Is The US Economy in a Recession?
I am amazed at all of the talking heads, financial analysts, government officials, investment newsletter gurus and all of the rest of the so called experts who are still asking if the US economy is in a recession.
Of course we are in a recession. One that has stagflation elements to it as well. Just ask an average American who shops for groceries, pays up for gasoline, is fearful of losing his job, is underwater with his house mortgage, and is using his credit cards to pay for household expenses, what he thinks.
His answer may not fit the official definition of a recession, which is two back to back quarters of negative economic growth, but it will likely be very accurate. Yes, indeed , we have moved into a recession that may turn out to be something even worst. Much worst. Stagflation is the worse of all worlds where economic activity plummets while prices continue to increase. The poor consumer has less money yet has to pay higher prices for everything from gasoline to milk and meat.
As the recession gets worse those experts and political spin artists who still deny it will fall in line. If you are smart you will avoid the rush that will surely come later this year. It is wise to act now to protect yourself.
The recession will get much, much worse than the forecasters are currently saying. The “experts” were wrong last year. They were very wrong last month. They are wrong now as they talk of avoiding a recession that we are already in.
And those who think that we are in a recession, but not to worry, as it will be short and not very deep, will be proved wrong as well. Those who believe that the government can easily solve the problems by cutting interest rates to one or two percent will be very wrong.
Ben Bernanke and the Federal Reserve Bank can cut rates to zero and leave them there for years and in the end it will do little if any good. The problem is this. If banks and lenders of all sorts are afraid to lend the interest rate really doesn’t matter. And if consumers and businesses are afraid to borrow interest rates really don’t matter.
The Japanese are experts with the interest rate cutting routine. In Japan interest rates have at times been cut to zero and after 18 years the economy is still in a recession. Real estate prices in many areas of Japan are still off 50% to 70% from their highs of 1989. Today interest rates in Japan remain well below 1%.
In my opinion, we are about to see an old fashioned panic that will envelope the credit markets. The present generation of financial managers are poorly equipped to deal with it as they still don’t believe that it can happen. Most of them are too young to have any experience with anything other than good times. They have no real perception of how bad things can get in an atmosphere of fear and panic.
And how can you protect yourself from the rapidly approaching bad times? If you have credit card debt you should make every effort to pay it off. If you have a job you should make an extra effort to make yourself an invaluable employee. If layoffs begin at your company better the other poor guy gets the pink slip than yourself.
If you have a home mortgage that you find is difficult for you to pay it’s better to speak to your lender about it early than to fall behind in your payments and have the lender call you. With a record amount of foreclosures under way lenders really don’t want to take possession of more houses. It is an expensive matter for them.
You should also look carefully at the credit condition of your bank. In the current environment do not assume that even major lenders will make it through the recession. If your bank has significant exposure to the subprime mortgage market perhaps you should move your account. Just in case.
Certainly you should not maintain balances greater than $100,000 at any one bank. It is safer to spread your money around among several banks just in case one of them has to shut down. Don’t laugh, there will certainly be a higher than normal level of bankruptcies among banks this year and next. Perhaps for longer. Something to be concerned about is that the government’s FDIC program is underfunded as well. The amount of cash on hand would cover only a tiny fraction of claims if a really large bank or a lot of smaller banks failed.
If you are invested in stocks perhaps you should sell out now, even at a loss, to protect what you have remaining in your account. Once underway even stocks in very sound companies will be sucked down by a raging bear market.
You might consider moving some percentage of your funds in gold and or silver. Even at current prices of almost $1,000 an oz gold probably has a long way to go before topping out in the current bull market.
The Federal Reserve is in a tough position. Probably they will sharply further reduce interest rates in an effort to prop up the US economy. However, as the Fed reduces rates the action will likely be counter productive. A cut in rates will place addition downward pressure on an already weak dollar. A weak dollar will add to inflation pressures within the US. If the Fed begins to increase rates to support the dollar and fight inflation the economy will likely tank even further. The Fed is really in a no win situation.
It is a sad fact that the Fed chairman , Ben Bernanke, is in over his head. This guy actually testified before congress that a lower dollar really doesn’t hurt Americans who don’t travel outside of the county. If he truly believes in such a thing he is indeed a fool. A lower dollar from here almost certainly will end the dollar’s role as the world’s premier reserve currency.
The end of the dollar as the world’s preferred reserve currency will make it increasingly difficult for the US to borrow the huge amounts of funds it needs from foreign investors. A lower dollar will cause even greater inflation in the US as everything we import, especially oil, will cost Americans more. Bernanke is out to lunch on his understanding of the importance of supporting the dollar.
Are we in a recession? Certainly we are and it will be a dangerous one. One law of nature is that after every bubble than will be a correction and that the greater the bubble the greater will be the correction. In a capitalist society the corrective process is called a recession. As we had the greatest housing and financial bubbles in history for the past many years look for this correction, this recession, to be one for the history books.
Yes, of course, we will survive it as a nation, but many people will experience a lot of pain along the way. Try your best not to be one of them.
For some ideas as how to prosper from a recession visit Taipan Investor. If you are a stock investor you might be interested in protecting yourself with puts.
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