The U.S. and euro area monetary authorities are facing an extremely difficult task of avoiding recessions while slowing, and reversing, their strong inflationary flareups.

How they got themselves in that situation is a vacuous, blame-game argument. Suffice it to say that inflation is always, and everywhere, a monetary phenomenon.

It follows, then, that inflations and recessions are caused by errors of monetary policy.

What are those errors?

The answer is a key tenet of monetary theory: Maintaining a monetary stimulus past the point where the economy needs it will cause accelerating inflation. Conversely, tight monetary policies (i.e., high real interest rates) past the point where they are needed to stop inflation will cause a recession.

Hence the difficult task of running a stable monetary policy.

Indeed, the monetary authority must know -- at any point in time -- (a) where the economy is, and (b) where the economy will be when its policy changes begin to hit the forces of demand and supply in markets for labor, products and services.

A perfect foresight is a divine attribute

Those two things tell you that the monetary authorities are short-term economic forecasters struggling with crucially important tasks: (1) properly calibrating the timing and the extent of interest rate changes, and (2) estimating with a high degree of accuracy the amount of time it will take for that policy change to move prices in the desired direction.

I apologize for the technicality of this discussion. I tried to make it simple and intuitively appealing rather than to exculpate central banks for their policy errors.

The key issue here is this: With inflation rates in the U.S. expected to continue racing past their current 40-year highs of 8.6%, and the euro area’s record-high 8.1% inflation (May 2022) – I firmly believe that there is zero probability that the trans-Atlantic community can avoid a recession of ex ante unknowable amplitude and duration.

Rapidly changing U.S. growth forecasts will give you a foretaste of that argument.

Last Friday, the IMF lowered the estimate of the U.S. GDP growth for this year to 2.9%. That was down from its 5.2% forecast in October 2021, and from 3.7% it announced last April.

Please note, the IMF’s report of the U.S. economy is a negotiated document – published after a detailed review with the American government. In fact, the U.S. Treasury lauded last Friday the IMF’s “frank and thorough assessments” of member country economies.

So, the IMF went further to say that the U.S. economy would grow 1.7% in 2023 and could narrowly escape a recession in 2024 with a growth rate of 0.8%.

And that was a coup de grâce. A recession as a near certainty for an unbalanced and declining U.S. economy, with a budget deficit currently running at 7.4% of GDP, public debt of 130% of GDP, current account deficit of 5% of GDP and an inflation rate of 8.6%.

The euro area needs greater fiscal discipline

In fact, the IMF estimates clearly imply at least a technical recession, defined as two consecutive quarters of negative GDP growth. That of course would be a lucky outcome.

The euro area has much better economic fundamentals with a budget deficit of 5% of GDP, public debt of 116% of GDP, and a current account surplus of 3.6% of GDP.

However, the area’s current GDP growth estimates of 2.6% this year and 1.6% in 2023, paint an overheating economy running way ahead of its noninflationary growth potential of 0.8%.

In spite of that, the euro area’s monetary policy -- announcing a mild tightening in the months ahead, and a continuing bailout of highly indebted countries like Italy, Spain and France – shows no sense of urgency about bringing inflation down. The European Central Bank is implausibly counting on a declining inflation brought about by falling energy and food prices currently running at respective annual rates of 39% and 9%.

At a closer look, it seems that inflation in the euro area is taking a back seat to the problem of “fragmentation” – sharply rising financing costs for Italy, Spain and France, with public debts ranging from 140% of GDP (France) to 174% of GDP (Italy). Last Friday, for example, the spread with respect to the German 10-year bond was 1.13 percentage points for Spanish bonds of the same maturity, 1.2 pp for French bonds and 2.14 pp for Italian bonds.

The U.S. and the E.U. economies are recession bound. Fired up by years of excessive credit creation, inflation is now driven by soaring energy and food costs. An additional danger for the E.U. is a possibility of an increasingly unstable monetary union.