Is there a recession coming in 2022? How will it affect crypto?
- The US economy declined for two consecutive quarters – a previously reliable recession indicator
- The White House says the US economy is doing well, while many indicators point to a downturn
- Crypto adoption may rise as trust in centralized institutions erodes
As we transition into these uncertain times, it’s important to understand not only what’s going on in the market, but also how the economy as a whole is changing, and to what safe havens we may retreat to restore some stability. Unfortunately, we cannot know for sure. However, the fact that you’re here reading this and doing your research already gives you an edge. Let’s see if we can get to the bottom of what’s happening to get an idea of what to expect.
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Are they trying to rebrand a recession?
It is certainly easy for the average person to detect when the economy is struggling – like being unable to afford things previously affordable. Taking a broader view, economic health can be measured by three factors: inflation, unemployment, and economic growth. Whenever an economy is doing well, gross domestic product, the most comprehensive measure of economic activity, will rise. Weak economies will see their GDP fall – this is a no-brainer.
What is the state of the world’s biggest economy right now? After an economic decline of 1.6% in the first quarter, the US economy fell 0.9% in the second quarter, with inflation reaching a four-decade high of 9.1% in June and 8.5% in July.
In most countries, two consecutive quarters of negative growth are considered an official indicator of a recession.
However, the US government relies on economists at the National Bureau of Economic Research (NBER) for this assessment that is discussed in closed-door meetings. Usually, economists with political experience are selected for the panel and they announce recessions long after Wall Street does, sometimes after the recession is already over. In 2020, the group declared a recession only after 22 million jobs had been lost and output had plunged.
The committee emphasizes on its website that “there is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.”
However, ten out of ten two-quarter decreases in economic growth since 1948 have been officially characterized as recessions.
Moreover, the NBER claims that it avoids political interference by timing its announcements so that they do not interfere with elections. Does that mean the decision won’t be released until November? This seems to be the case.
There is no question that the R word is playing havoc on the current administration’s reputation, which is why they try to play down the economy’s red flags and soothe recession fears before the midterm elections. It is not always the health of the economy at this precise moment that determines people’s vote, but what direction they think it will take. That is why winning the economic messaging battle before midterms is so crucial.
A coordinated response from the White House to negative GDP growth figures in the second quarter was that there is no recession in the US economy.
“The unemployment rate is still one of the lowest we’ve had in history. It’s in the 3.6 area. We still find ourselves with people investing,” US President Joe Biden said before adding, “that doesn’t sound like a recession to me.”
This statement was echoed by top economic officials, including Treasury Secretary Janet Yellen, White House National Economic Council Director Brian Deese, and Federal Reserve Chair Jerome Powell. They all seem to be trying to project a sense of confidence, but it doesn’t seem to be working.
Even if we’re not technically in a recession, does it matter much if a lot of people feel the economy is not performing well? The majority of Americans, according to recent surveys, think the US economy is in a recession.
A recession is imminent when the yield curve inverts
Every US recession over the past half century has been preceded by an inverted yield curve, as seen in the chart.
Source: Federal Reserve Bank of St. Louis
A normal yield curve slopes upward, while an inverted yield curve occurs when short-term rates exceed long-term rates. An economy in good health carries a higher interest rate on longer-term debt. An inverted curve between 10-year yield and 2-year Treasury yield currently indicates that a recession is imminent or has already begun in the United States.
I mentioned this chart back in March when it was only heading in a downward direction. At this point, the curve is flashing negative and is clearly irreversible.
We may not be seeing the whole economic picture
Can statistics serve the purpose of strengthening the US government’s image in the eyes of the public? By closely examining inflation, unemployment, and other economic indicators, you can see how the calculations have changed over time, covering less meaningful information.
To start with, the current official measure of inflation ignores the crucial food and energy components, rendering it ineffective as a measure of living expenses and failing to capture the full picture of inflation.
Based on the methodology used prior to 1980, which captured more information, today’s 9.1% is actually closer to 18%. The measurement was changed in the 1990s and then again in the 2000s, each time factoring in less of the economy into the estimate.
Let’s now take a closer look at the low unemployment levels that US President Biden has praised.
The Bureau of Labor Statistics (BLS) unemployment reporting methodology, known as U-3, focuses on a narrow segment of the labor market and doesn’t include long-term discouraged workers, who refrain from seeking a job due to economic reasons, discrimination or lack of skills.
The alternate measure shows US unemployment standing at 24.3% in June, while official figures indicate 3.6%. This is a very different picture from what is being reported by the government.
How does crypto fit into this picture?
A clear factor motivating Bitcoin’s (BTC/USD) creation was the 2008 financial crisis. The anonymous Bitcoin founder(s) aimed to create a currency that would function without third parties because the traditional financial system was widely failing. The result was a non-fungible store of value independent of the economy of any particular country. Scarcity, security, and transferability are the three qualities that give bitcoin its value. Bitcoin is a commodity in its original meaning, regardless of the economic conditions in which it operates. Its current correlation to stocks might not last forever due to people’s changing perception of it.
It’s clear today that crypto is no longer a niche for geeks. Big players are investing in it, and regulators can’t ignore it any longer. It is crypto’s mission to restore power to the people through decentralization, and its creative energy does not seem to be waning any time soon.
Centralization is becoming increasingly unpopular as people see what’s happening to the world’s largest economy and other previously strong economies. We will one day see crypto decouple from traditional markets, creating a new decentralized world with strong economies and better living standards for everyone. Is that too bold? Maybe, but not for nothing we are called crypto enthusiasts.