or a year and a half, money rained down from the sky. Bitcoin and gold surged. Stocks skyrocketed, and cryptos went to the moon.

All thanks to a manipulated economy.

The Federal Reserve’s quantitative easing has placed interest rates near-zero and provided unprecedented liquidity in the markets–more than 4.5 trillion in stimulus to Congress.

Someone called it “the crazy fiscal and monetary policy” since the Federal Reserve Board’s establishment, with analysts accusing central banks of creating “fake markets.” In 2020, in just eight weeks in which central banks pumped $4 trillion in asset purchases, global market capitalization rose by $15 trillion.

At the same time, Congress approved the largest federal money stimulus to the U.S. economy: more than $5 trillion as support for the ongoing pandemic. About $1.8 trillion went to families and individuals and nearly as much to businesses to support the blows inflicted by COVID-19.

Without this mix, the economy would have already collapsed, economists argue. Instead, the gears of the distressed markets started turning smoothly again. But this also helped create financial bubbles thanks to the too-accessible money in the system.

In these altered economic conditions, where Americans have invested more in five months than in twelve years combined, markets would have needed only one hiccup to start plummeting. Not just the markets but the entire economy.

Since the beginning of the year, that bubble has been gradually deflating –one tear at a time. Investors lost more than $200 billion in just a few days in the crypto market alone. But cryptocurrencies are not the only building block of an economy approaching a recession that, for many, is already underway.

Yet the appearance at first glance would be another. Companies are investing, consumers seem to be spending, and unemployment is back to pre-pandemic levels, near its lowest in nearly half a century: the economy would appear to be booming.

So what is going wrong? The Fed’s ongoing playbook has historically led to a recession, the pandemic has depleted the American households’ savings, and the growth pace of inflation is the fastest in four decades.

The Fed policy and inflation

As the coronavirus spread, the Fed cut interest rates close to zero to support the economy. In addition, it intervened in the bond market, buying colossal amounts of government-guaranteed debt.

But as the months passed and the economy recovered faster than expected –with inflation already high– the Fed persisted in pumping stimulus, buying bonds in rounds of $120 billion.

In other words, the Fed flooded the system with money –digitally printing it by buying Treasury bills and bonds.

Only in March the central bank halted purchases to proceed later with rates. Something it should have done earlier, experts warned.

Printing money means causing inflation, despite Fed Chairman Powel considering it obsolete. Last summer, the good old equation of exchange–which accurately measured the relationship between money supply and price change for the past 60 years– successfully predicted inflation would be at least 6 percent up to a possible high of 9 percent by the end of the year. In December, prices rose by 7 percent.

Since February 2020, the money supply has grown by 40 percent, which means not only flooding the system with money but also with inflation. William Dudley, former president of the Federal Reserve Bank of New York, argues prices are growing too rapidly to curb inflation without doing damage. Unlike his former colleagues, he believes the only way the Fed can regain control at this point is to cause a recession.

In December, the Fed planned to raise interest rates by only 0.75 percentage points. Today with inflation out of control, the projected increase is 2.5%. Still an insufficient level for insiders who point to the need for 5–6 percent on federal funds. But such high rates would not curb inflation without triggering a recession.

Household savings

During the pandemic economy, the savings rate hit the highest in more than sixty years. The press pointed out that individuals saved to meet expenses and unforeseen contingencies, and the stimulus policy led American households to sit on $2.6 trillion in extra savings.

A questionable figure as long as the government uses a broader definition of the average person. For example, paying down debt falls under “savings.” A figure also that means little if it does not consider its distribution among more or less affluent households. In fact, according to a survey conducted for the NYT, only 16 percent of respondents said they had more savings than in the early days of the pandemic, compared with 50 percent who answered otherwise.

In the same survey, 40% of respondents replied their families are worse off today than before the pandemic. And the ratio of people who have depleted their savings to those who have increased them is 3 to 1.

Most of the extra savings during the pandemic ended up in wealthy pockets, with 70 percent accumulating in the 20 percent richest of the population. For one in five families instead, the pandemic wiped out all earnings.

In recent months, the situation has worsened even more. The savings rate has plunged below pre-pandemic levels, with January being the month with the lowest savings rate since 2013.

Treasury yield curve

Also endorsing the recession hypothesis is the shape of the treasury yield curve. The curve is the indicator that measures the difference between short-term and long-term U.S. government debt rates. And it has flattened in recent times, which historically suggests a recession.

Last month, yields on two-year Treasury bonds exceeded yields on 10-year bonds. Economists call this a flattened yield curve, a sign that portends difficult times such as a recession or at least a crisis.

Before recessions in the early and late 1980s, the curve inverted. And the same happened in the early 2000s before the dot com bubble and the subprime mortgage crisis.

Stock Market decline

Stocks are not the economy but a good indicator of its health. A crash reflects a loss of confidence in the economy, a bearish investors’ psychology, and induces consumers to spend less.

Today’s stock market has not had an overnight crash, but it is experiencing a slow persistent decline. In six months, the S&P500 has lost 14 percent. Before last Friday’s rebound, the Dow fell for seven weeks straight, the longest negative streak since 1980. And the bottom still seems far off. According to Goldman Sachs, the situation may get even worse. The most optimistic case predicts that U.S. companies will adapt to an expected slowdown. But senior management seems to lean toward a gloomier version: a very high risk of recession with stocks falling at least another 10 percent. A forecast borne out of the less-than-rosy growth expectations of the most advanced economies.

Looking at the relationship between price and earnings from the late 19th century to date, the S&P500 still appears valued twenty percentage points higher than its historical average. Stocks, therefore, could still lose a fifth of their value or more –as history has proven on more than one occasion.

Meanwhile, on Wall Street, cash has become king. On the other hand, the more the Fed pursues its policy of raising interest rates, the more the conditions for the stock market to do well come to an end. Typically, the more interest rates rise, the more investors turn to bonds, moving away from stocks.

But given the situation, cash is the best option in terms of return. Blackrock, the largest asset-management company, is now raising cash holdings in many portfolios by more than 50 percent. And the same is happening to portfolios at State Street Global Advisors.

How a recession may or may not be

The economic horizon portends three scenarios. In the first one, the Fed action results in a soft landing: inflation falls, the economy does not take a big hit, and unemployment does not rise as significantly. In the second one, inflation falls, the economy goes into recession, and unemployment rises. Finally, in the last one, the Fed fails to counter inflation.

However, hearing the Fed leaning toward a soft landing calls to mind when the Fed said months ago that inflation would be transitory. In the past 60 years, only three times has the central bank managed to pull the brakes on the U.S. economy without repercussions; never with inflation so high, now at an all-time high in more than 40 years.

It promises to be difficult for the economy not to suffer repercussions by adjusting after a decade of cheap money. The consensus and odds of a recession are growing: from 18 percent in January to 28 percent in April. Looking ahead, Goldman Sachs pegs that number at 38 percent. One point for a soft landing is the yield rates on treasury bonds under two years. Investors often refer to the relationship between two- and 10-year yields, but rates with shorter horizons-which two researchers acknowledged as more accurate-provide a scenario with no recession warning signs.

On the other hand, there are three issues. Gross domestic product shrank in the first quarter; wages adjusted for the rising cost of living are collapsing, and household savings rates are at the lowest in several years. An interest rate hike by the Fed preceded four of the last five recessions (1981–82, 1990–91, 2001, and 2007–2009). And earlier this month, the Fed raised half a percentage point, the highest increase since 2000.

This move, along with the balance sheet reduction plan, would be the fastest withdrawal of a monetary support policy in decades. Then again, there is not much time left. The longer it takes the Fed to control inflation, the more dizzying the recession will be.

Of course, not all factors on which inflationary trends depend, such as supply chains, are under its control. But should inflation not subside despite interest rate increases, the risk of a recession would become significantly higher than it already is.