The collapse of stock prices into a bear market, rising interest rates, and crazy energy prices mark the end of a decade-long economic pattern that’s made us a little too complacent about the economy. Since the early 2000s, it seemed like the only way to lose money was to leave it in a savings account.
The big question going into a potential recession with high inflation is where your wealth will shrink the least.
Inflation is the alligator closest to the boat, and at 8.6 percent year-over-year, it’s big enough to capsize the economy and take a bite out of our retirement savings. We can debate what is causing the inflation because, as Wall Street Journal columnist Greg Ip pointed out last week, economists have yet to explain it adequately, but here we are.
Federal Reserve Chairman Jerome Powell can’t wait for white papers; his job is to keep the monster from flipping the boat. The Fed’s primary tool is short-term interest rates, and he cranked them up last week.
Powell expects the Fed’s interest rates to rise from 0.25 percent in January to 3.4 percent in December. The world’s most powerful central bank has not raised rates that quickly since the early 1980s, the last time inflation rates were this high.
Similar Fed moves triggered a lengthy recession in 1982, and economists fear a repeat.
“If the Fed continues on a path of aggressive rate hikes, there is a serious risk that it will thrust the economy into a recession, needlessly pushing millions of people out of jobs,” warned Dean Baker, senior economist at the left-leaning Center for Economic and Policy Research.
Other economists think Powell can lower inflation without causing an economic contraction, but the Fed’s track record is poor.
Wall Street investors and business leaders don’t have much faith. Stock prices are down more than 20 percent from their peak at the beginning of the year. Traders determine share price on a corporation’s future earnings, and analysts see lower profits ahead.
The global economy is undergoing fundamental changes that will impact all of us. Economic and territorial conflicts between democratic nations and authoritarian leaders are spoiling the international trade that brought lower consumer prices to the world.
Russian President Vladimir Putin, Chinese President Xi Jinping and Saudi Arabia’s Crown Prince Mohammed bin Salman are happy to sabotage the global economy to advance their totalitarian agendas.
Fitch Ratings, a Hearst-owned financial data company, has revised its global growth forecast from 3.4 percent o 2.9 percent. Analysts expect inflation to remain above 4 percent through the end of 2023.
Other economists predict a recession in the last half of 2022.
So, what do you do?
If you’re waiting around to get a job, get one now with a stable employer. There are two openings for every person looking for work, but those openings will disappear quickly in a recession. Folks in the tech industry are already seeing job offers rescinded.
Reduce your credit card, auto-loan, and, God forbid, payday loan debt. The Fed’s interest rate hikes are trickling down, and mortgage rates are nearing 6 percent. This is a bad time to borrow money and a lousy time to relocate.
Stop spending and start saving. Pandemic benefits and lockdown savings made people feel flush, and we bought a lot of stuff during the pandemic. Since infection rates dropped, we’ve been eating out and traveling.
In April, the average American’s personal savings rate was 4.4 percent of income, much less than the typical 7.2 percent. The last time we spent this much was 2008, just before the Great Recession. Reducing spending and increasing savings not only gives us a personal buffer but also helps ease inflation.
Do not panic sell if you have retirement savings invested in stocks and bonds. Up until this year, almost anyone could make money in the markets by allowing their money to ride. Not anymore.
Rocky economic periods create real winners and losers. Financial strategies should also match an investor’s age, economic status, risk appetite and personal goals. Time to spend a little money on professional advice.
Hire a financial advisor who is a fiduciary, someone who is legally obligated to put your interests first. Pay for a portfolio review to see what to keep and trade.
Every government is working to stop inflation, which means slowing the economy. Recessions are a normal part of the economic cycle, but that doesn’t mean we can’t soften the blow when they come around.
Tomlinson writes commentary about money, politics and life in Texas.