Travel back in time a whole century to the year 1922, the dawn of what has become known as the roaring ‘20s. Forever immortalized in the textbooks, literature, and imaginations of America, the 1920s will be remembered as a time of decadence, affluence, technological advances, and moral degradation. Does it sound familiar? We think of Art Deco, The Great Gatsby, the flappers, and the speakeasies. What doesn’t come to mind nearly as often is that just like in 2022, a hundred years back, the world was also only several years out from a global pandemic, the Spanish flu of 1919-1920. Another point of interest is the turning point in Russia at the time. The Soviet Union was formed in 1922. Today, the invasion of Ukraine has once again placed Russia in the spotlight of the international news. The ‘20s today eerily mirror the ‘20s of the twentieth century. And what is the significance of this? Everyone knows what brought the roaring ‘20s to a screeching halt. According to a number of economic trends, it looks like the United States may once again be on the road to another economic recession.
We’ll start by taking a look at the effect of the major global crisis of the times: Russia’s invasion of Ukraine. Sanctions against Russia, as well as companies pulling out of the nation, have naturally led to supply chain issues, of which we are feeling the effect. As a significant producer of oil and other commodities, these actions against Russia have hiked up prices in oil, food, and components for consumer goods, only leading to further inflation and economic hardship. Necessities are now taking up a larger percent of a person’s income, and this decreases demand in other industries. Now, decreased purchasing power leads to less consumer spending, due to their deceased discretionary income. Less consumer spending means less money flowing through the economy, which ultimately slows economic growth. All of this leads to a reduced GDP growth and an increased risk of recession, ultimately leaving citizens to fear a possible return to the ‘70s.
Stagflation, a combination of stagnation and inflation, was the hallmark of the 1970s and is once again applicable in this day and age. Essentially, it means a combination of elevated prices, inflation, and decreased economic growth, or stagnation. The government increased printing of new dollars in the past two years in hopes of stimulating the economy after the lockdowns. Injecting more money into the economy will also inevitably lead to inflation, which is at a 40 year high. In response, the Fed raised its interest rates in hopes of stopping this inflation. Raising interest rates, however, slows down economic growth through disincentivizing loans, and can even cause recessions. In doing so, the government is walking a fine line between inflation and recession.
Another time-tested indicator of recession is an inverted yield curve. What exactly does this mean? To begin, a yield curve is a graph showing the difference in interest rates between bonds.
The yield curve should slope up, but now, it slopes downward instead. An inversion in the yield curve means that short-term interest rates, in this case 2 year bonds, exceed the rates for long-term, 10 year bonds, meaning investors believe the economy will fall sharply. An inversion in the yield curve corresponds to the onset of an economic recession; it has predicted every economic recession in the last 50 years. Essentially, when short-term rates are higher than long-term ones, banks no longer want to lend money, limiting opportunity for economic growth and making it harder for companies to pay off current loans. The inverted yield curve heralds a looming recession in the near future.
Although it may have seemed like a positive, the low unemployment levels may be yet another cause of concern for the future. Firstly, low unemployment can be taken as a green light to raise interest rates, which naturally slows down economic growth. Secondly, this low unemployment rate is causing increased inflation. In the wake of the coronavirus pandemic, we’re seeing the rapid retirement of the baby boomers, the wealthiest generation in history, who control 53% of the USA’s wealth. This leaves a workforce vacuum, leaving a multitude of available jobs and positions which creates the low unemployment. Since there are now more jobs than people willing or available to work, the labor costs are rising. In order to afford the labor costs, prices also must go up, which leads to inflation. Essentially, with the COVID-19 pandemic, governments around the world tried to turn the world economy off and then turn back on. This is simply not how it works. Inevitably, the fallout of the lockdowns is leading to economic concern.
It is a known phenomenon that everything tends to regress to the mean. We are currently at a time of economic excess, with high inflation a telltale sign. The only way to alleviate these excesses is to decrease economic activity through a recession. As the chart shows, historically, peaks in inflation have been followed by a recession.
The economy goes in cycles. History goes in cycles. The economy shapes history and history shapes the economy. Every aspect of the economy is intricately interwoven with the past, current, and future events. While major, external circumstances like disasters and politics are the major drivers of the macroeconomic scene, at the individual level, we have the power to make day to day financial decisions that microscopically shape the economy. Some tips for preparing for an economic recession include, setting aside an emergency fund, paying off any current debts, living a more frugal lifestyle, and building up your resume in case of job loss. And so, we as college students, with our lives ahead of us, face an uncertain future in terms of the economy upon graduation. But how we prepare, budget, and save is up to us. Perhaps the greatest benefit of all is that we have the ability to learn from history.