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The Fed is under time pressure to replenish its interest rate arsenal to a desired level of 4 percent in time for the next recession likely to occur in 2018.  The longest time period between U.S. recessions during the last half century has been 10.7 years.  Currently, we are at the 7.5-year mark since the beginning of the last recession, which is the average time period among the last 6 recessions.  

The next recession is likely to be triggered by a stock market bubble. Trillions of dollars in Fed QE pumped into the economy in the aftermath of the recession created overly inflated stock valuation based mostly on merger, acquisitions and stock buyback rather than real increase in productivity or organic growth in revenues.  By 2018, the overly inflated stock market will blow up pushing the economy into a recession.

Recessions can be ignited by various factors, such as the housing bauble in the last recession, but the real cause of a recession is the decline in consumer consumption brought by economic and financial uncertainty.  When consumers feel or perceive economic danger, such as inflated housing market, or inflated stock market, they intuitively reduce spending and increase savings to protect their finances.

“We will be able to observe early signs about a year before the recession hits” says Dr. Dan Geller, the developer of the Money Anxiety Index and the author of the book Money Anxiety, “prior to the last recession, we started observing an increase in consumer financial anxiety about 14 months prior to the start of the recession in December of 2007.”  

The Money Anxiety Index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  


 


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