Sugar Rush! Why The Economy Will Run Hot, Then Crash

The expected “sugar rush” from more stimulus is why the economy will “run hot” then crash. As every parent knows, giving a child too much “sugar” leads to a “rush” of energy. Then comes the crash, where you find them in some odd place taking a nap.

The Coming Economic “Rush”

Recently, JP Morgan joined the rest of the Wall Street banks in predicting a surge in economic activity for 2021 of 6.4%. Of course, the entire reasoning behind the rise in activity was due to “stimulus.”

“In a note to clients, JPM’s chief economist Michael Feroli made the following forecast revisions:

  • We now look for a $1.7 trillion fiscal stimulus package (up from $900 billion) to be passed in March
  • Even before that kicks in, growth appears to be on firmer footing at the start of the year
  • All told we now expect 6.4% (4Q/4Q) GDP growth this year and 2.8% next year
  • We see the labor market getting back to full employment, or around 4% unemployment, by 2Q22 and expect core PCE inflation to reach 2.0% by 4Q22, with balanced risks around the outlook.
  • While the outlooks for growth and inflation are moving up, Fed rhetoric appears to be getting more dovish” – Zerohedge

The statement quickly lays out the premise of the “rush and crash” syndrome.

The chart below shows annual real GDP growth rates from 2008 to the present. The surge in GDP in 2021 is a continuation of the “sugar rush” of monetary interventions. However, notice economic growth “crashes” back to annual norms in 2022.

The dashed black line is the average annual growth of GDP from 2007 at just 1.7%. (Without the addition of JP Morgan’s estimates, the actual growth rate through 2020 was only 1.3%)

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

For reference, a rate of growth below 2% isn’t strong enough to absorb population growth.

(Note: Prior to 2000, an economic growth rate of 2% was considered “pre-recesssionary.” In order to justify excess spending and Government interventions, 2% growth is now considered a “success” of policy.”

 

It’s All Been Artificial

Here is the more significant issue. The vast majority of the growth in the U.S. over the last decade was due to a variety of artificial inputs which are not indefinitely sustainable. From increasing federal expenditures:

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

And a litany of “bailouts,” which are a function of increased debts and deficits and massive monetary interventions.

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