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Truth, Tightening, and Mistakes from the Past

September 12, 2022

In the movie “A Few Good Men,” actor Tom Cruise demands the truth from Jack Nicholson while on the witness stand during a heated trial. Nicholson then famously screams, “You can’t handle the truth!”

Right now, it feels like the American people want the truth on the economy. Yet, the government is kind of telling us we can’t handle the truth because it insists we’re not in a recession[KTD1] , even though every past instance of two consecutive quarters of declining gross domestic product (GDP) has marked a recession.

(I mentioned recently on my radio program how we may be in one now, even without a formal declaration. Recessions can occur even in the absence of two consecutive quarters of contraction.)

Plus, there are some added challenges this time around.

First, the Federal Reserve is tightening monetary policy into the beginning of a recession. Second, the size of the financial economy has skyrocketed over the past several decades. These two factors make historical comparisons more difficult because we haven’t seen something like this since World War II.

One thing we know is that monetary tightening into the start of a recession worsens the contraction. Four of the six worst recessions included monetary tightening at the beginning, the 2007-09 recession being the exception. So, we’ve seen how tightening can cause downward pressure to stick around.

Thankfully, tightening into a recession doesn’t happen often. But when it does, things often get worse. Policymakers, businesses, and investors must be sure not to repeat the mistakes of the past.

So, even though the government says we’re not in a recession, there are signs the opposite is true.

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