Could It Have Been Better to Have Had a Recession?

[marko]

My parents and the people I grew up around lived through the Great Depression. Many of them thought the next big Depression was overdue and lived like it was coming tomorrow. Some never dared to borrow money to buy a home or farm or start a business, because the next depression was over due. They were right. They lived their lives like it was a depression even though there wasn't one.

But some other people made a fortune buying foreclosures and things that people couldn't afford anymore.

Banks were chasing my grandfather around begging him to buy apartment buildings they held etc for pennies on the dollar. (I just learned this a few years ago)

Like the Great Recession of '08 and '20, there's bargains and TLH to be had in the market for those who are prepared.

 

[big-papa]

My mom and dad were a bit that way. In any case, they certainly NEVER got over the Great Depression.

Same here, especially my Dad, who was an early teen when it started. It colored every financial decision he ever made (or didn't make) and not always to his benefit.

Cheers.

 

[stepford]

I don’t worry about the BRICS, because those are quasi criminal countries, so how can they trust each other?

There's some old saying about pots and kettles. Can't remember it just now...

 

[jazz4cash]

I think it’s reasonable to speculate. The answer to “would it be better to have a mild recession” is unknowable until it’s too late. I am more comfortable with using monetary and fiscal tools responsibly to dampen the economic cycle bottoming process. Maybe the result is a rolling recession that does not impact all sectors at the same time. Counterpoint is just get it over with and hit the reset switch.

 

[jebmke]

There's some old saying about pots and kettles. Can't remember it just now...

self-reflection is almost always good

 

[FI_RElater]

Of course I knew about that generation’s conservative financial ways, but I never fully connected that they assumed another depression was always around the corner. There were many busts and panics before that, which they also probably heard about from their parents and grandparents. Their allergy to debt and risk makes some sense, except in light of inflation eroding their purchasing power.

What you have to remember is that THEIR parents had been subjected to a number of serious shocks: The Panic of 1893 (most serious depression prior to the Great Depression), The Panic of 1907 (50% drop !), the inflation of 1918-1921 which at times was over 20%, and of course the bank failures prior to FDIC. Those impacts would have largely been driven into their heads.... and then would have been reinforced once the Great Depression hit. Of course, the first big depression (the Panic of 1873) where unemployment reached 14% and which led to the twenty year "Long Depression" would have also been in the background of all that more "recent" history of the late '20's.
No wonder that all those events would have been seered into the psyche of those at that time. Imagine what could have happened if 2008 hadn't turned out as well as it did; a total meltdown would have also seared caution into many, if not most, people.

 

[Koolau]

Here’s an interesting article about how global reserve currencies have lasted an average of 94 years since
1450.

World Reserve Currency History: From 1450 to 2023 - About Financials

Dive into the captivating world reserve currency history, tracing its evolution from ancient times to modern dynamics. Explore its impact on global finance.

aboutfinancials.com

I don’t worry about the BRICS, because those are quasi criminal countries, so how can they trust each other?

Not to sound like a know-it-all but I didn't learn much new from the article. Having said that, it does put the whole concept into perspective. One thing seems obvious. There will always be challenges to the "top dog" of currencies. I appreciated the brief discussions of why reserve currency status was lost but I would have liked more discussion of how a country with reserve currency status maintains that. I have my own ideas, but I'd be interested in a discussion of what upended the past reserve currencies and how USA can avoid those mistakes.

 

[rembrandt]

 

[Markola]

Not to sound like a know-it-all but I didn't learn much new from the article. Having said that, it does put the whole concept into perspective. One thing seems obvious. There will always be challenges to the "top dog" of currencies. I appreciated the brief discussions of why reserve currency status was lost but I would have liked more discussion of how a country with reserve currency status maintains that. I have my own ideas, but I'd be interested in a discussion of what upended the past reserve currencies and how USA can avoid those mistakes.

Agree. It hints at military dominance laying the groundwork for each new global reserve currency, and decline of empire as the reason for each currency’s deterioration and replacement by the next dominant military power.

 

[Montecfo]

In my 4 decades of trying to understand the US/world economy and invest, I figured out that things happen way beyond my understanding. So, after 2008-2009 recession, I simplified my investment strategy to mainly invest in S&P 500 (plus some hedging strategy). Had I done that since I started working after college, I probably could have retired by age 45 instead of at 54.

This is easier to see now. But did anyone predict the rise of indexing and momentum type (cap weighted) growth we have experienced?

That was not really in view.

 

[Montecfo]

The version I always heard was "Pigs get fat, hogs get slaughtered".

But back to the topic of economic calamity, some folks here sold all their stocks during the last couple of periods of financial uncertainty. You can only do that once.

As far as recession, well we have had rolling recessions through specific industries. Look at manufacturing. But strength elsewhere buoyed perhaps by deficit spending has papered over that, for now.

But there are certainly signs of economic weakness and some new potential hurdles. And worrisome to think what deficit spending will look like in a prolonged deep recession.

Some smart actions to reduce the deficit would prepare us better. But we really need to get the economy growing faster than government debt is growing in order to make this work.

Labor markets are tight but automation is replacing some jobs. AI may do a really good job of keeping labor costs in check while continuing to drive productivity. Good trend there.

Maybe we can thread the needle and avoid a deep recession and keep growing while reducing debt as a % of GDP. Lower rates would help all of those things and I'm guessing we get those one way or another.

 

[Markola]

^^^+1. Also, the world is not ready for the implications of robots with machine learning capabilities, IOW, infinite labor guided by ever-more powerful general intelligence. I can’t grasp it all, nor can anyone, but the old models will surely be broken.

 

[Fermion]

The first AGI is coming in about 5 to 20 years, then the one it designs about 2 years after that, then that one will make one in about 1 month, then Terminator.

 

[ncbill]

The first AGI is coming in about 5 to 20 years, then the one it designs about 2 years after that, then that one will make one in about 1 month, then Terminator.

Watch out for...

 

[aja8888]

The first AGI is coming in about 5 to 20 years, then the one it designs about 2 years after that, then that one will make one in about 1 month, then Terminator.

Will it do laundry? If so, I'll buy one.

 

[Koolau]

^^^+1. Also, the world is not ready for the implications of robots with machine learning capabilities, IOW, infinite labor guided by ever-more powerful general intelligence. I can’t grasp it all, nor can anyone, but the old models will surely be broken.

Some version of "Brave New World" or similar. Yeah, I can't grasp it either. Not really looking forward to such a time.

 

[MichaelB]

Not to sound like a know-it-all but I didn't learn much new from the article. Having said that, it does put the whole concept into perspective. One thing seems obvious. There will always be challenges to the "top dog" of currencies. I appreciated the brief discussions of why reserve currency status was lost but I would have liked more discussion of how a country with reserve currency status maintains that. I have my own ideas, but I'd be interested in a discussion of what upended the past reserve currencies and how USA can avoid those mistakes.

There really isn’t enough history of reserve currencies to answer your questions. It’s not something specific a country chooses, more like it evolves and happens because other countries want it that way. Ray Dalio discusses it in his book and analyzes it pretty well (but the writing is dry).

I think it’s safe to say the US$ as reserve currency was a clear positive for the world and the US after WW2. It no longer is a clear positive for anyone, but no other country wants their currency in this role and no other currency is really suitable for it. By definition a reserve currency needs to allow free capital flows, and China neither allows free flow nor is likely to change until their internal domestic order changes.

The Euro is not suitable because there is no single source of monetary policy.

The US economy will continue to be the largest in the world for quite some time. It would be beneficial for the US if another currency were to “take charge” but there’s no indication that will happen anytime soon.

 

[Koolau]

There really isn’t enough history of reserve currencies to answer your questions. It’s not something specific a country chooses, more like it evolves and happens because other countries want it that way. Ray Dalio discusses it in his book and analyzes it pretty well (but the writing is dry).

I think it’s safe to say the US$ as reserve currency was a clear positive for the world and the US after WW2. It no longer is a clear positive for anyone, but no other country wants their currency in this role and no other currency is really suitable for it. By definition a reserve currency needs to allow free capital flows, and China neither allows free flow nor is likely to change until their internal domestic order changes.

The Euro is not suitable because there is no single source of monetary policy.

The US economy will continue to be the largest in the world for quite some time. It would be beneficial for the US if another currency were to “take charge” but there’s no indication that will happen anytime soon.

Thanks for your treatise on the subject.

Of late, it seems the USD remains world reserve more by default than design or even desire. As "bad" as the dollar is, it's better than the other fiat currencies. Not a great recommendation.

Whether BRICs is a suitable replacement, or whether the BRICs countries really all want to replace the dollar, just the idea that the dollar could become like the Pound Sterling, is unsettling. We've had a lot of advantages with the dollar as world currency. I guess I'd like to see more "effort" and interest in maintaining that status. Just my musings on the subject as I know so little.

 

[MichaelB]

Thanks for your treatise on the subject.

Of late, it seems the USD remains world reserve more by default than design or even desire. As "bad" as the dollar is, it's better than the other fiat currencies. Not a great recommendation.

The US$ isn’t “bad” at all. If anything, it’s amazing. I do agree with your default vs design comment. However, like holding a tiger by the tail, once you have it what do you next?

Whether BRICs is a suitable replacement, or whether the BRICs countries really all want to replace the dollar, just the idea that the dollar could become like the Pound Sterling, is unsettling. We've had a lot of advantages with the dollar as world currency. I guess I'd like to see more "effort" and interest in maintaining that status. Just my musings on the subject as I know so little.

We don’t need effort to maintain it. That’s happening already, and it’s a problem. We need the opposite. The global economy and financial system is far too dependent on the US economy and the US$ as reserve currency and other global economies need to carry their fair share.

 

[Koolau]

From what I understand, our status as world reserve currency has some real advantages. I'm sure there are disadvantages as well as you suggest. My guess is if you asked our "leaders" they are anxious to hold onto reserve currency status and are willing to pay the costs for it. I have no evidence of this.