(Mises)—Those who have been predicting a recession in the United States and an associated stock market crash seem to be having a hard time. At least, it appears so. US gross domestic product grew by 2.1 percent in Q2 2023, after growing 2.0 percent in Q1; the unemployment rate was rather low at 3.8 percent in August 2023; and the S&P 500 was at 4,460 points, around 10 percent below the index record of 4,818 points from January 2022. Yet, there are many variables that yield a point to the prophets of doom.
For instance, high inflation has reduced the real incomes of people and businesses, lowering their demand for goods and services. The increase in credit costs, which began in early 2022 with the Federal Reserve interest rate hike, should (at least) slow down consumption and investment—and lead to more loan defaults. In addition, the US yield curve is severely inverted, signaling an imminent recession.
Not to be forgotten is the downward pressure on asset prices—real estate, in particular—caused by the rise in yields. This puts pressure on banks and makes them more cautious about taking on additional credit risks. The supply of borrowable funds to consumers and businesses is drying up and becoming more expensive compared to the cheap and plentiful credit supply in the last decade. When bank credit growth slows down, the economy’s money stock growth slows down as well.
The latest data for the US shows that bank lending growth has declined considerably—declining 0.5 percent year over year in August, down from 10.1 percent year over year in August 2022. This, in turn, impacts the money stock M2, which fell by 3.7 percent year over year in July. (It should be noted that, in addition to lower bank lending, other factors were also at work—such as interest rate–induced shifts from bank deposits included in M2 to those not included in M2, which contributed to the reduction in the US commercial bank money stock.)
While all this is undoubtedly the case, the “time factor” must also be considered in this context.
Put simply, it takes time for higher credit and capital costs to impact the broader economy. In fact, the economic and financial effect of increased borrowing costs will materialize gradually over time, in small increments, so to speak. Borrowers typically have a debt maturity profile. This means that not all of their total debt will be due at the same time, with maturities spread out over the years. So, only a part of a firm’s loan portfolio will have to be refinanced at higher interest rates in 2023.
Over time, however, credit costs rise as a growing portion of the outstanding debt must be refinanced at higher interest rates. In the course of this development, the trouble begins—and things start to get messy. Higher credit costs reduce firms’ profits, while increased interest rates curb the demand for their goods and services. These are the typical conditions under which the economy slows down or even contracts.
Of course, in such a scenario, the government may increase its deficit and try to fend off recession by boosting overall demand. This is, however, a risky undertaking when government debt is already very high and borrowing costs are elevated. Investors could all too easily question the effectiveness of an increased deficit spending program and become concerned about the government’s creditworthiness—with potentially disastrous consequences.
Even though it appears to have been premature for the doomsayers to predict a recession and a stock market crash, it may have become clear that “all is not going well.” Perhaps most important in this context is the issue of valuation levels. Clearly, the rise in interest rates in the last eighteen months or so has already significantly impacted many asset markets—just think of the real estate sector. However, the asset price revaluation phase may not have reached its final stage.
For example, US stock prices show a rather pronounced disconnect from the bond market. This suggests that stock prices are either headed for a downward correction—granted that bond prices remain at current levels or continue to fall—or that bond prices will correct upward to support higher stock prices, or a combination of both will happen with slightly lower stock prices accompanied by slightly higher bond prices.
Undoubtedly, the key questions are: Will interest rates remain at elevated levels, or will they continue to rise? On the other hand, will interest rates return to the downward trend they had been on since the early 1980s until around 2022? Answering these questions amounts to making a truly “big call.” Undoubtedly, quite a few considerations must be made that allow both higher and lower interest rates to be predicted going forward.
Either way, the answer to these questions will most likely be compatible with making a case for holding physical gold and silver. This is because higher interest rates are likely to result in a rather large-scale “credit event,” while further declining yields would signal the (expected) return to inflationary monetary policy—an attempt to boost asset prices, devalue the currency, and overcome the recession, whatever it takes.
One thing is certain, though. The storm that hasn’t reared its ugly head yet will come in the form of recession, high unemployment, and—if central banks lower interest rates again and keep increasing the money supply—chronic high goods price inflation.
About the Author
Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
