Even if you don’t understand Macroeconomics or Finance, it won’t be a tough task for you to put a finger on the fact that something is majorly wrong with the economy right now.
i. The global debt is at an all time high ($303 trillion dollars in 2021).
ii. Government bailouts have been skyrocketing.
iii. Money printing has been extremely high. (In the US a humongous amount of money was printed within 22 months, from $4 trillion in January, 2020 to $20 trillion in October, 2021)
Why is a recession good for the economy right now?
Now, there are 2 ways in which you can wrap your head around the concept of a recession.
The classic definition– Slowdown in economic activity
(Eg- The 1930s was termed as the ‘Great Depression’, because economic activity had stalled)
Such a definition leads us to believe that a recession is an ‘evil thing’.
Instead, we can define recession as a period during which fit firms end up surviving.
Money flows out to those people who have best use of that capital.
Let us understand this better, by looking into the 2 phases of the economy-
The boom and bust period of the economy.
Reason 1: It streamlines the flow of capital.
During the boom phase, there is a large availability of capital in the economy.
This consequently results in people clamouring for more growth.
Countries start competing against each other in order to accelerate growth.
This might lead to something called as artificial growth, and eventually inefficiency in the economy.
Inefficiency in the economy = Money flows into companies that aren’t necessarily creating good businesses/working on good ideas.
A lot of inefficient businesses end up getting a lot of capital during the boom phase, which is not good for the economy
And therefore, the bust phase, also called recession, is very important for the economy.
It streamlines the flow of the capital and it ensures that the capital is reaching the people who have the most productive use for it.
Reason 2: It brings an opportunity for structural change.
During the Great Depression (1930s), there was a systemic inefficiency in the economy.
One of the primary reasons the world moved towards a recession was because people were losing a lot of jobs. This led to people not spending money, which led to underspending.
This led to a vicious cycle of-
UNEMPLOYMENT > UNDERSPENDING > UNDERPRODUCTION
When such a scenario plays out, the economy needs a jolt, so that the cycle breaks.
In the 1930s, this jolt was provided by fiat money, i.e.- Government’s ability to print more money.
When the government throws money into the system, people start spending more, companies begin to produce more and as a result, they hire more.
Hence, the problem goes away.
After the 1930s, a lot of countries moved from the gold standard, to the fiat standard. This was a fundamental shift.
Another fundamental shift took place in 2008.
It was termed as the subprime lending mortgage crisis.
In simple words, banks across the US started selling products that they should not have sold.
This brought oversight on investment banks into the picture.
Since the banks did not act responsibly, it led to a recession and hence restructuring of the banking system.
What will be the repercussions of the current recession?
Excessive money printing is leading to something called as ‘unstable inflation.’
This is something that has not happened in the past.
So, what is the implication of this?
For this, you need to understand the concept of certainty.
Businesses like certainty.
If inflation is very high, businesses will take loans, build structures and processes accordingly.
If inflation is very low, they will manoeuvre their operations, hiring practices, etc accordingly.
Businesses cannot prepare for the kind of uncertainty that comes along with unstable inflation.
Unstable inflation > Lot of firms go out of business > Slow growth
Points to remember if you want to make money in this market-
1) This will become the age of monopolies.
Companies like Amazon, Microsoft, Apple, Hindustan Unilever are much better placed in terms of handling unstable inflation. They will win in the long term.
They will pick up the market share that is left by small companies which will fail to survive this recession.
2) Artificial growth will stop for companies for at least half a decade.
A lot of companies planning to launch their IPOs will have a very hard time, specially the ones struggling in revenue.
3) Study and understand hard assets.
You can watch this video to understand it better.
The world will now reward diversified investors. Traders will have a very tough time surviving in this market for the coming few years.
But nonetheless, it will be an excellent market for those who can handle volatility.
And handling volatility comes only with conviction.