The Illusion of Consensus and the Inevitability of Economic Cycles: Why We Should Brace for a Recession
If you dig into recent Federal Reserve data, you'll find a stark tale of two Americas. While both groups—those at the top and the bottom of the wealth ladder—experienced a savings bump at the height of the pandemic, the picture has drastically changed.
For the bottom 80% by wealth, the situation isn't just bleak—it's darker than before. Imagine you're standing at the bottom of a hill, and it's as if someone turned up the incline. Your savings are now 8% less than before the pandemic, and the hill's slope has gotten steeper. This is a puzzle because recessions usually serve as moments that jolt people into saving more. But, this time, the bottom 80% finds themselves behind where they started.
At the same time, the top 20% have their savings increased by 8%. Now, this isn't a judgment call. It's just math. And this math is becoming increasingly problematic because the distribution of economic suffering isn't a problem until it is—a big one.
The Unspoken Language of Interest Rates
Here's the thing: interest rates aren't just numbers; they're signals, like a barometer for economic weather. The Federal Reserve's hike in rates has led to a 30-year fixed mortgage now costing around 7.5%, a peak not seen since the year 2000. These aren't just rates; they're messages telling us that money is getting more expensive. In layman terms, it's like the economy saying, "Hey, you need to work harder to afford the same things." It's not just a number; it's a change in lifestyle, in aspirations, and in plans.
Borrowing: The Silent Killer
If the high interest rates are bad news for anyone looking to buy a home, they're catastrophic for those who already have mortgages and are looking to refinance. Each uptick in interest is another shackle, another constraint. Those chain links are made of cold economic steel, and they have real weight.
Here's the silent truth about debt: It's not a problem when interest rates are low. But once those rates start climbing, monthly payments swell, and you can suddenly find yourself underwater. The Great Recession of 2008 was largely a story about debt—of homes, of businesses, and of governments. And it looks like we're setting ourselves up for another narrative about the perils of borrowing.
Student Loans: The Millennial Anchor
As if the interest rate story wasn't harrowing enough, let's talk about another impending liability—student loans. Payments that were deferred due to the pandemic will resume soon. This is like adding an anchor to a generation already swimming against the tide. It may not sink them, but it'll make the swim a heck of a lot harder.
A Vanishing Safety Net
Now, remember the stimulus package? Households had around $1.2 trillion in stimulus capital. They were spending it at a rate of $100 billion per month, almost like an economic fuel. But fuels run out. With about five months left in this stimulus tank, we're looking at a new breed of scarcity, one that we've cushioned ourselves against over the past year and a half.
The Labor Market Cooling Off
In the midst of all this, the labor market, which had been red-hot, is starting to cool down. A few months ago, there were more jobs than people looking for them. The ratio was 1.7 to 1. Now it's at 1.4 to 1. Jobs are still out there, but the feast is becoming less bountiful. And as we know, in economics, direction often matters more than the absolute state of things.
Why Recessions Aren't All Bad News
But let's talk about the upside—yes, there is an upside—to a recession. Economic downturns aren't necessarily evil; they're like forest fires that clear out the old underbrush to make way for new growth. For those at the start of their economic journey—20 or 30-somethings—a recession can present a buyer's market. Stocks, property, and even businesses become more affordable.
The Economic Dice Game
The prevalent wisdom is that a recession happens about every seven years. We've been on a winning streak, rolling the economic dice again and again without landing on that fateful six. Are we overdue for a reset? Jamie Dimon thinks so, and statistics would agree.
The point is, when everyone's singing the same tune—that of a soft landing—it's usually time for a new song. Economic behavior, particularly at scale, has a contrarian streak.
Final Thoughts: The Unpredictability of Predictability
In economics, paradoxes abound. When everyone zigs, maybe it's time to zag. When the consensus is that we're not headed for a recession, perhaps that's precisely when we should be most prepared for one. So as you hear talks of a soft landing, remember that life—and especially economic life—is rarely that predictable. Prepare for some turbulence; it's the only sensible thing to do when everyone else assumes a smooth flight ahead.
So, fasten your seatbelt and double-check your financial parachute. There's a good chance you're going to need it. And strangely, that's not necessarily a bad thing.
Reference: Board of Governors of the Federal Reserve System. "Data." Federal Reserve, https://www.federalreserve.gov/data.htm. Accessed 6 Oct. 2023.