It is said we stand in preparation to fight the last war. It never plays out as planned and the war of the prior generation is ultimately not the war of the present.

Economic crises are cut from the same cloth as war. We prepare for the prior economic calamity with significant resources. Then, when we least expect it, a new threat rises and brings the best laid plans of men to dust. 

We are presently experiencing a crisis like never before. A pandemic has swept the planet and threatens to keep circling the globe in waves of slightly different variations man has no natural immunity against. Knowing we have prepared for the last war, the pillars built after the financial crisis of 2008-9, is meaningless. Man has experienced pandemics before, even more deadly contagions than the current infection. But economically, we will have to venture further back in time for an equivalent.  And when you mix the two together it becomes a crisis unrecognizable.

President Herbert Hoover

Fearful we will make the mistake of preparing for the wrong confrontation, we quickly shift our focus from the prior economic crisis of a decade ago and focus on the pandemic of 1918-9 and The Great Depression of the 1930s. 

Except even that isn’t the same on virtually all levels. Never before has the stock market collapsed so fast from an all-time high to a bear market (a 20% or greater decline). The prior record from The Great Depression has fallen handily. 

The death toll is lower today than the pandemic of 1918-9. So far. It is fear that drives us. In a knee-jerk reaction we shutter large swaths of the economy, leaving only those industries we consider vital, functioning. The wheels of industry ground to a halt until the world stopped. All is quiet on the Western front, a front that covers the whole of mankind.

Fear controls decisions — and if you have control of your fear — others will manipulate your activities as if you acted on your personal fears. The disease is not the worst and modern medicine is containing the damage. It is worrisome, but it seems man will conquer the new scourge in a reasonable amount of time. Then, life can return to normal.

Or can it?

Healing the sick and preventing illness will prove the easy part of this theatrical presentation. The damage already done to the economy is massive. Many businesses, large and small, will not return. The question remains: Is the the next Great Depression?

It is dangerous to say this time is different. Fortunately it is already different so there is room for hope. 

And, before we point out why this is not the next Great Depression, we can thank the gods that be we had The Great Recession of 2008-9 as a dress rehearsal. For without that economic nightmare, we might never have had the courage to use the tools necessary to make this time different in a better way.

 

A History of Economic Collapse

It is acceptable banter in polite company to say this is the worst economy since The Great Depression or the economic consequences will be worse than The Great Depression. But the story starts before that great economic event, and Herbert Hoover was instrumental in the solution. 

During World War I, The War to End All Wars, Herbert Hoover earned the nickname “The Great Humanitarian.” As Europe descended into war, Hoover organized the largest relief effort in history. With tireless effort he secured funding for resources to feed the civilians on the Continent. Even after the war he worked to stabilize the destroyed nations on both sides of the battlefield.

President Wilson turned to Hoover to head his Food Administration. Hoover labored hard to bring 120,000 Americans home when they were caught unprepared in Europe as war broke out. Then he fed Belgium, a nation controlled by Germany, an enemy of the U.S. in that Great War. Hoover manged to feed millions while keeping America’s soldiers well fed at the same time. A delicate balancing act at best.

After the war Hoover headed the American Relief Administration, feeding 20 million in Central Europe. A devastating pandemic took hold during the later days of the war. As soldiers returned home they brought the deadly Spanish Flu with them. 

In 1918-9 the government closed businesses and churches to fight the pandemic. Face masks were required in many communities with harsh penalties for failure to comply. The shelter-in-place policies of today were not part of the strategy in fighting the Spanish Flu in the same blanket manner applied in early 2020. 

After the war the stock market enjoyed a relief rally. Businesses grew tepidly, if at all, as a war hangover recession loomed. The reduced war spending eventually affected economic activity. Though not spoken about often historically, the recession of 1920-21 is the result, in part, from the efforts to combat the pandemic of a few years earlier. 

President Harding tapped Hoover for his Secretary of Commerce. A recession that began in January of 1920 and ran until July of the following year was especially deep. Research conducted by Robert Barro and Jose Ursua indicated the Spanish Flu reduced worldwide economic activity by 6-8%. 

Herbert Hoover proved up to the task of defeating this deep economic decline of the early 1920s. His work led to the booming economy in the decade ahead. 

 

It has never been a good bet to bet against America.

 

The Great Depression

If ever there was a president up to the task of defeating an economic crisis it was Herbert Hoover. President Hoover was concerned over the wild speculation on Wall Street. A nasty tariff fight in Congress spooked the markets and caused sharp declines, but quickly recovered each time in early and mid-1929. Then the wheels came off. 

On September 3, 1929 the Dow Jones Industrial Average hit a high, a level it would not see again until November 23, 1954. What started slow turned into a steamroll. In October 1929 it was free fall.

But the economy seemed sound by many measures. The stock market was down much more than economic activity would dictate. This started a process of efforts by President Hoover that never seems to work.

One measure after another was tried. Fear the solutions (usually involving more government debt) would exacerbate the problem caused President Hoover to use only half measures. Tax cuts were on the table, but not too many so as not to sink the national debt into the unknown abyss. Increased government spending was also on the table, but once again, only in half measures as to at least pretend fiscal constraint was being applied.

Hoover’s ideas were exactly what the nation needed to exit The Great Depression early, if only the president could have seen clear to unleash the dogs 100% in battle against the economic disaster unfolding. FDR, once in office, used virtually all the programs proposed by Hoover. FDR used greater flare to describe his programs and gave them different names. FDR also did not hold back. The national debt ballooned like never before. It was different that time.

Yet, even President Roosevelt could not go all-in. FDR’s programs started the economy rolling again, but not to new heights. And after a period of growth he increased taxes to reduce the deficit, triggering the second phase of The Great Depression in 1937. A quick learner, FDR saw the economy stall and stepped on the gas again quickly. There seemed no end to the deficit spending.

It took another world war to open the spending gates wide enough to permanently end The Great Depression. In 1946 the federal budget deficit exceeded 26% of GDP. This may stand as the largest imbalance in the U.S. government’s history.

 

2020 Is Not the Next Great Depression

This time is different is the battle cry of the unenlightened. History may not repeat, but is tends to rhyme. My good buddy Samuel Clemens once told me something along those lines a long time ago. However, every once in a while, it is different. In short, there always has to be a first time for everything.

By many economic measures the economy is taking it on the chin worse than any time in modern history. The stock market collapse is faster than 1929 or 1987. Thirty million are out of work in the first month of the pandemic and counting. Many businesses were forced to close and many never reopen due to the financial shock to their budget. 

There is another difference nobody wants to place front and center. Unlike the early days of The Great Depression, the government stepped up with all canons and fired fast and hard this time around. Even during the Great Recession of a decade ago Congress dragged its feet on how much stimulus should be provided the economy. 

This is the greatest time is history to be alive. What mankind is accomplishing was unthinkable a mere decade ago.

Unlike The Great Depression and with lessons learned from a half generation ago, the Fed dropped rates to zero instantly and reignited quantitative easing on a scale unthinkable a decade ago. Congress passed, and the president signed, stimulus bills at lightning speed. Trillions of dollars were pumped into the economy with fiscal policy (government spending) and trillions more with monetary policy (Federal Reserve activities).  

Never before have so many economic weapons been brought to bear, not even in a wartime situation. Some snickered when President Trump said he was a wartime president. Not a personal fan of the current president, I still agree with him on this issue. It will take a war time effort and war time powers to right the economic ship.

The Great Depression spiraled ever downward as elected leaders provided ineffective levels of economic stimulus 90 years ago and the reluctant efforts of a decade ago led to anemic economic growth as the economy left the Great Recession behind. The just finished economic expansion had one of the slowest, if not slowest, starts in U.S. history. 

The willingness of leaders in Washington to spend whatever is necessary, coupled with the Federal Reserve’s willingness to use unlimited resources to counter the economic dislocation, make it impossible for economic activity to descend into the chaos of the 1930s. Stimulus checks to individuals and forgivable loans to small businesses will limit the damage. Make no mistake, the damage will be acute and will linger. That lesson was taught us by The Great Depression. WWII spending proved the path necessary financially to beat the economic demon into submission. 

More proposals keep coming forward. Nearly $3 trillion in stimulus spending is already passed and working its way into the hands of individuals and businesses. It is not enough and will run short. Congress knows it and keeps pumping more stimulus measures at every whiff of a slowing economy. How much more stimulus spending will come is anyone’s guess. All I know is nobody seems to want to rein in the excesses at this time. And that is probably a good thing. The 26% of GDP deficit in 1943 is only the worst year of many with large fiscal deficits in the early 1940s. The spending was insane back then and America thrived afterwards. With the money going into the hands of Americans (back then and now) there is no doubt in this accountant’s mind the economy will pass this painful speed bump reasonably quickly with far fewer casualties than if belated measures similar to 2008-9 were used; or worse, the reluctant policies of 1929-1932.

The stock market has enjoyed a healthy bounce off the initial bottom. Nobody knows if this is a bear market rally or the first leg up in a V-shaped recovery. As always, follow the advice from another buddy of mine, Warren Buffett: It has never been a good bet to bet against America.

 

What Could Derail the Stimulus Measures

The Fed dropped rates to zero, opened the gates to unlimited quantitative easing bond purchases and has extended the purchases far beyond Treasuries. It seems the printing press (creation of more money/increasing the money supply) has not caused inflation to increase by any discernible amount over the past decade. In fact, inflation has been stepping lower and lower since the early 1980s. 

Printing more money, if you will allow my use of the term, has not ignited inflation in recent decades. What always seems to be an unbreakable law in times past does not seem to be an issue at present. Reason says at some point more money will force prices higher. Where that point is nobody knows. Many economists expected it to be an issue by now. Since inflation never seems to rear its ugly head anymore, economists as less frightened by it. 

Perhaps the lack of fear over inflation is low because most have never lived through it or it is a very distant memory. 

If inflation should make an appearance it could be game over. This whole fantasy of stimulus spending with the Federal Reserve buying all the newly issued bonds with fiat money only works if inflation does not attend the party. 

SpaceX is taking us to the future.

The national debt is likely to pass $25 trillion this calendar year with more red ink on the horizon. We could be paving the groundwork for one of the richest economic booms in the history of mankind or a worldwide inflationary disaster of Biblical proportions. I lay odds on the former.

Inflation may increase for a short time as demand is high and supply is artificially constrained. Once the pandemic passes completely in a year or two (the virus fades into the history books like the Spanish Flu or with the advent of a vaccine) supply and demand should find an equilibrium.

I know people are scared. Scared of getting sick and of losing loved ones. Scared of not having enough to feed themselves or their family, shelter and care for their family. Scared their business will fail. There are so many things that can befall us. I am an optimist and a realist. Businesses will fail. People will die. It will not be all roses. But we, as a people, will survive and even thrive. 

New businesses will be started; jobs will be created. Families will heal and new friendships forged. Warren Buffett is right, America’s best days are still ahead. The same can be said of the entire human race, all peoples, from all nations. 

This time is different. It is also the same. And like every time tragedy struck in the past, humanity has survived, thrived, grown and reached higher afterwards than ever before.

I for one am glad I am on this journey with you, kind readers. We should never be afraid of making the hard decisions. It will not be as bad as The Great Depression because this will not stretch out for a decade followed by a world war. This will last a year or so at most with the worst happening this year. And the other side will be glorious as the resources to build new businesses that will travel to the stars and beyond as being created as we speak. 

That is the hope you and I both need to live through this trial. There is no one more than you I would rather be on this journey with. Godspeed.

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Restarting the economy is going to be more difficult than it was stopping it. A vigorous discussion on the topic is desperately needed as many feel talking about opening the economy is akin to reigniting the infection rate when in reality the discussion is needed to formulate an appropriate and workable plan.

Talking about restarting the economy is good policy. Shutting down large swaths of economic activity was necessary for public health. And for the most part it was a fairly easy process: governors gave the order and their state ground to a halt as people sheltered in place, giving COVID-19 no viable path to propagate. The same happened around the world. It is The Day the World Stopped.

The spread of COVID-19 had slowed and in many countries has all but stopped. Concerns the virus is picking up steam where social distancing is relaxed is still a real risk. However, policies designed to slow the spread of the virus appear to be working. Multiple medical therapies hold promise and a massive effort to develop a vaccine are in progress. A vaccine would be a game changer, but realistically that is still as much as 1 ½ years away before it becomes available. The economic price would be too high, and the resulting harm to human health from lack of services, too damaging to wait over a year before reopening the closed parts of the economy.

Reopening the economy can begin in as little as a few weeks to a month if handled properly. Germany has made signs they are ready to slowly restart economic activity. China, the first to suffer the scourge, has already reopened much of its shuttered economy. The real question now is: How well will it work? If the virus takes off again it will set us back. However, if enough people have built an immunity while social distancing is still practiced, many parts of the economy can reopen.

Turning economic activity back on will not be like flicking a light switch. There are several issues when restarting an economy after such a brutal and abrupt stoppage. We will now turn our discussion to an appropriate and safe way to reopen a shuttered economy. Even more important than opening closed businesses is how to get money flowing again. If nobody shows up for the party we are no better off.

 

A Plan for Reopening Shuttered Industries

While it is true the current economic downturn may be the most abrupt (fastest) and deepest decline in modern history, it isn’t the first time an economy had to plan on restarting after such a shock to the system. The situation (and rules) are different from rebuilding after the destruction from war; the rules, however, have many similarities, albeit on a much smaller scale. 

After World War II, Germany and Britain were in ruins, along with much of the rest of Europe and Japan and other areas of the Far East. While a contagious virus wasn’t running wild, a plan was developed for rebuilding the destroyed areas. Without the Marshall Plan, Europe would have suffered much longer as they worked to rebuild. A similar reconstruction plan was instituted in Japan. 

We don’t need anything as drastic as a Marshall Plan today. But the lessons can still be learned.  For example, you didn’t start rebuilding a war torn Britain by investing in industries that heavily rely on infrastructure before the infrastructure was funded and well on its way to becoming operational. In other words, there has to be an order to the reopening of an economy. 

It can happen fast. The Marshal Plan was a 4-year plan to fund investment in rebuilding cities and industries, and remove trade barriers between European nations and those nations and the United States. 

We do not need 4 years to reignite our economy! Still, it will take time and it will not always be a smooth process. Prior to a vaccine for COVID-19 there stands a strong chance there will be pockets of infection flareups. Fear will be the common enemy.

It would be unwise to open everything at once. A step-by-step process will allow for the fastest opening of the economy without undue risk to public health. The real question is: What gets opened first, second and so forth and to what degree?

Step 1 

Before any plan can work social distancing must be practiced by the public until an effective vaccine is found, effective and fast testing is available or most people are inoculated. If enough people develop a natural immunity (prior infection) the same result can be achieved, if only over a much longer time frame and higher number of dead.

A requirement everyone wear a mask in public would also go a long way, if not very fashionable. Social distancing and a mask would reduce the spread of COVID-19 to such an extent it might not remain viable for long as it can’t keep finding new hosts.

A cheap, fast and easy way to test for those currently contagious would also allow for a faster opening of economic activity.

Step 2

The first businesses to reopen should be retail establishments. It is easy to practice social distancing at a furniture mart and therefore, these businesses should be allowed to open soon.

Certain service businesses can be opened at this time as well. The law office, bank and public buildings and parks all allow for social distancing without much inconvenience to people.

Factories and other manufacturing facilities can reopen along with service businesses and retail outlets. Safety policies might mean some factories run at less than full capacity, but they would be open and should be able to find ways to slowly increase business activity until fully operational, or nearly so.

Churches and other places of worship would also be some of the first places to reopen. 

Step 3

After an adequate waiting period (say two or three weeks) to determine the virus is not spreading faster again, it will be time to open even larger swaths of economic activity. 

This is where it gets difficult. Bars and restaurants really could use a return to normalcy. Unfortunately, large groups of people gather at these establishments and social distancing is extremely difficult. Unless a natural immunity or vaccine reduces risk, large gatherings are a serious threat to reigniting the infection rate. 

Instead, it might be proper to open salons. Social distancing is impossible in these situations; by design the hair stylist has to be close to you to cut your hair. However, a mask might be enough to solve the problem. Yes, the hair stylist is close to the customer when cutting her hair, but the room isn’t crowded tight with people. A mask and hand washing between clients could do the trick. (This is more important than you think! Do you want to now what our world would look like after people go a year without any hair care? Yikes!)

An accurate and fast way to test for those currently contagious would also facilitate a quicker opening of these businesses.

Step 4

As serious as the matter is, certain businesses need to reopen as some point. Gyms are a high risk place, but social distancing, frequent hand washing and sanitizing equipment between use should make it a viable solution to reopening our exercise centers. A fast, accurate and low cost testing method to reveal who is contagious would certainly allow for these establishments to open sooner.

Restaurants are next. We might limit the number of people in the room and require masks for all employees. (Kind of hard for patrons to eat while wearing a mask.) The same for bars. A reasonable plan would be to allow a certain number of people per area and slowly raise the density of people allowed per gathering as long as infection rates remain low.

Step 5

The hardest hit is the last to reopen. Concerts and sporting events pack people in too tight for proper safety with a highly contagious virus on the loose. Yelling and cheering at a packed sporting event all but assures you will face a high risk of infection if an infected individual is present. Sporting events with empty stands is an option, but there is something about a full stadium that makes the event serious, real.

Travel will also be among the last to fully reopen. Packing a plane is not the best idea when a highly contagious virus is on the loose. Proper precautions could be taken to reduce risk. Disinfecting after each use and masks on public transportation would make sense. Testing, when available, would allow for a full opening of economic activity even if a vaccine is not yet ready.

 

These steps do not have to take place in a vacuum. Fully reopening the economy could happen in a few months with most business activity functioning at a high level within 30 days. Accurate, fast and low cost testing would also speed the reopening of the economy. A vaccine would be the best option, but the economy will still need time to reset as it opens after such a shock. Things will not pick up where they left off.

We have learned a lot about COVID-19 so far. Treatments are getting better and more equipment is available. That reduces the seriousness of the infection. Even without a vaccine there will be a growing number of people with a natural immunity. As we discover how effective an immunity infection provides, we can also focus on how many have been infected without serious symptoms. At some point we need to know how many people already are not at risk due to immunity. Reinfection issues will need to be addressed.

It is growing clearer each day we can reopen economic activity without undue risk to human health. There are measurable risks to locking people down to prevent the spread of disease. At some point it is a better choice to take precautions while letting the herd out in the pasture.

 

Velocity of Money

The velocity of money is the gorilla in the room nobody is talking about. Opening businesses is only the first step. My guess is there will be a surge in business activity as the wildlife gets a whiff of fresh air. Then the economic reality of the family budget will bear down. 

The stimulus money will certainly help, but that money helped people muddle through the abyss. Some jobs are not coming back. Some businesses will not survive the assault inflicted upon them. There is no amount of money that will put things back exactly as they were.

Will back rent need to be paid or will landlords suffer the loss? Will all employees be called back to work? What about businesses that close? If tenants are forced to pay a backlog of rent it will retard tenants’ spending on other goods and services. If the landlord swallows the loss the landlord will be forced to reduce spending. Either way money will not move as fast in the economy. The same applies to employees not called back to work as their employer closed permanently. 

The same applies to mortgage payments and other loans. Will payments be pushed to the back of the loan? Regardless, the family budget is worse off. Many questions still need answering for a smooth re-opening of economic activity.

And will jobs still pay the same with higher unemployment? 

 

 

Bars and restaurants might get an initial surge of business, but not all industries will enjoy such a bump. Travel and entertainment take time to set up. Planning a concert takes time. The day the switch is flipped is not the day people have airline tickets to get away. People will start closer to home before venturing further. Planning a vacation will not happen instantly.

And some industries are of the trickle-down type. For Boeing to sell more airplanes, airlines need to book more passengers. The money flows downhill and Boeing is not first in line for a check.

The above chart shows a damning detail about the American economy. From 1960 to 1990 the speed at which money exchanged hands in the economy was static. The accelerating economic growth of the 1990s bumped the velocity of money a bit higher before coming back down in the early 2000s.

But ever since the Great Recession the speed that money changes hands has been slowing. Part of the issue is the level of the money supply. The Federal Reserve has not been bashful about increasing the money supply over the last decade. If people don’t increase spending at the same pace the Fed increases the money supply we see the velocity of money come down. Each new dollar the Fed dumps into the economy has less effect than the one prior. This is a form of spin-down and it always comes to an end at some point.

That has been a problem for the last decade. More and more money gets pumped into the economy, but it has had a smaller and smaller effect. Money just does not move the way it used to, even when more is pumped into the system. 

The third major bear market in 20 years might drop the velocity of money even lower. A vibrant, healthy economy has a strong velocity of money as money is earned, spent, saved and invested. For a decade we have seen money pumped into the economy and mostly it arrived with a loud thump. Most of the past decade of economic gains is attributable to public spending on the national credit card. Without this so-called stimulus, we had no discernible economic gains. I will leave it to you, kind readers, to determine if this is a viable long-term solution.

The real challenge is not the reopening of businesses; it is the reinvigorating of the movement of money. If everyone has a million dollars, but they all sit on it — none of it moving — there is still no economic activity, at least as measured by Gross Domestic Product which tracks how much money has been put to work buying goods and services. If the velocity of money slows even more it could be a very anemic recovery, indeed! Or worse.

The economic expansion after the Great Recession was slow by historical standards. It is also a likely reason it lasted so long since the excesses of too rapid of growth were avoided.

But slow growth is like watching paint dry or suffering water torture if you need a job or are working to build a business. If money isn’t moving it means it isn’t going to wages or small businesses either. 

The challenge is starting a national dialog on reopening the economy as soon as safely possible and developing plans to avoid an incredibly slow recovery, even slower than the 2009-2019 expansion.

It seems during my entire adult life (from the early 1980s) each economic expansion has started slower and was harder to accelerate. Interest rates have dropped for 30 years until we are now at 0% yet again. If the Fed creates more money, only to see the velocity of money slow more, there will be little value gained by future Fed actions. 

Maybe a Keynesian style government infrastructure spending program might do the trick. However, China has tried to do this every time they want to spike growth and the benefits are not all they desired.

I guess the Fed could print money forever without consequences and give it away as a basic income. I also have a bridge I’d like to sell you if you believe there is such a free lunch without consequences. 

I certainly do not have all the answers. I think my plan for opening the economy is sound with some modest tweaks by the powers that be. The real problems start when the economy is back open and it isn’t what we remember when we last saw it.

And we better start tossing ideas around because I think time is running shorter than anyone wants to admit.

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

 

Rare is the decade where a capitalist society doesn’t experience an economic slowdown. Call it a soft landing, recession or depression, the results are the same with varying degrees. Economic slowdowns and declines are inevitable under capitalism.

Expansions are born from the depths of the previous economic decline. Inflation tends to be low and unemployment high. Pent up demand is waiting for an influx of goods and services to satiate desires. As businesses whittle down inventory, the recession eases. A glimmer of increased demand begins the cycle all over. Employment increases to meet demand. Eventually wages climb as the labor market tightens.

Increasing productivity means even a slowdown in growth can start unemployment ratcheting higher; no actual recession needed to send hearts aflutter. Sometimes the economy slows sharply as in the early 1980s and 2008. Most recessions since World War II have been mild, with GDP declining 2% or less. The 2008 recession lasted 18 months and it felt like the world would end. In reality, GDP declined 5.1%. The 2001 recession, in comparison, lasted 8 months with a .3% decline in GDP.

The last time economic activity declined more than 10% was in the waning days of WWII. Reduced military spending caused the GDP to dip 12.7%. Unemployment didn’t climb much in 1945 as the U.S started the switch back to a peacetime economy. Before WWII, recessions more often than not exceeded 10%. Economic downturns were far sharper in those days and lasted longer. Still, unemployment can climb quickly to double digits or nearly so. When pink slips start flying they come fast and furious.

The longest economic expansion on record started March 1991 and continued for a full 10 years, ending March 2001. The current economic expansion started June 2009. We are nearing another record long period of economic nirvana.

Long periods of economic bliss lull people into a false sense of security. Debt grows larger as a percent of income as households are more confident.

Inflation is creeping higher. The Fed is slowing increasing interest rates to reflect a normalization of interest rates after the deep 2008 recession. Unemployment is near record lows and employment numbers are off the scale! Warning signs are beginning to show as consumers are reaching their credit limit, ending the buying binge. The cycle is nearing the point of renewal.

Renewal is painful if you’re unprepared.

Signs

Overproduction and debt usually play a role in most recessions. U.S. production isn’t as out of touch with demand as world production, most notably in China and Germany. However, by previous economic standards, the economy isn’t stressed enough to trigger a downturn of any size. Things look really good right now. But. . .

Tariffs are the wildcard. Tariffs are designed to slow the economy, regardless the claims of politicians. Business is well aware of the seriousness of the current rush to impose tariffs. Tariffs also push inflation higher.

Signs are showing in the EU, China and other countries. The U.S. so far is humming like a well oiled machine. If tariffs continue ratcheting higher the U.S. will eventually stumble, too.

Tariffs are taking on a different flavor this time around. (This time isn’t different, however.) In 1929, tariffs were adjusted across the board. Retaliatory tariffs were levied nation against nation around the world. Today we see the U.S. imposing tariffs and the target nation strikes back with narrowly focused tariffs against the U.S. only. Without the U.S. a vacuum has formed. Most nations are building new economic alliances without the U.S.

There is no doubt tariffs will cause pain around the world. The U.S. already discovered how the new world order of tariffs will be played out. Harley-Davidson, an iconic American company, is moving some production to Europe to avoid tariffs. If the intension of the tariffs was to bring jobs back home, it’s having the opposite effect! Time will tell how this new world order plays out.

Doomsday Preparations

The world isn’t going to end! You can drop the end of the world stuff right now. However, there is economic pain coming. The exact cause is not yet known. The possibilities discussed about are strong possibilities. Then again, it could be something totally out of left field, like Lehman Brothers in 2008. You never know.

What we do know is that this cycle is long in the tooth and it’s time to prepare for the inevitable slowdown in economic activity, even if it doesn’t culminate in a full-blown recession. Unemployment will climb someday and probably sooner than most people expect. If tariffs bite as they did in the past, we could be within a year of slower economic growth.

Since my crystal ball isn’t any clearer than yours, all I can do is provide good advice that works in good times and bad. Wealthy people have certain habits you need to acquire ASAP!

For several years now I’ve warned clients to reduce, or even eliminate, debt. The 2008 recession only hurt if you were saddled with debt payments. Without debt, 2008 was a minor inconvenience. Debt is a common recession culprit. Don’t be part of the problem! Your insistence you are responsible with debt crumbles when unemployment makes an appearance in your household, your income properties are vacant or the tenants refuse to pay, or your business or side hustle no longer provides the cash needed. I hear the “responsible with debt” mantra often. I’ve also been around long enough to watch said clients have their home repossessed.

Debt is the most important issue to address. If you are deep in debt, there are steps you can take to reduce liabilities fast. Normal pay down of debt may not be fast enough to give you a margin of safety before the recession strikes. Prices are still high. Selling assets at a high is better than liquidating later at any price, or worse, giving assets back to the bank.

I firmly believe you should NEVER have debt on a vehicle. EVER! If you need a car loan you can’t afford the vehicle. If you bought real estate the last few years, consider reducing debt by selling highly appreciated properties. I know real estate never declines in value (egads!), but selling a property or two to eliminate debt obligations allows you to sleep better in any economic environment.

Here is the last word on debt; I promise. All consumer debt must go! No credit card debt! Period.  Now is the best time in a generation to reduce debt. Your assets are worth more now than in decades. Take advantage of your great fortune.

Rainy Day Fund

I’m now going to share advice I give to all clients near, entering or in retirement.

Retirees need to keep ~ two years of spending in a liquid account (money market (I like Vanguard), Discover Savings, Capital One 360 or T-bills). If the market keeps rallying, take living expenses from your index funds. If the market declines, use the liquid funds to live on. Divert capital gains and dividend distributions to the liquid account instead of reinvesting. This gives you a margin of safety of several years before you’d have to either reduce your lifestyle or sell index funds in a down market to cover living expenses.

For those not in—or near—retirement, the same philosophy applies. Rather than two years of living expenses in liquid funds, you may wish to only keep one. In a perfect world you would have Roth IRAs so there would be no tax consequences of moving some index fund money to the money market account.

Facts and circumstances will determine the correct level for you and the accounts you increase liquidity in. Having liquid funds to cover living expenses is a powerful tool to weather any economic storm. The only issues not covered are outliers. An uninsured medical emergency can throw any plan awry. Disability is another potential problem. It’s impossible to cover all possibilities. Having a cushion, a margin of safety, stacks the deck in your favor.

A Hard Man to Break

I don’t predict the economy or the stock market. Far better than me try and fail miserably. This isn’t about market timing! This is about structuring your finances in an appropriate way.

Debt is the worst cancer. Debt is a crisis, especially this late in the business cycle unless you think this time is different. (It’s not!) Low debt levels are always the better path. Virtually every wealthy person you meet says the same thing: leverage (debt) bites you in the end.

Keep adding to your retirement accounts. This is not the time to break a good habit. If you don’t have a lot of non-qualified (non-retirement) money you may have to keep some IRA or other retirement money liquid. If your finances are not affected, no problem. If you do face financial stress you at least have liquid funds available (even if a tax penalty applies) to cover living expenses for an extended period of time without the bank knocking at the door.

Opportunities are created in recessions. The U.S. has had 49 economic downturns in its history. We get to celebrate the grand ol’ 50th with the next recession. Limited debt and liquid funds for spending needs allows you to keep your money invested for the next inevitable economic expansion. The winners of the last recession were the ones who stood pat or even bought while the market was down.

Things have to get really bad for people without debt to suffer. A liquid nest egg coupled with no debt requires a complete system failure before you feel any real pain. And if the system does fail there is nowhere to hide so it doesn’t pay to prepare for it. It’s lights out.

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you.