In an attempt to fight inflation, the U.S. Federal Reserve has raised interest rates, warning that more big rate hikes are on the table if inflation will not cool. This has led to fears that a recession is on the horizon for the U.S. But what is recession? And why does it matter?
In this episode of Fiscally Savage, Dylan brings us a closer look at recession, one of the scariest words in economics. How is it measured? What does it mean for workers and businesses? And are we on the verge of entering one?
- [01:04] Why the US Federal Reserve is raising interest rates
- [02:24] The textbook definition of a recession
- [03:35] The COVID-19 recession as an example of a recession that does not conform to its textbook definition
- [03:59] The three factors that experts observe to determine whether or not there is a recession
- [08:16] The three factors that are indicative of a recession but do not necessarily cause it
- [12:12] Why recessions matter
- [13:56] Three tips for managing through a recession
- [18:02] How Dylan survived the 2008 financial crisis and thrived afterward
- [19:59] Closing statements
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Today, we’re gonna be talking about current events on our Friday show. My whole purpose with this show is just to take things that are happening in the economy, in the markets broadly. Very US-centric for my listeners who are overseas in Europe, but what happens in the United States tends to trickle out into the rest of the world. If you look at the Great Recession, you can definitely see the connectors there.
[00:00:40] So today, what we’re going to be talking about is the idea of a recession. Now, with the US Federal Reserve raising interest rates in their bid to combat inflation, everybody’s expecting these actions to be pushing the US economy into a recessionary state. Now, there’s a couple of questions that should immediately come off the top of your head, which is, why do we believe that the Fed raising rates is going to cause a recession?
[00:01:04] Well, because — for two reasons. Number one, they’re trying to combat inflation. And as we talked about it last Friday, the reason inflation is high is most likely due to a supply chain issue rather than it is to a demand issue. But if you can’t increase supply, you can reduce demand. And the easiest way to do that is to make a lot of people poor. And how do you do that? Well, you drive the economy off a cliff and into a recession. It’s not exactly a very kind thing to do, but it’s effective.
[00:01:31] The second reason people believe that the Federal Reserve is trying to do this is that there’s actually a precedent for this. The last time that there was inflation this high was in the late seventies, early eighties. And the chairman of the Federal Reserve at the time, Paul Volcker, raised interest rates until he caused a deep recession, caused a lot of unemployment, and that drove demand down. Now, hindsight is always 20/20 unless it’s not. And that might seem a little glib, but that’s exactly what the Volcker era is. We’re not entirely certain whether or not his recession is what killed off the inflationary spike that happened during that time or not. It’s highly likely that it is. But I point it out just to illustrate the idea that economics and finances in general are not an exact science. And there’s a lot of squishy things around it, just like the definition of a recession.
[00:02:24] Now, right now, there’s a lot of people who are pointing to the idea that we’re in a recession at the present moment when this podcast drops. And they’re doing that because they’ve read in a textbook that a recession is defined as two quarters of negative GDP or gross domestic product. The GDP, of course, is, you can think about it like the national income — all the money for all the goods and transactions, government spending, and then, of course, exports minus imports equals GDP. That’s how we calculate that. So if you have two quarters where that’s negative — that is, we’ve lost money, our income has gone down — then we consider that to be a recession according to a textbook.
[00:03:02] Now, for anyone who’s gone through a formalized education process and read textbooks and then has gone on to get further study in that field, you probably learn pretty early on that a textbook definition is not necessarily reality, and it’s horrendously more complicated than what was presented when you were in those lower-level classes. The definition of recession is literally no different than that. That the idea that we have two quarters of negative economic GDP is not actually the definition of recession. It’s a squishy thing.
[00:03:35] Let me give you a good example where we actually didn’t wait for two quarters of negative GDP to call a recession and that was in March of 2020. When COVID hit and the stock market tanked, a bunch of people lost their jobs, they called a recession immediately. We didn’t have two quarters of negative GDP. We weren’t sitting on our hands going, oh, my God, is it a recession or not? The answer was we were in a recession at that time.
[00:03:59] Now, how did we come to that conclusion? There is an actual board of economists who sit down and they examine three different factors of what’s going on in the economy to make the determination of whether or not we’re in a recession, and that is, if the downturn have depth, diffusion, and duration. Now, those are some terms that are bandied about. There are other more technical terms for them, but they’re the ones we’re gonna use today.
[00:04:22] And what we see here is we look at that and say, okay, how deep is it? That is, how big is the drop? According to our last GDP numbers in the United States, we’re less than 1% drop. That’s not a very deep recession. If it is a recession, we haven’t dropped that far. So on the depth indicator, yes, we’ve had a negative number, but it’s not 3% or 5% or 6%, which would be a significantly bigger downturn.
[00:04:46] Diffusion is the idea of is it spread across the economy? And you can kind of think about it this way. Let’s say that there’s a new technology that comes out that’s going to completely replace one very specific type of worker in the economy. And that technology comes out across the economy overnight and unemploys all those people in whatever little sector it is. Now, that’s gonna sting and it’s gonna leave a mark, but it’s not a diffuse issue because it affects one very specific sector of the economy. An example where you can kind of see this is, you know, shocks to oil. Shocks to oil will hit the oil industry very acutely, but it might not diffuse across the economy in the same way that is affecting the O&G space, oil and gas.
[00:05:32] Other examples of this is if you’re in power utilities and there’s new regulation that’s going to affect the power utilities themselves but not necessarily their customers. Amazon could be having issues with labor because that’s something that’s happening right now. That is, again, going to have a very acute impact on the economy but not necessarily diffuse across it.
[00:05:50] Diffusion is tricky, but what you wanna be able to see is to say, well, this downturn here in this particular sector is driving downturns in others. Again, going back to March of 2020, you saw this with COVID, right? It would hit very deep and very fast across the entire economy. Same thing with the Great Recession in 2008. You know, the housing market collapsed, it took a bunch of financial institutions with it. And then because of that, it created what’s called contagion across the entire economy, and everything dipped very deeply.
[00:06:19] The last part is duration. And this is the one that can kind of be controversial across different things. And the reason I say this is that, for example, the Great Recession in 2008 had a duration that was relatively short compared to recovery. So the duration of the recession might only be a couple of months or might be six months, it might even be a year, but the duration does not equal recovery. Duration is how far or how long the free fall happens.
[00:06:48] And this is what makes this whole thing squishy because you can have a couple of things, like the, you know, March 2020 recession when COVID hit, everybody freaks out. It creates something that’s very deep. It creates something that’s very diffused. But the duration was actually very short. We were back up and running within a couple of weeks. And so, after we got out of the freak-out, everybody took a breath, and we actually thought, okay, thought this all the way through. What’s going to happen? Well, people are gonna start working from home. The deliveries are gonna come up. A lot of workers are gonna shift one industry to another. And that, of course, brings us right back online in terms of our GDP growth. So that’s a recession where we’ve got deemed a recession because of its depth and diffusion, but the duration wasn’t really that bad. And truth be told, we didn’t have the two quarters of negative GDP growth at the time in which we called that recession.
[00:07:42] You look at the 2008 financial crisis with the Great Recession that’s there. You had something that was very deep, very diffused, and the duration itself was less than a year before we started on recovery. Where this gets mixed up is that people will say, well, it was, you know, that all happened. Recovery started, the recession ended in 2009. But I didn’t start recovering, Main Street didn’t start recovering, my friends didn’t start recovering until 2012. Well, that, of course, is the difference between the actual recession of the economy in general versus, you know, the day-to-day lives of the people affected by both the recession and then the later recovery.
[00:08:16] It’s worth noting at this point that there’s a few things that are not actually indicative of a recession. They’re indicators, but they’re not a recession itself. That includes metrics like employment, housing, and the stock market.
[00:08:31] People love to point to the stock market as if it’s some sort of indicator of the economy, and it’s in fact not. The stock market will do what the stock market’s going to do for a variety of reasons that I’m sure that I will get into in later shows. But the stock market is a vehicle to shuttle capital around. It can indicate a lot of stuff that’s happening in the economy, but it’s not the economy itself. As of this recording, the Dow Jones Industrial Average, S&P, and NASDAQ Composites, and those indices are all pretty far down for the year. So if you’re looking at your portfolio, you’re probably not a happy camper. And it’s unlikely that at this very moment we are in a recession. Why? Well, because we don’t actually have the deep losses that we would expect to see where we do see deep losses that are not stock market-related. We don’t see huge diffusion. And we haven’t started ticking off the duration.
[00:09:26] Employment is another thing. This is where I’d like to say all of our indicators are going, pointing in different directions, right? Our stock market is pointing down. Okay, well that doesn’t seem that great. Interest rates are going up. Okay, that doesn’t seem that great. And employment’s holding steady. You know, job postings are decreasing, yes. But right now, employment’s strong. And so, when you look at that, is it easy to say, well, yes, we’re in a recession when people aren’t losing jobs? That’s one of the hallmarks of recession is that employment starts going down.
[00:09:57] But let’s flip the script for a second. Sometimes when employment goes down, the stock market goes back up. Why? Well, because those companies are expected to save money. So what’s going on with all of this? And, you know, this kind of goes back to a point that I’ve made before. Now, we live in interesting times. And because we live in interesting times, a lot of our indicators and things that we’ve come to rely on to help us steer the ship of the economy are no longer reliable or at least we’re not sure what they’re indicating to us anymore. The yield curve, of course, is a famous recession indicator. That’s where short-term interest rates are higher than long-term interest rates. We say that the yield curve has inverted. Then that’s been a fairly decent indicator of when a recession’s coming until it’s not. You know, we like to say, oh, it’s predicted the last 10 recessions. Well, it’s also missed two. It’s had false positives in the past. That is to say, as with everything, the definitions are squishy.
[00:10:52] And employment, I think, in my own personal opinion, if I put on my hat, employment’s the most interesting piece of this because if the Fed is trying to induce a recession in order to combat inflation but employment holds on steady, this is where you get companies like Bank of America, JPMorgan Chase, are starting to say a recession is coming in six to nine months. Those are wonderful headlines for generating clicks and scaring people. But the reality is they don’t know. We’re gonna get back to why they might like the idea of a recession in here in just a second. But the reality is they don’t have any better crystal ball than I do. They just have data and pay more people to analyze it than I can do sitting at my desk or where I’m recording this podcast.
[00:11:34] The employment was probably the key piece because, remember, the Fed is raising rates to combat inflation — inflation is too many people with too much money chasing too few goods — and they can’t actually do anything about the “too few goods” piece of this equation. So instead, they’re trying to do something about the “too many people with too much money” side of the equation. And the easiest way to get them to stop spending money is to take away their job, which, of course, the Fed has publicly stated is part of their goal; that they want to shift the power in the labor marketplace back to the employer and to get wages to come back down. The chair of the Fed has publicly made that statement. So I’m, you know, you can go fact-check me if you’d really like.
[00:12:12] And that, of course, brings us to why recessions matter. And that’s because it affects the lives of individual people like yourself and I. I’m not sitting here talking to you as somebody who is going to be just fine in a recessionary environment. Look at all the recessions in the last hundred years. The people at the top end of the economic spectrum always do very well, but it’s Main Street who suffers. It’s the Main Street who loses the factory that supplied the jobs, that supplied the purpose for the people who worked in that factory. It’s Main Street who are trying to start small businesses who can’t get bank loans and access to capital. It’s Main Street who suffers in this case.
[00:12:51] And the people who benefit — this goes back to Bank of America and JPMorgan Chase, for example, but certainly not exclusive — they’re the people who have cash and other financial firepower to take advantage of it. If you’re closing up your business, they can buy your assets quite cheap. And that’s good for them. If everything’s going to foreclosure, they can buy a whole bunch of real estate at rock-bottom prices, even if the interest rates are high, because they’ve got the cash and financial firepower to do so.
[00:13:16] And so, this may be why, ladies and gentlemen, as you’re looking around and you’re seeing all these clickbaity headlines that are trying to drive fear — because nothing sells like fear and outrage, let’s just be honest on that — it might in fact be because those people are positioned to take advantage of recession. If you look at some of the best investors in the market — Warren Buffet, of course, comes to mind, but there are plenty of others — they made their best money in downturn years where everything was in a recessionary state, whether it was in the stock market, the real estate market, or whatever, because they’ll be able to buy things up cheap. And when that recovery takes place, they then now have an asset that they bought low and now they can sell high.
[00:13:56] But for you, dear listener, the question that’s probably coming into your mind is, well, how can I manage my way through a recession? Definitions are great, but they’re not actually gonna help me feed my family. So I’m gonna give you three little tips that I have used in the past to deal with economic downturns that have been tried and true. And, you know, I’ll preface this right at the top. They also might be not exactly comforting.
[00:14:21] So the very first thing that you should know is you have to plan beforehand. And this comes back to exactly my focus of my podcast, my work as a financial coach. Why? You can go to fiscallysavage.com/tools and download my free tools that will help you on your path to financial sovereignty. I do this because people need to act with intentionality in their relationships with money and with others. You have to have a plan beforehand. You have to dig the well before you’re thirsty. And this is one of the things that people very much forget.
[00:14:57] All money decisions, at the end of the day, are emotional ones. And there is a delicate balance between taking all of my money and enjoying today and planning for the future because I wish to be able to ride out the bumps of life, which is, of course, lumpy. So you have to have a plan. What is your savings? How many months can you go without an income? How much is your emergency fund? What is your backup plan if you run out of funds? We all need to at least have had these thoughts prior to a recession making them a problem. You can deal with your problems at a time and place of your choosing or a time and place of the problem’s choosing. But in either case, you’re going to have to deal with it.
[00:15:36] Number two is be flexible. One of the things that I saw a lot during the Great Recession were people who had lost their job and could not find a new one because they were unwilling to be flexible.
[00:15:48] A great example of this would be a friend of mine who lost his job as a director at a Fortune 100 company. Now, he went back out to the market at his age and was trying to find another director of that same job title in that same department. Well, everybody who had that job probably laid off somebody or they weren’t hiring for it. And where they were, he was going up against everybody else. And it turned out that as time went on, he had been offered a whole lot of other jobs. But he had wrapped a lot of his identity into “I am the director of this particular type of department.” Rather than taking other opportunities that came along, he held out and held out until it was too late, and then couldn’t actually go back and get any of those jobs, and found himself in a real pickle.
[00:16:36] Being flexible and having a recession happen is critical here. When the, if you are flexible, you have the opportunity to reinvent a lot of your life. And some of the best businesses in the world — Apple computers, of course, comes to mind — were founded during recessions. Why? Because people went out and decided, you know what? I’m gonna get off this rat race and I’m gonna try something new.
[00:16:59] It is imperative, ladies and gentlemen, that when you find yourself in a recession and things aren’t going well, that you maintain some level of flexibility. And start asking yourself what, of course, is the most important things to you. That’s my point number three. Understand what the most important things are to you. It’s good to have a plan beforehand and it’s good to be flexible. But if you don’t know why you’re doing either one of those things — what are the actual important things to you? — well, it’s really hard to plan when you don’t have a target and it’s really hard to be flexible when you don’t know where you’re going.
[00:17:35] And so, it’s very important, ladies and gentlemen, to understand what things are important to you. What are your non-negotiables? And if your non-negotiable, if you sit there and say, it is important to me that my life does not change at all during a recession, that’s a noble goal. And I would argue that it’s probably not that realistic. Something to look at and say, what’s important to me, would might be the question of, is staying in this town the most important thing to me?
[00:18:02] And I’m speaking from experience here. The town that I grew up in, ladies and gentlemen, I like to say that I have so much street cred they put my name on the signs because there’s literally a school and a park and a street named after my family in my hometown. We’ve been in that town for over a hundred years at this point. And my cousins, my mother, my father, my grandparents, they all live there. And when 2008 hit, I was presented with an option. I could stay in my hometown, the place that I was born and raised with all of my family around me, or I could go overseas and have a job. And that, of course, is how I found myself in Taiwan teaching mathematics to Chinese students.
[00:18:46] I had to be flexible enough to ask myself what was the most important thing to me? Was it staying in my hometown? Or was it being employed and furthering my career? And I chose the thing that was important to me, which was being employed and furthering my career. And because I was flexible enough to say, yes, I’m gonna go overseas. I’m going to then have a great adventure, which I did. And during that period of time, I had my wife with me. And we had, I started our marriage overseas going on adventures because we were flexible enough to think outside the box and we knew what was most important to us was to further our careers and invest in each other.
[00:19:23] But maybe it’s important for you to stay in your hometown. And there is absolutely nothing wrong with that. This, of course, might really require you to be flexible in other ways. But you have to have a plan before it happens. If the worst happens, you were called in your boss’s office and you’re handed a pink slip, what is the next thing you’re gonna do after you’ve taken the time to care for yourself and feel those feelings?
[00:19:49] Three things to manage a recession. Number one, have a plan beforehand. Number two, be flexible. And number three, understand what is most important to you.
[00:19:59] But that’s all I got for you today, ladies and gentlemen. I’d love to know what is most important to you. And I would love to know what your thoughts, feelings, questions, comments, concerns, or worries are about recessions, about the Feds, about anything else. So I’m gonna invite you to find me on Instagram, @fiscallysavage. Please hit that follow button, share some of my content, and hit me up on the DMs with a question, comment, concern, or worry. I’d love to answer it on the show during our Current Events episodes. Or if you got a topic that’s really on top of your mind, reach out. I would love to get a little more audience engagement. Until next time, ladies and gentlemen, go out there, take control of your financial life, and live free.
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