I’m getting worried the global economic recovery from the pandemic is about to go very sour. And with it, asset prices. In fact, a recession may well be on the horizon. The reason is simple. Economists might be able to count the amount of economic activity, but not whether it’s worth it.

Actually, they’re not very good at counting the amount of economic activity either. But let’s not get into that.

My point is that, when the economy returns to something more normal, whatever that is, we’re going to discover that a lot of what has been driving GDP is not really a good idea. And, when it stops, we’ll get a recession.

Before we get into a better explanation, ponder this odd question: do you think the economy should be bigger in 2021 than it was before the pandemic in 2019?

The keyword there is “should”. Of course we want it to be. And maybe it will be. And maybe it won’t. But is an economy weighed down by a pandemic supposed to be bigger than one that isn’t?

It doesn’t smell right to me. And yet, the UK economy is expected to outgrow its 2019 peak this year, or next, depending who you ask, despite Brexit. The United States has already recovered. China is producing more than pre-pandemic. And the euro area… well, they’re lagging behind of course… but still, it’s an impressive recovery given what’s happened.

But this impressive amount of GDP just does not seem right given the state of international trade, disruption to travel and plenty more. That is not to mention lockdowns and other Covid restrictions still in place in many places around the world. Constraints on a great deal of spending haven’t been removed. Tourism, for example, is still in trouble.

Then there are the bankruptcies, evictions, and business failures which were deferred – what happens when those are finally allowed to occur?

If you ask me, it’s downright suspicious that our post-pandemic economy is the same size as it was before. And soon to be bigger.

So, what’s going on?

Well, the government has stepped in to fill the void. Whatever you think of it, governments around the world are posting huge deficits to keep GDP pumped up.

But here’s the problem. We’re talking about a gigantic misallocation of capital. In other words, our economic activity is misguided. GDP is being generated to do things that are driven by the government and the pandemic, which is not the same as the GDP you get without either of those two influences.

In other words, pandemics and government intervention don’t just create economic output. They shift what and how economic output happens.

But what does that mean for when the pandemic ends? It could be a recession.

We’ll have to go dig into some theory to explain exactly why…

As some economists see it, a recession is not really about the lack of economic activity. That’s just a symptom of the underlying problem.

To some, a recession is really about the reallocation of economic activity from purposes no longer worth pursuing, to new ones worth doing.

When central banks fiddle with interest rates, for example, this leads people into the misguided economic activity of building houses in remote parts of Spain, which nobody actually wants. They were fooled into economic activity that makes no sense.

The recession is the result of the economy trying to correct this mistake by putting a lot of Spanish homebuilders out of jobs while creating them elsewhere. But the transition takes time and during that time, there is unemployment and less economic activity.

If you agree with this way of thinking about a recession, which very few do, then our coming post-Covid recession should be a bad one. Because, thanks to the pandemic, an absolutely vast amount of economic behaviour has now been shifted to activity that does not make sense.

The government has propped up the companies that should’ve failed alongside the ones that it crushed with lockdowns and it has also created businesses which benefit from the pandemic.

Of course, nobody knows which businesses and which economic activity is worth pursuing. Otherwise, central planning would work.

Only the actions of free individuals pursuing their wants and desires can reveal what economic activity is worth pursuing – how our resources should be used.

Should the grapes be sold, turned into wine, jelly or something else, for example?

That’s a question which only the free market and free prices can answer. And that’s why the free market outperforms economically. It’s the only system which provides for a measure of whether economic activity actually makes sense.

But, enough of the theory – and back to the real world. The recession is rearing its ugly head.

Goldman Sachs has revised down its expected GDP growth for the United States, again.

University of Michigan chief economist Richard Curtin observed that over the past half century the University of Michigan’s “Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy…”

CNBC summed it up with this headline: “Consumer sentiment measure falls to pandemic-era low, sees one of largest drops on record”.

It’s not just consumers who are beginning to fret. Bank of America’s Fund Manager Survey showed overall sentiment collapsing too.

Bloomberg reports on an indicator called the Marshallian K – a measure of money supply growth relative to GDP growth – which has fallen below zero: “A measure of U.S. financial liquidity whose declines foreshadowed two of the decade’s worst equity routs is flashing alarms even before the Federal Reserve embarks on its planned winding down of asset purchases.”

If you ask me, economies around the world are rolling over. And one will soon fall out, into a recession.

This is especially concerning because inflation continues apace, ushering in the spectre of stagflation. Conveniently, I was asked on to the MoneyMagpie podcast with Jasmine Birtles to discuss investment during stagflation. I hope you check it out.

Over at UK Independent Wealth, Nigel Farage and Rob Marstrand have been very conservative with the investment recommendations, because Rob is worried about a downturn too. If you’d like to know what he does recommend, you can find out more here.

Nick Hubble
Editor, Fortune & Freedom