We are all hearing a lot that the recession is coming, or even here already according
to some people.
Although we don't have the usual characteristics of a recession, or a market crash.
We don't have our usual bubble that has popped.
Crpyto possibly was starting show some signs but that was curtailed early enough.
Now I am smart enough to know that I cannot predict the future, and as they say economists
have predicted about 7 of the last 3 recessions.
I do however like thinking through possible scenarios.
I then assign a possible percentage of the outcome to said scenarios, and may invest
according to the potential outcome.
I would like to run through one possible version of the recession of what we might see, if
it got into full swing.
Again I am not married to this idea, I am merely exploring it with you, and talking
about how it may happen, and would also love your ideas on it too.
INFLATION Right now we are experiencing inflation, the
reason being the governments have printed so much money due to the COVID crisis.
Now the governments are doing what they can too cool the economy.
A lot of people have made a lot of money lately, especially those invested in real estate.
A lot of people have real estate.
I think I remember a statistic that was crazy high about the percentage of the 1% that made
it to the 1% through real estate investments, it was well over 90% of them.
It's not just real estate too, but most of the stock market is still up around 50% since
COVID, and it was around 100% before the governments started to intervene.
These are huge gains in wealth, for the ones that had the right assets.
Governments are doing what they can to try and break the back of inflation, we are seeing
rates increasing, attempts at quantitative tightening, doing what they can when it comes
to monetary policy.
And residential property has been hit a bit as a result.
We are also seeing new fiscal policies too, with increased tax along with corporate tax
with the inflation reduction act.
And hiring a massive army of IRS agents.
They are trying to scare people to stop spending, to cut back, with the adage of inflation being
too many dollars chasing too few goods.
But it doesn't seem to be working as well as they would like.
We have seen in the past when we have had inflation like this then FED have gone all
the way, and increased rates as high as round 20% to just grab it by the throat and throttle
it.
INTEREST RATES However, that was about 40 years ago, and
since then society has decided to take on a lot of debt.
Everyone has been running on debt, more credit cards, loans, financing, and living in the
now, and paying it off in the future.
This has only been further exacerbated by the low interest rates we have been experiencing
for some time.
When money is cheap, or virtually free, this is all very affordable.
But now the rates are increasing, and it's not so affordable.
PERSONAL DEBT So a lot of people have a lot of personal
debt, and with rising interest rates that becomes less affordable.
Of course if their wages are also rising, then it becomes more manageable.
Other nations have higher debt when it comes to property, nations like New Zealand, or
particularly Australia, have a lot of mortgage debt.
They also don't have longer term debts of 30 or so years like the US, but often just
one to 3 years, and the highest is usually only about 5 years.
In New Zealand about 55% of people's mortgages are coming up for renewal next year, and when
they have a big mortgage, and interest payments may now be double, it simply becomes unaffordable
for many.
GOVERNMENT DEBT Whereas in America it is more so the government
that has a high level of debt, and equally when their bonds come up for renewal, they
will have a much higher interest rate to pay also.
Spoiler alert, they don't have enough government income as it is, when you add increased interest
on their debt, then they simply can't afford it.
Raising taxes can only increase government income by so much, and definitely not close
to this amount.
PIVOT Now governments like Australia can't let their
entire property markets collapse and a higher percentage of their population lose their
houses.
Likewise the US government can't continue to keep rates at which they can't afford.
A lot of people think eventually governments have to capitulate, and pivot one way or another.
Equally they don't want to just be predictable, for people to simply profit from these absurdities.
Therefore they would eventually have to lower rates and or print money as it is not sustainable.
INFLATION In other words, there is more inflation to
come.
BUBBLE We are in another bubble, but it doesnt appear
as obvious as others.
People are looking for the usual bubbles, in the stock market, or real estate, but this
one might be harder to find.
In the 80s we had Japan, the 90s we had the Asian Financial Crisis, then the .com bubble
and of course the real estate bubble the popped in 07 resulting in the global financial crisis.
But where's the next bubble.
Sure we saw SPACs crash and crypto, but it wasn't the end of the world.
But we have have out of control inflation?
What kind of bubble is that?
This is the currency bubble.
How does a currency bubble pop?
With more inflation.
WORK AROUND The chance I see of avoiding this, is running
this to as close to a crash as possible, trying to keep it as stable as possible, threatening
the markets with scare tactics.
But the markets might just call their bluff, as they realize there is very little they
have in their arsenal, due to so much debt already amounted by the government, they have
little actual control any more.
They can give the illusion they are sorting by naming things like Inflationary Reduction,
even though they will literally create more inflation.
But if they can keep the economy chilled as much as possible with words, then perhaps
the economy can work its way through.
I am not sure about this though.
Anyway, perhaps supply chains will improve and perhaps the transitory elements of inflation
will at least ease.
Maybe long enough for oil or energy prices to also reduce, perhaps they hope the war
will come to an end, and other such measures might eventually take effect, and they can
try and keep a lid on inflation for as much as possible until all this eases.
EMPLOYMENT In the meantime we have high employment rates,
with a lot of demand for more positions.
This should really mean that inflation trickles down and wages do eventually rise.
I kind of feel like the old soviet saying of "They pretend to pay us and we pretend
to work" is apt right now.
I think businesses will end up needing to pay more, to hire more people, and work harder.
This should see wage rises across the board.
Of course this would then eat into business owners profits.
Said business owners are also seeing price rises everywhere, and need to make profits
to get by too.
Therefore they would have to raise the prices of their products in order to make the same
amount in real terms.
Which would further add to inflation again.
However business may be doing well for them anyway, as sales are up, hence why they needed
to employ more labor in the first place.
Anyway long story short, wages might rise, to adjust more or less for the new pricing
levels.
And what does that mean?
Well it would mean that people are now paying more tax.
Everyone has more income, and the government has more income.
The income is much higher relative to debt.
We have inflated the economy out of debt.
However, this would like leave a massive disparity in wealth between the haves and have nots,
and we would face more inequality.
BOOMERS Employment should remain strong though, and
we have demographics maintaining that too, with the largest generation already starting
to retire, leaving positions empty, with smaller generations to replace them.
The next generation is of course Gen X, however, it is a relatively small generation especially
in nations that were more affected by world war 2, the US actually wasn't too badly affected
when compared to others, and is in one of the best positions when it comes to demography.
DEFLATION The other risk is that governments go too
extreme, and really crash the economy.
This can be hard to restart, and governments can make it worse.
For example after the 1929 market crash, the US wasn't into double figure employment figures
until the government started to intervene and make things worse.
If the war hadn't gotten the country out of the depression, who knows where they would
have ended.
After the global financial crisis in 2008, over a trillion dollars was spent American
Recovery and Reinvestment Act, and it had little effect.
STIMULUS PACKAGE It is also arguable that Inflation Reduction
Act may even be the necessary stimulus package, in a sense, that may be required if we do
indeed hit a real recession, something similar to the 2008 global financial crisis.
This was tough to get out of.
I even have a theory, that partly what got us out of it, was Apple, with the iPhone,
that started a whole new industry, an absolutely massive industry.
That also created a product that gave us about $10,000 of other products, all combined in
one little tool that fits in our product.
It's innovation like this that gets the world out of these slumps.
And again, we might see the industry of electric vehicles and renewable energy have a similar
effect, and really drive the economy, whilst offering deflationary products to combat the
mess the governments have got us in.
SUMMARY There is a lot of debt out there, and perhaps
they only way to deal with it, is to inflate our way out of it.
The US government can't cover their government spending with tax, even with 0% rates, let
alone a lot higher.
But like I said, it's absurd to think you can predict how these things go.