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Elon Musk predicts the recession could last until the spring of 2024, but sees a brutal silver lining




The world may 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 slowdown in economic activity, the world’s richest and most successful entrepreneur said Thursday “probably until the spring of ’24.”

This would put US 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 struggles are painful, Musk indicated that they serve the valuable purpose of shaking out bad business ideas by purging the market of so-called misinvestments.

Such bad investments gradually build into the boom system, as capital chases ever more marginal profits until the incremental return no longer justifies the risk.

A key element that factors into investor calculations is the cost of money, which is set by decision makers at the world’s central banks. Until the recent shift to interest rate hikes, the largest central bank – the US Federal Reserve – had its foot on the gas pedal in an attempt to stem the normal downturns in the economic cycle.

It’s no coincidence that since June 2009, the US economy has contracted only once, for two short months, according to the 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, mostly in the form of trillions of dollars of newly created money, but also through fiscal measures like corporate tax cuts and pandemic checks.

In such a cheap money environment, investors have been rewarded for taking out their savings and putting that money to work by backing new startups that promise to solve big social problems like Theranos and Nikola Motors, or have innovative ideas like Juicero and Celsius.

These are the same types of companies that always suffer when cheap money dries up.

Bill comes due

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

Eventually, the bill falls due, triggering a wave of insolvencies as weak managers run out of investors willing to fund their business plans.

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

Experts believe that this point is upon us. After offering markets a buffet of non-stop cheap money, the Federal Reserve has now been forced into an abrupt reversal to cool an overheated economy.

Less than a week ago, the most recent winner of the Nobel Prize in Economics, Douglas Diamond, told Fortune that the US central bank kept interest rates “too low for too long” and now risked a crash.

This year alone, the central bank raised interest rates by three full percentage points, dramatically affecting asset prices for everything from stocks and housing to cryptocurrencies. As recently as early March, when policymakers knew inflation was running at 8%, the Fed was still expanding its balance sheet and thus 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 right,” Musk said.

Ironically, one of those companies that may not have survived is Musk’s own. The CEO admitted at the height of the stock market bubble that Tesla was “about a month” away from bankruptcy. The main beneficiary of the 2020 pandemic rally might not have survived if it weren’t for the Fed’s decade-long period of ultra-low interest rates and monetary stimulus.

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