20 years, M2 grew mostly modestly, and this was associated with an average inflation rate of 2%. Not everything, but something to do with low inflation. Then we come to the frenzy of the past two years, with massive increases in federal spending that have led to equally massive money printing by the Federal Reserve.

This was Joe Biden’s single biggest mistake. It raised inflation from about 1% to about 10%, so real wages fell for 18 consecutive months. This is the soft underbelly of the Biden economy, and now, as the Fed makes a belated correction for its earlier mistakes, the American economy is in grave danger.

All this could have been avoided, but could not be avoided, and now we face the threat of a severe recession next year. It probably started this year, but Milton Friedman argued that inflation is too much money chasing too few goods – and, oversimplifying, Uncle Sam created the money and then over-regulation, tax hikes and, of course, the war on fossil fuel production created. high barriers to production of goods.

Yes, we had a supply chain bottleneck from COVID, yes, Vladimir Putin is invading Ukraine, but the bulk of this economic mess is home grown based on the policies of big government socialism and large-scale central planning. Along with the leading indicators and the money supply, to add: The bond market has turned upside down with short-term rates much higher than long-term rates.

A very useful recession forecasting model developed years ago at the New York Fed that has very high accuracy. Basically, when the three-month TDI exceeds the yield on the 10-year Treasury bond, the probability of a one-year recession increases. Currently, the three-month bill is now at 4.30 and the 10-year is at 3.80. This is a very worrying sign.

Now, there are many other indicators I could point to: the big housing recession, the big slowdown in manufacturing, I don’t want to get any deeper in the weeds than I have to. No model is perfect, but I would suggest that focusing on leading economic indicators and the M2 and Treasury yield curve gives everyone a pretty decent idea of ​​where we’re headed. So inflation will slowly come down, but a recession could be very difficult.

Still, always optimistic, we should be able to do better in the future with regard to economic policy than we have done in the last two years. You’ve heard this from me before, but first and foremost, we need to open the plugs, permit, pipe, and process more oil and gas immediately. All of this will lower prices, promote jobs and economic growth.

John Kerry’s COP-27 Green New Deal, a socialist, redistributive, climate-remediation scheme – he’s trying to bribe poor countries not to use oil and gas. Joe Biden is shutting down coal plants all over America – dumber than dumb. New EPA regulations and taxes on clean-burning natural gas are equal fool than dumb, if such dumbness is possible.

Next, we need to reintroduce work pay and work requirements to able-bodied people on public assistance. ok? It succeeded in reducing welfare spending 25 years ago, resulting in a balanced budget.


Also, we need to make Donald Trump’s supply-side business tax cuts permanent. Then we need to curb Biden’s regulatory assault on all businesses—a policy that is literally choking the economy.

At the end of the day, we have less money to chase more goods under these policies. Less money follows more goods. Inflation will collapse, the economy will rise. We have done it in the past and we can do it in the future. It is time to act as stewards of economic prosperity. Let us replace the utopian socialist schemes that always lead to decline and poverty wherever they are implemented. I know we can right this ship, and I’m gonna say, Happy Thanksgiving – swallow, swallow, swallow – and that’s my riff.

This article is adapted from Larry Kudlow’s opening remarks for the November 22, 2022 edition of Kudlow.

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