Recessions come and go and if you look at the last one the US endured, it came and went in record time! I think if you blinked, you might have missed it. So, what is a recession and what does it mean to you?
The definition is: a period of time with a decline of economic performance (usually it is two consecutive quarters). Investopedia.com defines GDP: As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
The last recession recorded in US history was tied to the pandemic and actions were taken to shorten the cycle. The numbers reported made it the worst on record since the Great Depression. The Dow Jones crashed over 20% in just a couple of weeks. The recovery, I would say, was artificial due to the response and the flooding of currency in to the market. The US government injected several trillions of dollars via stimulus checks, American Rescue Plan, Paycheck Protection Program and the CARES Act to name a few.
The Federal Reserve additionally acted by lowering the federal funds rate from 1% to 0% and reducing the banking reserve requirement to 0%. This allowed banks to lend (create loans with zero reserves). The Fed also committed, back then to keep rates at 0% until 2023 to ensure confidence in the market.
Side note: We are now in February of 2022, and the Fed has announced that it must raise the federal fund rates at least four times this year and to begin as early as March. This is necessary to combat the seemingly out of control inflation. As a reminder, January 2022 was officially recorded as a CPI (consumer price index) of 7.5% and it is a new 40 year high. Additionally, they are having emergency meetings about this as they may not be able to wait until March to act.
So, back to the recession…what does it mean to you and I; the victims of their games? Well, if you are old enough to recall the 2008 Great Financial Crisis, you should recall that you knew someone who lost a job, perhaps their house or car due to non-payment. The joke was this: “Do you know the difference between a recession and a depression? A recession is when your neighbor loses their job and a depression is when you lose your job.” Not funny, but true. By the way, if a recession is not handled correctly, a depression can be born from the recession. Yes, it is a slippery slope.
So, it seems that the Fed has figured out how to handle the recession as they did in 2020, one might say. And I say that this may be correct. But, consider this, if they fired their weapons like create more currency (trillions) and lowered interest rates to zero percent. One should ask, did the Fed reload their weapons? That is the question to answer now. Over the past two years, reloading their weapons should have been raising the federal funds rate above zero and reducing the money supply (in my book, I cover QT or Quantitative Tightening). I can tell you without checking that they did not do any of these things. If anything, the Fed has continued to expand their balance sheet and have produced over 40% of all US dollars since the March 2020 recession. That is a massive inflationary move!
Again, refer to my book for the simplistic explanation of how your dollars are devalued when more dollars are created. This will cause inflation down the road. Check! We now have it.
Back to the recession, are we close? Of course! That is why I’m writing this to you! I want you to think preparedness. Jim Rohn teaches that the economy works as seasons. There is Spring, a time to plant. Then Summer, a time to grow. Then Fall, a time to reap. Then there is Winter, a time to survive. We are entering a financial Winter and it is time to gather your nuts and prepare your firewood. Rest assured there will be a Spring again but to get there, you have to make it through the Winter first. How can you know? Look for the signs…GDP will decrease (not there yet), interest on bonds will invert (already happened), confidence in jobs and a positive Leading Economic Index Report.
What can a recession do to you? In a recession, people sense it and begin to pullback their discretionary spending. That means putting off home improvements, going out to eat or movies, putting off hobbies perhaps making their car last a little longer. Okay, that isn’t so bad to me, is it? What happens though is an economic decline cycle begins. As more people withdraw from this type of spending, then employers are forced to cut back their employees, reduce wages or reduce hours worked. Also, less goods are being sold by manufacturers that also begins the employee cutbacks. As cutbacks happen, then even more discretionary spending is withdrawn from the market. And more cutbacks, and then less spending, etc.… This will continue to spiral down until a bottom is found. The Fed stopped it once, but are their weapons ready to take aim again? I will leave that up to you to decide. The average recession lasts for about 11 months.
What action should you take to prepare for a recession? First establish a budget and stick to it. In the budget, set up an emergency fund to prepare for several months of expenses. This will require saving some cash. Figure out what is essential and non-essential and spend accordingly. Lastly, have a backup plan if you were to lose your job. Can you learn a new skill? Can you market yourself for a different job? The important point here is to do this now and not during the recession.
Remember, a recession is like the winter season. When winter ends, you can expect spring to return, and then you will know when you can relax a little and go back to enjoying life!