Economist Murray Sabrin Sees Recession Coming

Murray Sabrin, PhD, an emeritus professor of finance at Ramapo College of New Jersey, thinks that the next recession might be right around the corner and that the time in now to start preparing for an economic downturn.

A number of leading economic indicators are pointing to rough times ahead, but the good news is that there is still time to prepare. Dr. Sabrin thinks that the next economic downturn could arrive in late 2023, and that the US Central Bank (FED) may not be able to intervene in markets to the degree it was able to in previous recessions.

Sabrin was the New Jersey Libertarian Party nominee for governor in 1997 and twice sought the Republican nomination for U.S. Senate. His newly released book is Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide. Grit Daily asked Sabrin about the potential for a recession, and what it might mean for regular people, and the wider economy.

GD: The FED was able to create a massive rise in many assets in the Post-COVID era, why would it be unable to support the economy this time?

Murray Sabrin: At this time with price inflation at a 40 year high, the Fed will be tightening money and credit conditions to prevent price hikes from accelerating. When price inflation subsides, the Fed will then turn on the monetary spigot to juice the economy and the financial markets. In other words, the Fed’s easy money policies are always followed by its tight money policies, giving us the boom/bust cycle. Take away the Fed’s ability to manipulate interest rates and create money out of thin air, the economy would grow fairly steadily as savings/investments and consumption would not be subject to wild swings during the Fed-created business cycle.   

GD: The jobs numbers (BLS) that are used by the government and mainstream press clearly don’t represent reality. The masses of homeless on US streets are evidence of this. What would a modern recession look like? 

Murray Sabrin: When the recession unfolds, the sectors that “boomed” during the easy money phase — commodities, intermediate products such as machinery, housing, auto sales — would correct, that is, the cheap credit would dampen the demand for these products. As workers are laid off in these sectors, the retail sector would also feel the effects of tight money. However, the good news is the economy has been undergoing a technological revolution, so to speak, with e-commerce, artificial intelligence and other innovative breakthroughs that could last for decades, thus dampening the ill effects of the next downturn. In other words, there are always  secular trends in the economy that are relatively insulated from tight money policies. Nevertheless, for most companies, being prepared for a recession is typically not on their radar screen, but it should be.  

GD: From the standpoint of a US business, what would the effects of a recession be? What could be done to prepare? 

Murray Sabrin: Businesses that are in economically sensitive sectors have to monitor their sales and expenses closely to determine if their company’s future may have hit the proverbial bump in the road. Entrepreneurs should have contingencies in place if it appears the economy is rolling over and there may be disruptions in their supply chains. One of the best leading indicators of an upcoming recession is when short term rates rise above long-term rates, which is an inverted yield curve. The lead time for a recession when the yield curve inverts is usually about 12 months.

The financial press reports on the yield curve constantly, and it can be monitored here, and here.

The former chart is the one that is usually reported in the financial media. The latter one reflects the Federal Reserve’s ongoing tightening of credit conditions.

Companies should consider setting aside cash from their operations as the year unfolds, which would provide them with the ability to pick up assets on the cheap when producer prices and other prices fall during a recession. Famed investor Warren Buffett, CEO of Berkshire Hathaway, has squirreled away, so to speak, more than $140 billion in cash on the company’s balance sheet, a huge amount of liquidity. Is he waiting for the next stock market decline to pick up quality stocks at bargain basement levels? Time will tell.

GD: Policymakers at the federal level in the USA no longer work for main street or the shrinking middle class. It’s clear that the top 1% of the economic ladder has an outsized influence in policy decisions. How does this impact government policy in a recessionary environment? 

Murray Sabrin: Wall Street is the biggest cheerleader for easy money because it causes asset prices to increase substantially during the boom. When the recession unfolds and the stock market tanks, the 1 percenters know the Fed will “have their back” and inflate to raise asset prices. We’ve seen this play out over and over again since the Fed was created in 1913. Recently, the Fed inflated the supply of money credit after the dotcom bubble burst in the early 2000s and then in the depths of the housing bubble in 2008-’09. And in 2020, the Fed went wild to deal with the government lockdowns and added more than $4 trillion to its balance sheet while the M2 money supply increased 25 percent. The new money has been spreading through the economy causing prices to rise — the law of supply and demand is working as usual — for the past year, and prices will probably accelerate in 2022 unless there’s a huge burst of production that will “soak up” the excess liquidity that’s been injected into the economy.

GD: Let’s talk about the “bust.” Can you lay out a few things that are likely to happen in the next recession?

Murray Sabrin: The next recession should occur in 2023 and no later than 2024 as the Fed begins to tighten money and credit to dampen price inflation. There may be a period known as “stagflation,” where the economy contracts but price inflation is still high. The lead time from tight money conditions to a recession is variable, but should be obvious when the unemployment rate begins to increase.