Økonomiske cyklusser, inflation og recessioner

There is an expression in economics “economists have predicted twelve out of the last two recessions”.

This is because economic health comes in cycles, typically every ten to fifteen years a two year recession will occur. So you can predict it the way you can predict rain. However, economic data is a lagging indicator meaning you’re driving using only the rear view mirror so often your predictions are inaccurate. Bill Clinton famously ran on a recession in ‘92 and it was over before he even took office.

The most basic economic indicators are unemployment and inflation. Theoretically the way to address unemployment is to enact monetary and fiscal policies which stimulate the economy (increase money supply) and the way to address inflation is to decrease the money supply which as a byproduct is typically thought to raise unemployment. In 1974 an event known as “stagflation” occurred with high unemployment and high inflation. This was one of the worst economic crises in part because of the response and has a lingering effect on the way we view economics today.

Now currently we are experiencing what many call high inflation. However, there are two types of inflation. Supply and demand inflation. Supply inflation is caused by low supply and demand inflation is caused by high demand. Now demand inflation would indicate a future recession because the theoretical way we would address this is lowering demand, or lowering the money supply in the economy, which would be done by causing a recession. There are many ways the government and the federal reserve could do this, they could cut spending, raise interest rates, raise taxes, raise withholding requirements for banks significantly, and other more nuanced approaches. However, there is also supply inflation caused by low supply. This seems to be the cause of the inflation we are seeing which can theoretically be corrected. Supply and demand inflation are not mutually exclusive.