March 16, the chairman of the fed, J Powell, said that a recession is unlikely despite
the fact that the fed has raised the rates and cut off the lifeline support to the economy.
A few months later, on June 22, Powell said a recession is 'a possibility' bu t not likely.
Mmm, I wonder what has changed.
GDP growth rates for q2 are out, and real growth decreased at an annual rate of 0.6
percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter.
Which means, technically, we are in a recession.
But J Powell said he does not think the U.S. is currently in a recession.
Seems like he has his own interpretation of a recession.
That’s probably what happens when you fail at your job.
However, a month later, on the 30th of August, he said that 'some pain' is on the horizon”.
I wonder what that means?
The economy is declining, the stock market has crashed, and companies are going bankrupt.
But J Powell keeps avoiding the word recession.
He is willing to call it however you want but not - a recession.
Let me tell you what “some pain” means.
It means putting people out of work, shutting down small businesses because the cost of
money goes up because the interest rates go up.”
Companies can no longer borrow money to sustain the growth they had the last 2 years.
Some people find it difficult to understand that money isn’t going to solve all of your
problems.
If a business is unprofitable, it can survive if you keep feeding it cash.
But it doesn't matter how long you will keep feeding it.
If it’s not going to become profitable, it will collapse the moment the financial
support dries up.
Have you ever been to Subway?
Usually, there are 3 to 4 people working at a subway store.
If we double the number of workers there, they are not going to produce double the number
of subways.
Their productivity will most likely diminish since they will disturb each other since the
place is too small for 8 people to work productively.
That's known as the law of diminishing return when any additional input will cause a negative
output.
But at the end of the day, you have to pay them all, at least the minimum wage.
That’s not a problem when you have access to free money, but when that free money is
not available, you start running into a trouble.
You have to cut your workforce and try to be as efficient as possible with just 3 employees
at every subway store.
Thats why we have news such as this “Bedbath and beoying are slashing more than 20% of
their stores”.
Paypal began firing employees since May.
Coinbase will lay off 18 percent of its employees.
Tesla already began laying off 10 percent of its workforce, with ex-employees confirming
on LinkedIn that they've been laid off.
While the fed is trying to calm us down that everything is ok and we shouldn't worry, the
reality is far from that, especially if you ask Ray Dalio who believes that the US is
on a brink of a catastrophe!
Why United state’s debt crisis will lead the country to a crisis the world hasn't seen
before?
Why it wont just crash the markets, but might cause the US economy to collapse!
How high does the fed to raise the rates to finally bring inflation down?
And how to prepare for the biggest crash in American history.
We will answer all of these questions and many more.
But before we do that give this video a thumbs up
and let’s dive in.
The main job of the federal reserve is to protect
the value of the dollar, to keep people’s faith in the dollar, to make sure that your
dollars tomorrow won’t become worthless.
So, when inflation is almost hitting double digits, it’s clear that the fed is failing
at its most important job.
But it isn’t always the fault of the fed.
The federal government is to blame as well since the president literally appoints the
chairman of the fed, who is the most important decision maker in the fed.
Secondly, sometimes the government overspends, like distributing stimulus checks or forgiving
student loans.
There is nothing called free money.
If you have borrowed money, you have to return it, plus interest - that’s how capitalism
works.
The moment you misuse that printing press and keep printing to pay for everything, the
value of your currency will quickly plummet.
Imagine hypothetically there are 10 goods and 10 dollars in the entire economy.
In this hypothetical example, each good will cost a single dollar.
If we throw an additional 10 dollars into the economy, now there will be 20 dollars
but still 10 goods in the economy which will make the cost of each good to double to match
the demand and supply.
Of course, it’s just a theoretical example but you get the point.
When you throw trillions of dollars into the economy, that’s what you get, whether you
like it or not.
And instead of trying to solve the problem by limiting the supply of money, the fed is
saying that inflation is caused by the shortage of energy or supply chain problems.
Yes, of course, these are the factors that are contributing to inflation but that still
doesn't exclude the fact that there are too many dollars in the economy.
Back in the 1970s, when inflation hit 11 percent.
Guess what Arthur Burns said; who were the chairmen of the fed back then?
He blamed the shortage or energy and food.
Later though, he raised the rates overnight to more than 12% by mid-1974.
That instantly cut inflation by half, which was good news.
But that naturally created a recession since suddenly, there was significantly less money
flowing into the economy, which increased the unemployment rate to about 9% from 5%.
Instead of keeping the rates high long enough, Burns panicked and lowered the rates, which
brought inflation back.
Inflation remained high until Paul Volcker was appointed as the chairman of the fed in
1979.
He raised the rates up to 19 percent and kept them high for a few years.
He was unpopular.
People hated him, but he left the office with inflation at around 3 percent.
And it seems as if the exact scenario is repeating now.
Instead of raising the rates last year, the fed denied any signs of inflation.
Now it’s not raising them high enough and blaming global energy prices.
The economy is getting into a recession, and they are changing the definition of recession.
Come on, guys!
Raising the rates will be painful, but you know what's more painful?
Seeing the value of your savings vanish!
According to Ray Dalio, that’s what happens when empires reach their peak.
The entire empire runs on debt.
However, someone’s debt is someone else’s financial asset.
Literally, a passive income asset.
When United State’s debt rises, someone else on the other side of the world holding
that debt becomes wealthier.
Over time as that debt keeps growing, sustaining it becomes even more difficult.
It’s like when you get into debt.
When you get a mortgage, you only have to make a 1500 dollar payment every month.
Not a burden!
But then you get a car loan, a credit card loan, a travel loan, a loan to renovate your
house.
But your income doesn't rise at that speed!
So, at some point, you either have to cut your spending or go bankrupt.
The problem is that when the source of the wealth is printing money, nobody even pays
much attention to where the wealth is coming from.
Everyone got their paycheque, but nobody’s money was taken away, so it's politically
easier.
So you hear of the discussions of ‘We need to spend money on this’ and ‘We need to
spend money on that,’ but there’s not much talk about ‘Where does the money come
from?
Everyone was concerned about the stimulus checks, but no one was worried, asking where
is the money coming from.
And now the US is indirectly leading a war against Russia by defending Ukraine.
Where is the money coming from?
Student loan forgiveness!
Where does the money is coming from?
The list goes on and on.
And then we wonder why we have so much inflation.
You cannot deceive the basic laws of demand and supply.
I know that raising rates will tumble the profits, but high inflation will squeeze consumer
buying power as well, so the consumers are losing either way.
The only difference is that savers will not suffer in the long run, which is how things
are supposed to be.
Sooner or later, the fed will have to acknowledge that, and it will raise the rates so high
and long enough that it will cause some kind of stagnation that will drag on for a few
years at least.
We have already talked about how to protect yourself during high inflation, but here are
a few suggestions from Ray Dalio: Build as diverse a portfolio as possible — ranging
from inflation index bonds, which Dalio recommended above regular bonds, to physical assets like
gold.
Figure out how many weeks you could financially survive if you lost your job.
“It always pays to find out whatever the worst-case scenario is and cover yourself
from that.
When stagflation hits, you cannot do much, so it's always better to prepare earlier.
Thanks for watching and see you in the next one.