3 Important Things to Keep an Eye On

With economic headwinds continuing to weigh on the economy, many Americans fear a recession is coming. But as bad as recession might be, there are a few things that can make it even worse. And if you thought 2008 was bad, some of these factors could make people wish for 2008 again.

No one wants to see a return to the stagflation of the 1970s, or to the malaise of the 1930s, but that’s not in our hands. Policymakers and politicians are the ones pulling the strings, and their decisions will determine the future path of the economy. Here are three potential problems they’ll face that could complicate the response to the next recession.

1. Stubbornly High Inflation

The latest CPI figures threw cold water onto hopes that inflation might drop back to normal this year. Many institutional investors had thought that progress in fighting inflation thus far would continue, so much so that they were expecting the Federal Reserve to begin cutting interest rates later this year. But with inflation coming in at 6.4% year on year, the stickiness of inflation is becoming readily apparent.

What the Fed has done so far has hardly helped to move inflation back towards its 2% target. Sure, we may not be at 9% anymore, but 6.4% isn’t great. At that rate of inflation, prices increase by 86% within a decade.

The scenario we’re all hoping to avoid is one like the 1970s, which saw high and persistent inflation throughout the decade. While inflation dropped below 3% at one point in the early ‘70s, it proceeded to shoot up to over 12%, then fall back to 5% before rising again to over 13% by the end of the decade.

Seeing that historical trend of inflation, even a further drop in inflation today wouldn’t necessarily mean that we’re out of the doghouse. The yo-yoing of inflation throughout the 1970s should serve as a cautionary warning that the Fed shouldn’t declare victory against inflation prematurely.

2. Consumers in a Tough Situation

As some people said of the Great Depression, it wasn’t too bad if you had a job. The problem was that many people didn’t have jobs. But that statement contains an important element of truth. The better your financial situation before a recession, the better you’ll be able to weather the recession.

The problem we’re seeing in the US today is that consumers aren’t in good financial shape. The savings rate has plummeted, credit card balances have risen, and households are facing rising debts and a deteriorating financial condition.

This doesn’t bode well for the potential to weather another recession. Had Americans built up solid reserves, maxed out their savings, and taken steps to weather a crisis by accumulating as much wealth as they could to safeguard against future uncertainty, they might have been able to come through the next recession in relatively good shape. But with growing debt levels and lower levels of savings, households are already financially stressed before the recession has even occurred, and that’s not a good omen for the future.

While many Americans have taken steps to protect themselves by reducing their risk exposure and diversifying their assets by buying gold and moving into other safe havens, many more are likely still hoping that the Federal Reserve will swoop in to save the day. They might find out the hard way that their hope for monetary policy to save the economy is misplaced.

3. Potential for World War

After over 75 years of relative world peace, the last thing anyone wants to think about is world war. But the world is probably closer today to an all-out military conflict than it has been in decades.

The Russian invasion of Ukraine has resulted in the participation of most Western countries on the Ukrainian side through the supply of arms and training. And while the West may not officially be at war with Russia, supplying arms to one of the belligerents is certainly not the behavior of a neutral party.

With the provision of ever more advanced missiles and artillery, and now the supply of main battle tanks, Western countries are pushing ever closer towards a red line that could mean full blown war, not just between Russia and Ukraine, but between Russia and NATO. Russia has been warning about that for a while, but Western leaders have seemed to ignore it. But they risk pushing Russia over the edge and inviting all-out conflict, in which nuclear war can’t be ruled out.

Much as we would like to think that the prospect of nuclear war died with the Soviet Union over 30 years ago, that’s not the case. And our leaders could very well push us into such a war if they’re not careful.

On the other side of the world there’s the increasing chance of a conflict with China. The shootdown of a Chinese spy balloon off the US coast resulted in some saber rattling from the Chinese, and exposed more elements of China’s program of spying against the United States.

With the increased tensions over Taiwan as well, it’s no wonder that some top military leaders think that we’ll be at war with China within a few years. But can we afford that?

Imagine a world in which the US is simultaneously at war with Russia and China, and think of how that could devastate the US economy. And if such a war came in the middle of a major recession, you could kiss any chance of a quick recovery goodbye.

It’s a terrifying scenario to think about, but one that doesn’t seem as far-fetched today as it would have five years ago. And if it comes about, you’re going to want to make sure that you’re financially prepared to weather it. World War II was a long time ago, and the suffering that people had to endure during that war has long since been forgotten.

Ensuring that you’re in good financial shape and that you have tangible goods and investments that can help you weather a crisis can help you. No one really wins a war, but being prepared for the possibility of war is certainly better than being unprepared. With war drums getting louder, peace is no longer the guarantee we thought it would be.

Prepare Yourself

All of this is to say that we’re facing the potential for a very rough next few years. If things take a turn for the worse, which they very well could, we would likely face an economic situation that we haven’t seen in most people’s lifetimes. That’s why it’s vitally important to prepare ahead of time so that you’re not caught unprepared.

Many Americans have already started to protect their hard-earned assets with precious metals like gold and silver. They trust these tangible physical assets to maintain their wealth throughout a crisis. If you’d like to learn more about how gold and silver can help you, call the precious metals experts at Goldco today.