The stock market is brutalizing Wall Street investors, falling more than 17% year-to-date in August. Earlier in June, the market lost more than 20%, briefly falling into a bear market as economists anticipated Gross Domestic Product (GDP) to return negative for a second consecutive quarter. When initial estimates determined that second quarter GDP contracted by 0.9%, many Americans believed that this was the official beginning of an economic recession. Under ordinary circumstances they would have been correct, but Americans are currently living through unordinary times. Although economists, government officials, and the current administration refuse to admit the reality of the situation, and deflect to a recession that may never come, Americans should know that they are in a recession today.
After two months of arguing the merits of a real recession and technical recession, economists had a rude awakening when Federal Reserve Chairman, Jerome Powell, delivered an emphatic speech on the Federal Reserve’s commitment to fight inflation. Speaking at the Economic Symposium in Jackson Hole, Wyoming, Powell warned that businesses and households should expect financial pain as the Fed maintains it’s aggressive push to ease inflation with their historic rate hike program.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Chairman Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The Federal Reserve has raised the federal funds rate to 2.5% so far in 2022 and is expected to go even higher until inflation is tamed. In January, economists only anticipated three rate hikes that would put the federal funds rate around 1.0% by the end of 2022. In fact, the Fed became so aggressive in their fight against inflation, they nearly raised rates a full percentage point in June, increasing rates by 75 basis points, which was the largest hike since 1994.
Following Powell’s damning speech about inflation and the Fed’s unfettered commitment to bring it down, economists began to admit that a recession was inevitable, but not till 2023 and it won’t be because of higher interest rates. According to Steve Hanke, an economics professor at Johns Hopkins University, the reason the United States will enter a recession is due to the lack of M2 growth. M2 is the term used by the Federal Reserve to define money supply. Available data shows that from the onset of the pandemic through August 2022, M2 increased over 40% from $15.4 trillion to $21.7 trillion, thanks to a tsunami of unprecedented stimulus from the federal government.
This argument about overstimulating the economy did not gain much traction with many economists as the Federal Reserve, Biden Administration and others referred to inflation as temporary and transitory. The team at Crash Proof Retirement®, however, has stated since April 2021 that massive stimulus efforts risked overheating the economy — history looks kindly upon those with truth and logic. When the current administration finally came around to recognize inflation as a persistent problem for Americans they pointed to a new scapegoat in February, blaming Russia’s invasion of Ukraine for high inflation.
The conjecture from federal officials and economists is finally coming home to roost as individuals, like Chairman Powell, are starting to say the quiet part aloud — there will be pain. Their admittance is too little too late because Americans have experienced pain for nearly two years. According to the American Enterprise Institute, inflation is causing the average household in the United States to pay an additional $450 a month for the same goods and services they were buying over a year ago. The untold truth of Powell’s statement in Jackson Hole is that Americans are going to experience more pain than what they are struggling with right now.
Regardless of whether experts want to classify current economic conditions as a recession or not — based on consecutive GDP contractions — this fact remains the same: higher interest rates will eventually reduce the impact inflation has on Americans pocketbooks. Conversely, Americans will replace the pain of inflation with more expensive debt, as a result of higher interest rates. The New York Federal Reserve recently published their Quarterly Report on Household Debt and Credit for August 2022, which indicated a record $16.15 trillion dollars of debt held by Americans.
Due to higher prices, credit card debt increased 13% year-over-year, which was the largest increase since the early 2000s. Consumers carrying large amounts of variable-interest debt will not only be forced to reduce their spending to pay their bills, but if they struggle to pay their bills this opens the door for a potentially catastrophic debt crisis occurring amidst an economic recession.
Despite these efforts to tame inflation, it is likely that inflation will persist through 2024 and the point made by Professor Hanke is a valid one. Money supply must be brought down as well, and the process of accomplishing that goal will slow the economy. This would mean that the Fed will increase bank reserves, which in turn will reduce lending and decrease economic advancement. While all of these actions threaten to place the economy in a deep recession, there is a backend risk of taxes being raised to account for increased deficits created by the ironically named, Inflation Reduction Act.
Continuing to deny the existence of a problem, such as a recession, puts Americans and their hard-earned savings at risk, especially for those who are invested in the stock market. Conveniently, Chairman Powell made his statement at Jackson Hole just in time for investors to enter September, which has historically been the worst month for investors since 1950. It is now up to investors in or near retirement to take it upon themselves to protect their hard-earned nest eggs. For Wall Street, however, profit has always taken precedent over security. Investors can follow simple tips to avoid losing years of their precious growth time by removing the risk of volatility and fees from their investment portfolio while following a safe path, especially during this economic recession.
