What the Coming Recession May Bring and What We Can Do About It
This week, we're going to wrap up this series of posts about what the coming recession may bring and what we can do about it.
Quick re-cap: Most of us go about our business each day with little time to think about something like a recession - an event that only occurs an average of every 10 years or so. The typical experience of a recession: Some people are hurt; some not so much. And by the time the next recession rolls around, the previous one has likely faded into the mists of our memory. That's even been true regarding the most recent so-called "Great Recession." Even though many of were hurt by the economic slow-down, and most of us were likely a bit shaken by the purported threat of a collapse of the world's financial system, for a lot of folks it's "out of sight, out of mind."
Given the fact that the next recession could be imminent, we thought it best to give a wake up call, a) in case you're not already prepared; b) so that you won't be back on your heels - mentally and emotionally - when the storm hits.
We talked about how if a hurricane were approaching, the prudent man takes whatever measures are necessary to either hunker down or flee the danger. We're not assuming the worst, but certainly not the best. Hurricanes go where they want to go; we just need to stay on our toes while they approach. Once they arrive, some get hit harder than others.
The comparison of a recession to a hurricane can be helpful, as long as we realize one is coming. And that's where the comparison becomes less helpful. We don't get satellite images of an approaching recession as we do with hurricanes. And, frankly, while weather forecasts can be iffy at times, economic and financial forecasts are notoriously inaccurate, to say the least. In the Great Recession, we had the head of the Federal Reserve adamantly insist that the subprime mortgage glut that was hanging out there like a sword of Damocles wasn't going to be a problem. We weren't going to have a recession. Shortly after that, massive subprime mortgage defaults triggered the credit crisis, that triggered a possible collapse of the world's financial system, that triggered the recession itself. It all happened in a matter of months. The worst of it - the virtual collapse of the stock and bond markets - happened in a matter of days, weeks at most, in the fall of 2008. Too few were prepared; many were hurt.
As for the coming recession and what it may bring, we could certainly say that it may be mild, terrible, or somewhere in between. But that's not all that helpful. And so we referred you to a book written by Jim Rickards, Aftermath, which presents the possibility of severe recession while remaining at arms length from dsytopian scenarios. We used this interesting and thought-provoking book to take us through a few of the challenges we could be confronted with during the next recession.
If you think all of this makes sense, please do take a look at previous posts, and consider reading the book itself. For now, we'll start wrapping up our series with the possibility that our US dollar may be at least in the initial stages of the eventual dissipation of its purchasing power. We looked at how much purchasing power the dollar lost during the inflation of the 1970s, the last time the dollar wobbled and almost fell.
However, again, that was then. So it's off most people's radar screens. And,unfortunately, recognizing the fact that the dollar lost roughly 98% of its purchasing power over the last century or so doesn't really help us focus more intently on the problem. If anything, the long time line of that loss of purchasing power leaves most of us like the frog plunked into a warm pot of water with the flame turned on low. It doesn't feel all that bad - until its too late to hop out.
Ideally, the above gets us up on our toes. And with vigilant and energized minds we pick up where we left off last time where Jim Rickards, in Aftermath, explains why the dollar could be in much bigger trouble than it was the last go-round in the 1970s. We can't, in our brief post, recreate the series of events that could lead to the demise of the dollar as the world's reserve currency, or why we could see either deflation or inflation - or possibly both in turn - and what that will mean to our financial well-being. But we can remind ourselves that we all own some financial assets. The last two posts discussed what those are in general, as well as the typical specific financial assets most of us own. When we look at the "bottom line" of our bank statements or brokerage statements, we can find the total value of any account the statement represents. That value is denominated in dollars - US dollars. The US dollar is the unit of measurement used to determine the value of our accounts.
With that in mind, Rickards presents a compelling case for the dollar - at some point - losing value dramatically. If that happens, what effect will it have on our financial assets? We can consider the various possibilities: Bonds may dramatically fall in value as stocks rise. Or maybe US stocks, denominated in dollars after an initial rise in value, sink lower and lower as the dollar persistently and sickeningly loses value month after month. What of gold? The accepted wisdom would be that it should skyrocket. But don't neglect the possibility that the initial stages of any crisis may involve a period where gold, along with all financial assets, fall precipitously. That's indeed what happened in the Great Recession, although after an initial fall, gold rose quite dramatically from 2008 until 2011.
While the book takes you through various scenarios in some detail, it's clear that Rickards believes that it's unlikely that the dollar will avoid at the very least some significant dislocation, depending on how the recession unfolds, along with the response of the U.S. government and the U.S. central bank (the Federal Reserve). He does not, however, believe it will remain unscathed.
When we conclude next time, we'll lay out a summary of suggested measures to consider when the coming recession finally makes landfall.
Quick re-cap: Most of us go about our business each day with little time to think about something like a recession - an event that only occurs an average of every 10 years or so. The typical experience of a recession: Some people are hurt; some not so much. And by the time the next recession rolls around, the previous one has likely faded into the mists of our memory. That's even been true regarding the most recent so-called "Great Recession." Even though many of were hurt by the economic slow-down, and most of us were likely a bit shaken by the purported threat of a collapse of the world's financial system, for a lot of folks it's "out of sight, out of mind."
Given the fact that the next recession could be imminent, we thought it best to give a wake up call, a) in case you're not already prepared; b) so that you won't be back on your heels - mentally and emotionally - when the storm hits.
We talked about how if a hurricane were approaching, the prudent man takes whatever measures are necessary to either hunker down or flee the danger. We're not assuming the worst, but certainly not the best. Hurricanes go where they want to go; we just need to stay on our toes while they approach. Once they arrive, some get hit harder than others.
The comparison of a recession to a hurricane can be helpful, as long as we realize one is coming. And that's where the comparison becomes less helpful. We don't get satellite images of an approaching recession as we do with hurricanes. And, frankly, while weather forecasts can be iffy at times, economic and financial forecasts are notoriously inaccurate, to say the least. In the Great Recession, we had the head of the Federal Reserve adamantly insist that the subprime mortgage glut that was hanging out there like a sword of Damocles wasn't going to be a problem. We weren't going to have a recession. Shortly after that, massive subprime mortgage defaults triggered the credit crisis, that triggered a possible collapse of the world's financial system, that triggered the recession itself. It all happened in a matter of months. The worst of it - the virtual collapse of the stock and bond markets - happened in a matter of days, weeks at most, in the fall of 2008. Too few were prepared; many were hurt.
As for the coming recession and what it may bring, we could certainly say that it may be mild, terrible, or somewhere in between. But that's not all that helpful. And so we referred you to a book written by Jim Rickards, Aftermath, which presents the possibility of severe recession while remaining at arms length from dsytopian scenarios. We used this interesting and thought-provoking book to take us through a few of the challenges we could be confronted with during the next recession.
If you think all of this makes sense, please do take a look at previous posts, and consider reading the book itself. For now, we'll start wrapping up our series with the possibility that our US dollar may be at least in the initial stages of the eventual dissipation of its purchasing power. We looked at how much purchasing power the dollar lost during the inflation of the 1970s, the last time the dollar wobbled and almost fell.
However, again, that was then. So it's off most people's radar screens. And,unfortunately, recognizing the fact that the dollar lost roughly 98% of its purchasing power over the last century or so doesn't really help us focus more intently on the problem. If anything, the long time line of that loss of purchasing power leaves most of us like the frog plunked into a warm pot of water with the flame turned on low. It doesn't feel all that bad - until its too late to hop out.
Ideally, the above gets us up on our toes. And with vigilant and energized minds we pick up where we left off last time where Jim Rickards, in Aftermath, explains why the dollar could be in much bigger trouble than it was the last go-round in the 1970s. We can't, in our brief post, recreate the series of events that could lead to the demise of the dollar as the world's reserve currency, or why we could see either deflation or inflation - or possibly both in turn - and what that will mean to our financial well-being. But we can remind ourselves that we all own some financial assets. The last two posts discussed what those are in general, as well as the typical specific financial assets most of us own. When we look at the "bottom line" of our bank statements or brokerage statements, we can find the total value of any account the statement represents. That value is denominated in dollars - US dollars. The US dollar is the unit of measurement used to determine the value of our accounts.
With that in mind, Rickards presents a compelling case for the dollar - at some point - losing value dramatically. If that happens, what effect will it have on our financial assets? We can consider the various possibilities: Bonds may dramatically fall in value as stocks rise. Or maybe US stocks, denominated in dollars after an initial rise in value, sink lower and lower as the dollar persistently and sickeningly loses value month after month. What of gold? The accepted wisdom would be that it should skyrocket. But don't neglect the possibility that the initial stages of any crisis may involve a period where gold, along with all financial assets, fall precipitously. That's indeed what happened in the Great Recession, although after an initial fall, gold rose quite dramatically from 2008 until 2011.
While the book takes you through various scenarios in some detail, it's clear that Rickards believes that it's unlikely that the dollar will avoid at the very least some significant dislocation, depending on how the recession unfolds, along with the response of the U.S. government and the U.S. central bank (the Federal Reserve). He does not, however, believe it will remain unscathed.
When we conclude next time, we'll lay out a summary of suggested measures to consider when the coming recession finally makes landfall.
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