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Recession, or the "R-word," as politicians refer to it, is a common topic of discourse today, with good reason.
Today's gross domestic product data shows that the U.S. economy shrunk in the second quarter. If you pay close attention in macroeconomics class, you will undoubtedly begin to fear.
Many economics students eventually learn that "two consecutive quarters of decrease" is equivalent to the definition of a recession. However, it depends on who is asking. And if you listen to policymakers today, they point to another norm entirely.
According to the National Bureau of Economic Research (NBER), to which most experts and U.S. policymakers refer when estimating the time of economic cycles, a recession is characterized by more than simply GDP.
According to the NBER, a recession is “a considerable fall in economic activity that is widespread and lasts for more than a few months.” The underlying subjectivity provides policymakers, especially the Federal Reserve, much-needed flexibility — a stark contrast to the easily-classified “two quarters” standard.
David Wessel, senior fellow in economic studies at the Brookings Institution and former editor of the Wall Street Journal’s economics section, stated, “It was easy to comprehend; it was black and white.” For a good reason, the NBER definition is quite vague, as several components exist.
Wessel stated that before the establishment of the NBER in 1978, “two consecutive quarters of GDP decrease” was the only criterion available.
GDP might represent the state of the economy, although estimates are frequently altered, on average by 1.5 percent over time. This is why the NBER’s methodology might give a more helpful evaluation, even though the “two quarters” criteria are still effective most of the time.
“The gap between the output and the income sides is huge in the first quarter of this year, leading some to believe that the GDP will be revised and may not be negative in the first quarter,” said Wessel.
This week, two assistant secretaries of the U.S. Treasury Department authored a long blog post in which they presented what they termed “substantial evidence” that the “economy is not now in a recession.” However, GDP has dropped for two consecutive quarters.
This week, a Fox News journalist questioned a White House official about why the administration of President Joe Biden was “trying to redefine ‘recession'” because “we all know that a recession is two consecutive quarters of negative GDP growth.” (“That is not the definition,” the representative stated.)
Similarly, a reporter asked Federal Reserve Chair Jerome Powell at a news conference this week whether he would consider the U.S. economy to be in a recession if second-quarter GDP dropped.
Powell stated, “The Fed does not make a judgment on it.” “However, if you consider what a recession truly is, it’s a broad-based fall across several industries that lasts for more than a few months, and there are several criteria inside it. And this doesn’t seem like that.”
Treasury Secretary Janet Yellen stated earlier on Thursday that a “semantic war” about whether the nation is in a recession should be “avoided” and that a recession is a “broad-based contraction of the economy,” which “is not what we’re witnessing right now.”
For traders of cryptocurrencies, notably bitcoin, the issue is whether a U.S. recession even matters at this time.
The answer is probably negative.
“We gradually realize that bitcoin is not a store of wealth, but rather a store of excess value,'” said Jeff Dorman, a chief investment officer of digital asset management Arca Funds. “It is irrelevant whether or not we are in a recession.”
The negative wealth generated by diminishing company confidence and expenditure and business income reduces demand for bitcoin, according to Dorman. Still, the largest cryptocurrency by market capitalization remains structurally unaffected.
“Bitcoin is nothing more than a call option on a future in which bitcoin is utilized as an actual currency in response to falling trust in fiat,” he stated. “Therefore, bitcoin’s price reflects whether this probability grows or reduces, and a recession might theoretically raise the likelihood of investors seeking an alternative to government currency.” Many crypto experts use fiat to characterize government-issued currency not backed by actual commodities like gold.
Given that most markets, including the cryptocurrency markets, have already seen significant losses this year due to macroeconomic uncertainty, it remains to be seen if labeling this time as a “recession” or keeping it unlabeled will make a difference.
Bob Iacchino, chief strategist at Path Trading Partners and co-portfolio manager at Stock Think Tank, stated, “I have no interest in a recession.” “You’re simply naming a time and an economic period, but it doesn’t matter to me. People either suffer or do not.”
Bitcoin and most other cryptocurrencies have risen since Powell’s dovish press conference on Wednesday and the GDP report on Thursday. Late Thursday, the price of Bitcoin surpassed $24,000, an increase of 8% over the preceding 24 hours.
Paul Eisma, head of trading at XBTO Group, stated that the risk market rally might be prematurely pricing in a probable delay in rate rises in response to the dismal GDP data.
“We are in a data-driven world, so any economic data that suggests a slowdown in demand and growth, or an easing of inflation and inflation expectations, will benefit risk assets, including bitcoin and cryptocurrencies.”
Compared to all of that, the “R” word may be nothing more than a distraction.