Nobel laureate Paul Krugman dismisses Elon Musk’s economic predictions, calling them conspiracy theories by a ‘recession truther’
It’s not like just the canary in the coal mine (SVB) died, one of the staunchest miners (Credit Suisse) died too and the cemetery is filling up fast!
Elon Musk says we’re already in a recession that could last until spring 2024, and only the strong will survive
Elon Musk believes economic slumps help shake out companies that fundamentally cannot be profitable under normal circumstances.
The world could be facing the longest recession it has seen since the global financial crisis over a decade ago, according to Tesla and SpaceX CEO Elon Musk.
Asked to predict the length of a contraction in economic activity, the world’s richest and most successful entrepreneur responded on Thursday: “probably until spring of ’24.”
This would set the U.S. gross domestic product on course to shrink for a period longer than the 18-month recession of the global financial crisis, which lasted from December 2007 to June 2009.
Painful but necessary
While these bouts are painful, Musk indicated they do serve the valuable purpose of shaking out bad business ideas by cleansing the market of so-called malinvestments.
Such poor investments gradually build in the system during boom times, as capital chases increasingly marginal profits until the incremental returns no longer justify the risk.
A key element factoring into investor calculations is the cost of money, which is set by policymakers at the world’s central banks. Until its recent shift to rate rises, the largest central bank—the U.S. Federal Reserve—had its foot on the accelerator pedal in an effort to suspend the normal dips of the economic cycle.
It is no accident then that ever since June 2009 the U.S. economy has contracted only once, for two short months, according to the National Bureau of Economic Research (NBER), the government agency that declares the official start and end dates of a recession.
Ever since the global financial crisis, policymakers have pumped unprecedented stimulus into the system to prevent a recession, mainly in form of trillions of dollars of freshly created money but also through fiscal measures such as corporate tax cuts and pandemic checks.
In such a cheap money environment, investors have been rewarded for withdrawing their savings and putting the money to work by backing new startups that promise to solve major social problems such as Theranos and Nikola Corp., or have innovative ideas like Juicero and Celsius.
It’s these same kinds of companies that invariably suffer when cheap money dries up.
Bill comes due
Noninflationary economic growth is largely a function of productivity, and cannot be achieved through sustained money printing (although “modern monetary theory”—until recently fashionable in some circles—did attempt to argue there was such a thing as a free lunch).
Eventually the bill comes due, triggering a wave of insolvencies as weak managers run out of investors willing to finance their business plans.
“Recessions do have a silver lining in that companies that shouldn’t exist stop existing,” wrote Musk.
Experts believe that point is upon us. After offering markets a buffet of nonstop cheap money, the Federal Reserve has now been forced into an abrupt reversal to cool off an overheating economy.
Less than a week ago, the newest winner of the Nobel Prize in economics, Douglas Diamond, told Fortune that the U.S. central bank held rates “too low for too long” and now risked a crash.
This year alone, the central bank hiked rates by three full percentage points, dramatically affecting asset prices for everything from stocks and housing to cryptocurrencies. As recently as the start of March, when policymakers knew inflation was running at 8%, the Fed was still expanding its balance sheet and with it the money supply.
Elon Musk himself recently expressed his disdain for the Fed, agreeing with Wharton finance professor Jeremy Siegel, who blasted Fed policymakers for making the biggest mistake in the institution’s 110-year history.
“Siegel is obviously correct,” said Musk.
Ironically one of those companies that might not have survived is Musk’s own. The CEO admitted back at the height of the stock market bubble that Tesla was “about a month” away from bankruptcy. The prime beneficiary of the 2020 pandemic rally might not have survived had it not been for the Fed’s decade-long period of ultralow interest rates and monetary stimulus.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
Nobel laureate Paul Krugman dismisses Elon Musk’s economic predictions, calling them conspiracy theories by a ‘recession truther’
Just a few weeks ago, a Twitter user said he was convinced that all economic data, whether job numbers or GDP growth, are all fake. Tesla CEO Elon Musk agreed, saying “the numbers don’t make sense.” With the economy’s prolonged downturn, economic indicators are all we have to look for positive or ominous signs—except for Musk, who apparently doesn’t believe them.
In April, he had proclaimed that a “mild recession is already here,” even though government data didn’t reflect that—and in fact, economic growth was subsequently revised upward to a healthy 2% for the first quarter. Nobel Prize–winning economist Paul Krugman, a professor emeritus at Princeton and New York Times columnist, has been optimistic about the economy for years, and now he’s taking a victory lap with inflation coming down. He’s also telling his audience not to listen to “recession truthers” like Musk or the others who loudly predicted a recession and are annoyed that it hasn’t happened yet.
“You might have expected technology billionaires to be well-informed about the world—someone like Musk could, if he chose, easily maintain a large research department for his personal edification,” Krugman wrote in a Wednesday column for the Times. “Yet they are often, in practice, easy marks for grifters and con men.”
The veteran economist thinks that part of the reason why tech moguls, some of whom have made wild predictions about the economy, give in to such “conspiracy theories” is their ego.
“The answer, I believe, is that technology billionaires are especially susceptible to the belief that they’re uniquely brilliant, able to instantly master any subject, from COVID to the war in Ukraine,” Krugman wrote. He said he thinks they just don’t want to be told things they didn’t want to hear in the first place. “So what happens instead, all too often, is that they go down the rabbit hole: Their belief in their own genius makes them highly gullible, easy marks for grifters claiming that the experts are all wrong.”
Why billionaires are easy prey for policy con men and grifters https://t.co/SfZMDYUSdv
— Paul Krugman (@paulkrugman) July 4, 2023
To be sure, Krugman isn’t rejecting the idea of a recession, even though he sees inflation cooling without much pain or causing a deep recession along the way, a scenario referred to as a “soft landing.” But he disagrees with claims that a recession is already here.
“A recession might eventually happen, but it isn’t happening now,” Krugman wrote.
A widely predicted downturn
The U.S. has had recessions before, but this time around, Musk was just one of the prominent businessmen who created a chorus predicting the most widely anticipated downturn in history. Predictions about the timing and nature of a recession have occupied center stage in the economic debate—with banks forecasting a “growth recession” in which economic growth is low but positive, and experts suggesting a “policy-led recession” may be brewing, thanks to the Federal Reserve. In recent times, some key recession indicators, like the yield curve, have been pointing to an impending recession later in the year. David Rosenberg, former Wall Street economist and founder of Rosenberg Research, noted in late May that gross domestic income, a measure of economic activity, had contracted for two consecutive quarters, which meant that a recession was here but “nobody’s noticed.”
This isn’t the first of Musk’s economic predictions, coupled with a Fed critique. The Tesla CEO agreed with Wharton professor Jeremy Siegel, who criticized the Fed last year, saying the bank was making a mistake in clamping down on inflation too aggressively in raising rates. Then in October, the world’s richest man said that a recession may last well into 2024, and in November said the Fed was “massively amplifying the probability of a severe recession.”
Just guessing, but probably until spring of ‘24
— Elon Musk (@elonmusk) October 21, 2022
Musk has also doubted Fed numbers in the past, warning that more interest rate hikes could put the economy in real trouble.
“Fed data has too much latency,” Musk tweeted in April, adding that additional rate hikes could set off a big recession. “Between Tesla, Starlink, and Twitter, I may have more real-time global economic data in one head than anyone ever.”
The Fed eventually did hike rates in May by 25 basis points, but we still aren’t in a recession yet.
Fed data has too much latency. Mild recession is already here.
It’s not like just the canary in the coal mine (SVB) died, one of the staunchest miners (Credit Suisse) died too and the cemetery is filling up fast!
Further rate hikes will trigger severe recession. Mark my words.
— Elon Musk (@elonmusk) April 30, 2023Other tech CEOs have cautioned about economic turmoil ahead with a slowdown and sky-high prices. Salesforce’s Marc Benioff said in March that he was preparing for a difficult 2023 as the economy heads toward a recession, and Microsoft CEO Satya Nadella said he was bracing himself for a rocky two years in the tech industry. Big companies laid off scores of employees to ramp up cost-cutting measures in response to the inflationary environment. But for the world’s richest man to openly question economic data that disagrees with his own projection? Krugman calls foul.
Where are we with recession now?
Despite over a year of talk surrounding whether or not the “R” monster will hit the economy, there have been few signs of it. Robust consumer spending and employment data suggest that the economy, although still faced with high inflation and subsequent interest rates to curb it, is in good health.
But what of all the economists who predicted otherwise? Suspicions swirling around the enigma that is the U.S. economy have led to theories like “richcession,” in which job cuts are limited to high-paying industries, and “rolling recession,” where only a few industries shrink while the economy on the whole flourishes.
“The U.S. economy is genuinely displaying signs of resilience,” Gregory Daco, chief economist at EY, a tax and consulting firm, told the Associated Press. “This is leading many to rightly question whether the long forecast recession is really inevitable or whether a soft landing of the economy” is possible.
The Fed is set to meet later in July to contemplate its policy approach in the months ahead.
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up for free.
]]>