Why We NEED A RECESSION & Soon!
MARSHMALLOW.COM = MY FAVORITE APP!
I love marshmallows. And – every three to four months when my craving gets bad, I order marshmallows right to my door from marshmallow.com.
And – it is awesome! They show up the same day, and the marshmallows are always fresh and delicious.
They come in four flavors (chocolate, vanilla, strawberry, and peppermint), and the company plans to expand into chocolate chips and sprinkles (rainbow and chocolate) soon.
Even better, they plan to expand into India and China as well, and that is why I am an investor too; if they capture as little as 1% market shares in either country, they will have free cash flow of $50 million per month and earn a $10 billion valuation!
Because there is no marshmallow.com with a business model like that – but there are thousands of other companies with similarly ridiculous business models.
And access to very cheap capital in very low-interest-rate environments has allowed them to survive on capital infusions alone – and not by generating profits.
AND THAT IS WHY WE NEED A RECESSION SO BADLY!
Those of us in real estate and mortgages well know that most recessions (outside of 2008) help our industries.
This is because the Fed lowers rates in response to recessions, or rates simply fall naturally in response to weak economic signals.
And lower rates spark refinance booms and more purchase activity – which is why housing usually fairs well during recessions (with 2008 being the exception, once again).
I should add here too that I don’t mean to make light of recessions, as they cause very real pain to millions of Americans.
But – we need recessions to clear all of the Marshmallow.coms out of the economy – for many reasons.
Access to excessively cheap capital has allowed thousands of companies to surface over the last 10 to 15 years – that would never have surfaced in a normal interest rate environment (when rates are higher and capital is more expensive, investors are much more prudent with their investments).
Investing in companies and schemes that do not really provide lasting economic value (or cater to actual consumer demand) is also known as “malinvestment.”
And – when there is too much malinvestment, asset bubbles form and the economy grows at too slow of a pace – like what we have seen over the last ten years.
Publisher and commentator Steve Forbes likes to remind people that we would all be earning 40% more right now if our economy had grown at its normal 3% growth rate over the ten years.
So, someone earning $100,000 now, would instead be earning $140,000. The importance of economic growth is something most people don’t understand – so this comment about incomes by Mr. Forbes is a great way to illustrate the importance of economic growth.
Tyler Cowen, a famous economist, likes to remind people too that if our growth rate had been 1% slower over the last 50 years, our economy and per capita wealth would be on par with Mexico’s.
TLDR: We need a recession to wipe out inefficient companies that have no actual business purpose and to eventually clear the way for healthy companies that will foster permanent and faster economic growth.
In more concrete terms, we will see a lot of delivery services (like marshmallow.com), a lot of weak retail firms (like the remaining number of Sears stores), and a lot of unproductive software firms (like many of the firms catering to mortgages and real estate) fall by the wayside.
And – hopefully they will be replaced with companies offering goods and services people actually need and want, e.g. more efficient green energy providers, cheaper and healthier food options, less expensive homes, better electric cars, better batteries, and better mortgage companies that make it even easier for borrowers.
What makes the problem worse is that the Fed and Congress have done too good of a job of forestalling recessions since 2008 (with stimulus and very low rates) – so the recession that is coming will now just be that much worse and that much more necessary.
And no, the resulting lower rates that come with the recession will not just start the entire doom loop of malinvestment all over again – as long as the Fed does not leave rates too low after the economy recovers.
In any case, a recession is coming soon (despite the Fed’s obsession with our ostensibly “strong” labor market); it will likely be bad because we have been pushing it off for too long; and it can’t come soon enough.
Founder | JVM Lending
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