Is a U.S Fed Rate Cut a tell tale sign of recession or just making you poor?
Kick the can down the road. Prevent an apocalypse. Delay the inevitable. Federal Reserve Chairman Jerome Powell hinted Congress this past Wednesday the central bank is prepared to cut interest rates. The cut could happen as soon as this month. A reduction in rates is a move contemplated despite improved employment and less bleak outlooks for the ongoing trade battle with China.
What does the federal reserve suggestion mean?
Data compiled by Fundstrat from 1971 to present suggests cutting a rate without recession leads to stock market rallies. The two exceptions for this rule of thumb come in 2001 and 2007 where the US was in recession.
Indicators such as the Purchasing Mangers Index (PMI), Yield Curve, GDP contraction, Consumer Price Index (CPI), wage rates, housing foreclosure rates, unemployment and monetary lending policies all factor into recession predictions.
Many of these items are not favorable. The Yield Curve has sustained inversion for more than three months. Prolonged Yield Curve inversion alone has been a very accurate indicator for recessions. Other indicators are common sense. A historic bull run that is unprecedented in 100 years raises a huge red flag. Nothing can go up forever. Persistent threats for trade tariffs and increase in goods can tip our country toward recession. All courtesy of “Your Truly” Mr. Trump.
Let’s review a chart that analyzes the number of days a United States recession has lasted. The data is obtained from the U.S. Bureau of Economic Analysis (BEA).
There are a few interesting observations about this chart. Over the past 118 years the U.S. experienced 23 recessions. Within the count I also include the Great Depression. A cursory view reveals that recessions were very frequent in the early part of the twentieth century. From January 1, 1900 to the end of the Great Depression (February 28, 1933) the U.S. economy was in recession 47.4% of the time. This period of time is only slightly over 33 years. The U.S. economy was much more volatile in the early 1900s. If we take an analysis of the 85 years since 1933 the economy was in recession 13.9% of the time. The U.S. clearly figured something out.
What was it that the United States figured out to cut the recession rate?
UNDERSTANDING THE REDUCTION IN RECESSION RATES
One possibility is advancement of technology. The Fed has better quicker access to economic data. In theory better technology should enable the Fed to stay ahead of the curve. If this is correct, then recessions may continue to be less frequent. This is the conventional school of thought.
The other possibility is what the government did to money.
The U.S. dollar’s identity changed dramatically post 1933. The US Dollar satisfies many public and private debts. The US Dollar could be converted into gold until the mid-1930s. After removing the physical exchange component the U.S. dollar was tied to the value of gold until the early 1970s. In the 1970s President Nixon completely severed the relationship between the U.S. dollar and gold. With the exception of the late 1970s’ through early 1980s’ oil recession — inflation was less volatile. Deflation has not been an issue despite the U.S. dollar’s change from tangible money to fiat money.
A key feature in U.S. monetary policy is how the Federal Reserve controls money supply. The Federal Reserve has more flexibility to control supply and demand of currency. The Federal Reserve is able to limit the impact of major economic shocks much more. Stimulating the economy by devaluing the dollar is a way to prevent temporary catastrophe. The long term affects of can be seen by increased public debt, and rising cost of living.
A good example of preventing a depression was printing more money during the financial crisis of 2008–2009. Many economists acknowledge that the government’s ability to control the supply of currency played a major role in keeping the crisis — easily the worst in 80 years — from causing even greater harm to the American and global economy.
The cost of depression prevention was devaluing the dollar. According to the Bureau of Labor Statistics consumer price index, today’s prices in 2009 are 16.23% lower than average prices throughout 2019. The dollar experienced an average inflation rate of 1.79% per year during this period, meaning the real value of a dollar decreased.
In other words, $100 in 2019 is equivalent in purchasing power to about $83.77 in 2009, a difference of $-16.23 over 10 years.
THE NEXT STEPS TO PREVENT A RECESSION
The obvious sign of dealing with a recession is the U.S. Federal Reserve. The Fed decides if our economy will deal with a recession or not. If rates are cut, and money flows from thin air you get currency devaluation. The cost of preventing a recession is making your money worth less than it is today. This is the primary method for preventing recession.
This is the reason for the widening gap between the rich and poor.
CONSEQUENCES FOR THE EASY WAY OUT
There are two sides to every coin.
Preventing a recession makes people poor. Letting a recession happen makes people broke. The difference is prospective. What people in government do to preserve wealth during economic swings matter. Poor is having items that are worthless. Being broke is temporarily having valuable items escape you. People can work a way out of being broke. People cannot work a way out of being poor.
If the government devalues everything people have (i.e. money) than there is nothing they can exchange with it to obtain value (i.e. assets).
Politically it is easier to let government stimulus enter the economy. People get their short sighted goals. You get paid today to take care of something today. When money expands it devalues. As citizens of a country we only use “money”. There is no barter system in Walmart. No one can offer a wrench for a loaf of bread. Walmart demands money. Individually we may barter for goods and services. At commercial enterprises (generally) this is not acceptable.
The implications of our monetary policy is far reaching. It’s important you have enough cash to weather temporary set backs. Never hold most of your wealth in cash. The current policy is to devalue it.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com