A foul wind’s a’blowin’! There’s evil in the air! A recession is a’brewin’ and you need to be prepared!
-From “Pay Off Them Debts Before the Recession Comes,” by Piggy Smalls featuring The Kitty Kat Kid, new from Bitches Get Riches Records
Last week we put all your pre-recession fears to rest by explaining how you can arm yourself with strong financial decisions before the next recession comes. To recap:
- Track your spending. You’ll feel less anxious and more in-control if you have a clear picture of your needs.
- Fatten up your emergency fund. Let your level of risk set the size of your emergency fund.
- Pay off as much debt as you can. This will give you more flexibility with your money and reduce your expenses overall.
- Get a credit card or increase your existing credit limit. Credit freezes up during a recession, so get it now while you still can. Yes, credit is scawwwy and can be misused—but it is a tool that can instantly put food on your table.
- Get your health in order. Avail yourself of healthcare access while you have it, and stock up on needed prescriptions.
- Identify areas to cut back before you have to. The less money you spend every month, the less money you need to get by. The less you need to get by, the easier it’ll be to pay your bills if you lose your source of income.
- Broaden your skills. Start doing whatever you need to make your resume stand out in a more competitive job market.
- Back up your work files. You don’t want to lose potential portfolio pieces.
- Stay the course. Don’t freak out and pull your money from the stock market.
- Be kind. A time is coming when we’re going to have to depend on each other. No one wants to help out an asshole when times are tough.
So praise be, we know what to do! But what exactly is going to happen? And when?
When? How?? Why???
As to why it will happen… no one quite knows! The New York Times hypothesizes three potential culprits:
The poorly-timed end of fiscal stimulus
If the Federal Reserve Board (“the Fed”) miscalculates interest rate policy, similar to what happened in 2008, it could cause a recession. Think of low interest rates as the gas pedal on a car, and high interest rates as the brakes. You need to use both to drive, but using them at the wrong time causes accidents.
Of course, federal monetary policy in general is a strong contender for the throne of Recession-Causer. In 2017, the Republican government cut taxes on corporations. While this gave the economy a bit of a boostie, it was less than expected, and the positive effects will fade sometime between 2022 and, uh, now. What’s more, the plan was structured around future tax hikes to lower and middle class Americans. All of these factors working in concert make it an especially bad combination.
A corporate debt bubble
Corporations, like people, can hold debt. Right now they’re holding a lot of it. There are about 30 million businesses in America, and they currently hold 9 trillion in debt. For comparison, there are about 325 million people in America, and they owe a collective 13 trillion in debts. Think about that and you’ll realize why people in the finance space are predicting a recession.
The plot of Star Wars Episode I: The Phantom Menace
That is: trade wars!
Quickly, what is a trade war? It’s exactly what it sounds like! Two countries try to harm each other, but instead of bullets, they use trade regulations. It’s exactly as Phantom Menace depicted it: boring, hard to understand, ruins everything.
At time of writing, the United States and China are trading like two extremely wealthy, extremely nasty, about-to-divorce parents on opposite sides of a twenty-foot dinner table. China is America’s #1 biggest trade partner, so it’s a big deal. And it doesn’t help that our president is actively picking fights with #2 and #3.
Across the pond, Britain and the EU are also trying to negotiate the terms of their divorce. Britain has been negotiating with something less than unity and poise. A no-deal Brexit would cripple the English economy. The volatility of these situations challenges the stability of the entire interconnected global marketplace. So that’s pretty bad.
It’s unlikely these trade wars will lead to the rise of a brutally fascist intergalactic empire ruled by a cloaked religious zealot, but stranger things have happened! Maybe start buying stocks in cloning technology?
What the hell is going to happen, anyway?
Recessions, like forest fires, happen all the time. The economy is cyclical, after all, so this is bound to happen sooner or later. Perfectly normal! And as we’re almost a decade into the second longest economic expansion in U.S. history, we’re fucking due.
It probably won’t be as bad as 2008. That was not a normal recession. Things like the Great Recession of 2008 and the Great Depression of the 1930s are generally more spread apart than a normal dip in the economy and stock market.
The economy regularly expands and contracts according to factors like the gross domestic product (GDP), employment, and interest rates as determined by the Federal Reserve. An expansion is when everything is going super well for the economy! A contraction is when productivity declines, business revenues go down, and companies lay off workers. Unemployment rises so consumers spend less money.
That’s what we have to look forward to in the next recession.
The people who’ll be hit the hardest by the coming recession will (of fucking course) be low-wage workers at the mercy of large corporations looking to tighten their belts in order to avoid losing profits. They might get their hours cut or be laid off entirely as the company institutes austerity measures. (Note: corporate austerity measures rarely seem to involve pay cuts for corporate leadership. Just the people who make the donuts.)
Property owners might also be hit by the coming recession. During a recession, housing costs could plummet and interest rates rise, meaning anyone trying to unload a house will be shit outta luck. And if you lose your job due to a recession… you’re still on the hook for your mortgage.
Can a recession ever be a good thing?
No. Full stop.
“But what if I—”
Savvy investors and the financially solvent (which, let’s not play, includes your humble Bitches) may be able to turn a recession to their personal advantage. Much e-ink has been spilled about just how exciting an opportunity a recession can be to those of us who understand and have the means to buy low and sell high when the walls come tumbling down.
But during the last recession… people died. Families lost their homes. Small businesses had to close and people lost their jobs and retirement accounts melted like Nazis in the presence of the Ark of the Covenant.*
And no matter what you think of the people who will be negatively affected by a recession, it is my fervent hope that you are human enough to have compassion for their plight.
If instead you’re celebrating the approach of a recession because of how you might personally benefit… kindly grow a fucking soul.
How worried should we be?
If you’ve made your plan and taken steps to safeguard yourself, you shouldn’t be too worried.
As is true for anything concerning money, a little caution is always a good idea! But there’s probably no need to board up the windows and stock up on ammunition.
Personally, I’m not concerned for myself. My husband and I have a healthy emergency fund, a great credit score, and solid employment. Aside from the mortgage, I’m debt free (good riddance, student loans). I have multiple side jobs and marketable skills, so if I lose my job, I know I’ll still be able to bring in an income.
As far as my investments go, I’m planning to leave them alone and ride it out. I might lose money, yes, but historically speaking, the stock market has always recovered.
It might be a little safer to switch some of your stock investments over to bonds before a recession hits. If you’re a savvy investor, you can then buy stocks when the market plummets and stocks are cheap. In fact, if you’re not ready to start investing yet, it might even be a good idea to save your money and invest it during the recession when stock prices are low. Here’s how all that works:
- Investing Deathmatch: Stocks vs. Bonds
- Investing Deathmatch: Investing in the Stock Market vs. Just… Not
- Investing Deathmatch: Paying off Debt vs. Investing in the Stock Market
- Investing Deathmatch: Traditional IRA vs. Roth IRA
- Investing Deathmatch: Managed Funds vs. Index Funds
*To whoever runs the giant warehouse containing the Ark of the Covenant: now would be a good time to whip that Nazi-melting thing out.