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Elon Musk predicts the recession could last into Spring 2024, but sees a grim silver lining

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The world may be facing its longest recession since the Global Financial Crisis more than a decade ago, according to Tesla and SpaceX CEO Elon Musk.

When asked to estimate the length of the contraction in economic activity, the world’s richest and most successful entrepreneur responded Thursday “probably by the spring of ’24”.

This will lead the US gross domestic product to shrink for longer than the 18-month recession of the Global Financial Crisis from December 2007 to June 2009.

Painful but necessary

While these crises are painful, Musk noted that they serve the valuable purpose of fending off bad business ideas by ridding the market of supposedly bad investments.

Such weak investments build up gradually in the system during boom times, as capital chases increasing marginal profits until the increasing returns no longer justify the risk.

An important factor influencing investor calculations is the cost of money, as determined by policy makers at world central banks. The US Federal Reserve, the largest central bank, had stepped on the accelerator to suspend the normal downturns of the economic cycle until its latest rate hikes.

It’s no coincidence that the U.S. economy has contracted only once in two short months since June 2009, according to the government agency NBER, which announced the official start and end dates for the recession.

Since the global financial crisis, policymakers have pumped unprecedented stimulus into the system to prevent a recession, mainly in the form of trillions of dollars of newly created money, but also through fiscal measures such as corporate tax cuts and epidemic controls.

In such a cheap money environment, investors were rewarded for withdrawing their savings and putting the money to work by supporting start-ups like Theranos and Nikola Motors that promised to solve big social problems or innovative ideas like Juicero and Celsius.

It is these companies that always suffer when cheap money runs dry.

the bill is coming

Non-inflationary economic growth is largely a function of productivity and cannot be achieved through continuous printing of money (although until recently the “modern monetary theory”, which was fashionable in some quarters, tried to argue that there was such a thing as free lunch).

Eventually, the bill comes due and triggers a wave of bankruptcies as investors who want to fund weak executives’ business plans run out.

“Recessions have a silver lining that companies that shouldn’t exist cease to exist” Musk wrote.

Experts believe this point is upon us. After offering markets an uninterrupted buffet of cheap money, the Federal Reserve now had to make a sudden reversal to cool an overheated economy.

Less than a week ago, Douglas Diamond, the newest winner of the Nobel Prize in economics, said: Luck He said the US central bank kept interest rates “too low for too long” and now risks a collapse.

This year alone, central bank rates have increased three full points, significantly impacting asset prices for everything from stocks and housing to cryptocurrencies. At the beginning of March, when policymakers knew that inflation was running at 8%, the Fed was still expanding its balance sheet and with it the money supply.

Elon Musk recently expressed disdain for the Fed, agreeing with Wharton finance professor Jeremy Siegel, who accused Fed policymakers of making the biggest mistake in the institution’s 110-year history.

“Siegel is clearly right,” Musk said.

Ironically, one of the companies that did not survive is Musk’s own company. The CEO admitted that at the height of the stock market bubble, Tesla was “about a month” away from bankruptcy. The main beneficiary of the 2020 pandemic rally might not have survived without the Fed’s decade of ultra-low interest rates and monetary stimulus.

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