JUNE 7, 2023
He does not budge, even as some economic data indicate that the economy is likely to escape recession.
For Elon Musk, the entrepreneur behind at least five companies — Tesla, SpaceX, Twitter, Neuralink and Boring Co. — the U.S. economy is already in recession.
The question, he says, is whether this period of weaker economic activity will worsen. This is what he, and his bros — for example, the tech investor David Sacks, one of Musk’s confidants — have been repeating for several months, challenging the analysis of renowned economists like Larry Summers, the former U.S. treasury secretary.
Fed Rate Policy Designed to Fight Inflation
The cause of the recession is, according to the billionaire, the Federal Reserve’s monetary policy to fight inflation, which is at its highest in several decades.
For several months now, the central bank has been increasing its interest rates, which has made credit more expensive. The main consequences of the policy are that it reduces consumption, one of the engines of growth, and pushes companies to postpone projects because borrowing for investment becomes costlier.
After the Fed left rates near zero for most of the coronavirus pandemic — even as the government issued stimulus packages to help households and support the economy — the central bank has changed gears in the face of an unprecedented surge in prices. The central bank raised its interest rates during its most recent meeting, putting its benchmark rate between 5% and 5.25%.
“Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession,” Musk warned in November.
In April he issued another round of Fed rate-hike warnings.
“Fed data has too much latency. Mild recession is already here,” he said. “Further rate hikes will trigger severe recession. Mark my words.”
One of the sectors hit hardest by the rate hikes is real estate, Musk and his tech peers have been pointing out for several weeks. They see real estate declining as sharply as it did in 2008, which caused the second-most serious financial crisis in history.
The billionaire believes that this real estate decline will spare no one, neither homeowners nor home buyers. This is what he just said in a Twitter thread.
Housing Crisis?
“House prices are declining almost everywhere,” a Twitter user said on June 4, with a chart showing that two-thirds of the economies for which the Organization for Economic Cooperation and Development tracks housing prices saw declines, based on the most recent quarter of available data.
The list of affected countries includes the U.S., China, Germany, Italy, France, South Korea and India.
“This will accelerate, as high interest rates make homes less affordable,” Musk commented on June 5.
Most central banks in the major economies for several months have been increasing interest rates to fight the inflation observed worldwide.
Musk believes the policy knocks many potential homebuyers out of the market as mortgages become too expensive. These people are forced to wait on the sidelines unless they’re willing to incur huge monthly payments.
And as they don’t buy, demand for real estate decreases and in turn reduces house prices. Normally, this price drop is good for homebuyers, but they still need to obtain credit at acceptable rates to make purchases.
The other way that rising interest rates hinder homeowners is that refinancing their mortgages becomes difficult. They can borrow less. So in the end, they can owe more on their current mortgages than their homes are worth and can no longer just flip their way out of their homes if they can’t make the new, higher payments. Instead, they risk losing their homes to foreclosure and might have to file for bankruptcy.
In the U.S., the Fed meets next on June 14-15, followed by another Federal Open Market Committee meeting on July 26-27. Speculation is for a pause at the June meeting but an interest-rate hike in July.
Musk is urging the Fed to pivot and start cutting interest rates.
Courtesy/Source: TheStreet
