A Warning from the 1970s
The United States has had 35 recessions since we first started collecting economic data in 1854, and it looks like we’re heading into another one soon.
According to the National Bureau of Economic Research’s Business Cycle Dating Committee, a recession can be defined as a significant decline in economic activity that is spread across the economy and lasts more than a few months. The Great Depression of the 1930s is regularly taught in schools and most people are aware of the Great Recession that occurred in 2008. However, unless they lived through it, not many people know much about the Great Inflation of the 1970s.
How it Happened
The 1970s were a period of high inflation, high unemployment, and high-interest rates that is thought to be as equally transformative as the 1930s or 2008. The impact of these three factors together was called stagflation – a time marked by low growth and high inflation. The road to stagflation began with the passage of the Employment Act of 1946. The act declared that the federal government had a responsibility to promote maximum economic growth through high employment, production, and purchasing power. It was meant to facilitate greater coordination between economic policies. In 1946, and the decade following, the U.S. was enjoying the post-war economy and trying desperately to avoid the unprecedented unemployment rates of the 1930s. As a result, the US economy adopted a Keynesian economic policy. The focus of this policy centered around managing aggregate spending through fiscal and monetary policies. It was seen as a quick way to change the economy and saw government intervention as necessary.
The combination of Keynesian economics and the Employment Act of 1946 presented an exploitable relationship between unemployment rates and inflation. Policymakers believed lower unemployment rates could be manipulated by higher rates of inflation. This relationship became known as the Phillips Curve and would become very damaging to the United States’ economic well-being.
How it Impacted Americans
In reality, policymakers were not able to control the Phillips Curve. People and businesses anticipated rising inflation. As a result, both inflation and unemployment became incredibly high. By 1974 stagflation had officially begun with inflation over 12 percent and the unemployment rate above 7 percent.
Americans lost an immense amount of purchasing power during this time. Many families faced economic instability and there was an ever-looming threat of losing savings. It became very difficult to plan ahead for long-term purchases or even week-to-week purchases. During this time, inflation diminished the average standard of living that many families were accustomed to.
How the Great Inflation Ended
By the late 1970s fighting inflation was absolutely necessary. The ability to fight it would come with a change in leadership. In 1979, Paul Volcker became chairman of the Federal Reserve Board. Volcker was determined to end inflation.
It was not an easy fight, to say the least. The introduction of the Monetary Control Act (1980) allowed for more restrictive management of the federal reserve and the introduction of credit controls. Following the act, interest rates rose, causing a brief recession in 1981. The 1981 recession was just as difficult as the 1970s economy but proved to be what needed to happen in order to end the Great Inflation.
Why Does This Matter?
You’re probably wondering why we are bringing up the 1970s economy in 2022. It’s because many economists see the United States possibly going down a very similar path that could result in another recession.
Our current economic situation is not an exact copy and paste of the 1970s. Unlike the 1970s, current unemployment rates are at their lowest point in decades. However, we are beginning to see inflation rates rise to a point that could impact the average standard of living. The origins of the situation are much different than the 1970s. The economy of the 1970s can largely be accredited to poor choices made by policymakers. However, today’s economy has been largely impacted by the COVID-19 pandemic and the Russian-Ukrainian conflict. Both of these have wreaked havoc on the supply chain and caused inflation to spike.
The good news is the world is learning from the 1970s and governments are attempting to fight a recession ahead of time. Economists do not think the impending recession is imminent. (Although consumers should still expect rising costs.) Many are giving the economy 12-18 months before there are any major consequences. This means there is over a year to prepare and some countries have already begun preparations. Across the globe, central banks appear to be altering interest rates in an effort to combat inflation. The US central bank recently announced its highest increase in rates since the early 2000s. Governments appear to be committed to fighting this recession before it can even begin.
What Can I Do?
Now, this does not mean we are completely out of the woods. A recession is still a very real possibility within the next few years. While the government has its own way of preparing, there are a variety of ways you can prepare and protect yourself from a recession.
Have an Emergency Fund
Having an emergency fund is good practice for any household. The best way to store your fund is in a high-interest savings account that is FDIC insured. This gives you easy access to your funds when you need it.
An emergency fund allows you to be dependent on yourself and your own funds rather than borrowing from creditors.
Live Within you Means
This is one of the best ways to prepare for a recession. Making a point to live within your means during times of economic stability means you are less likely to go into debt when the economy becomes unstable. You’ll be able to more easily adjust your budget and resist taking out loans or depending on a credit card.
Keep a High Credit Score
Speaking of credit cards, it is vital to maintain a high credit score. During a recession, credit availability tends to decrease. Those with excellent credit scores are then the ones being approved for new loans or credit cards.
The easiest ways to increase your credit score are paying bills on time, keeping old cards open, and maintaining a low debt-to-income ratio.
Hire a Pro
A financial advisor can help you make the most of the good times while preparing for the bad times. The experienced financial advocates at DuPont Wealth Solutions can help prepare you for any economic future. Call us at 614-408-0004.
To learn more about what you can expect in our future economy listen to Episode 29 of our podcast, Your Financial Advocate.