A Looming Recession
The fire-breathing dragon called “inflation” has lain dormant for many years, thanks to a continuing robust economy and the Federal Reserve keeping a lid on interest rates. Now the monster has been aroused, and is hungry for dollars. He munches them like snacks, and is always bellowing for more. His victims include, but are definitely not limited to, mortgage interest rates, prices in the supermarket, gas pump, and shops at the mall, and any number of business transactions that require financing. He is not satisfied with the resulting high prices in every aspect of our lives; he doesn’t want you to be able to buy a home, finance a new car, borrow money for that remodeling project. He is especially delighted when his voracious appetite affects those who can least afford it, and literally are forced into the bread lines for sustenance.
Now, with interest rates climbing across the board, we’re beginning to look around for the guilty party(ies). We can always turn our wrath on Big Business, that other monster which rules over the economy like an all-powerful monarch. Then we have the continuous “waste” in government spending, along with the goodies lavished on favored segments of the business behemoth, like the oil depletion allowance and the ethanol boondoggle, which continues to promise better gas mileage at lower prices, but fails to deliver either one.
In an all-out, free-fall recession, we are likely to experience runaway inflation, which causes interest rates to spiral upward to a point where there’s no way to eke out a profit. In my own case, I was building homes in the early ‘80s, when a real stinker of a recession overwhelmed us. My construction interest rates went from a manageable 12% to 20%, within six months. I had about twenty living units in various stages of completion, and I found that I had not
just lost my profit margin, but my loans were actually under water. In other words, no way out but to continue to feed the monster out of my own pocket, or walk away and declare bankruptcy. To avoid these grim alternatives, my partner did the walking away, and I remained committed to the business. It took two full years of sweating it out, but I finally sold my inventory and paid off the construction loans. It cost me my entire savings to do so, and when I was finally able to shut the doors, I was dead broke. It was the most expensive education ever.
That was probably a worst-case scenario, but interest rates are headed in an upward direction, with only band-aids being applied to economic wounds that are beginning to fester. No businessman can continue to absorb interest hikes by attempting to raise prices of his product. The market will tell him when those limits are reached, and his choices will then amount to those I once experienced. It’s not a pleasant prospect, because the only winners in a long-term recession will be the scavengers, who will always crawl up from the sewers to pick the bones of mordant businesses. This kind of boom-or-bust economy is endemic in our society, and the government is often at a loss as to how to mitigate its effects.
As is usually the result, the little guy loses and the big guy wins. The stories of the demise of many average businesses are legendary, and we try to look to the government for long-term solutions. This latest bull market has been a long one, and we may have been lulled into complacency by the good times. Credit has been cheap, prices have remained reasonably affordable, and many of us have prospered, except the average wage earner, as always. We may have put ourselves into a position in which we have over-acquired and we may be stuck with assets whose interest rates will rise beyond our ability to make the payments, while their values plummet.
There is nothing more depressing than the sight of the repo man, stopping in front of your house. We pray that long-term interest rates never reach the 15% levels that they did in 1985, putting even modest housing out of the range of the average buyer, and leading to all kinds of financing “tricks” which amount to “pay me later, but pay me a lot more.”
If you’ll bear with me a moment more, here are a few words of caution from someone who has been bruised and bettered during many economic cycles, Hold on to your cash to the maximum extent possible, sell off any non-producing assets, go easy on any new acquisitions, and be prepared for some belt-tightening in the coming year or more. Life is becoming a roller coaster, and we’re about to start the downward plunge from the dizzying heights. It might take all your stamina to ride it out without losing – well – you know what happens when you’re “pulling too many Gs.”
George Thatcher, 2022
George is an American Bad Ass. He grew up in Jersey, flew B-52s in Vietnam, taught English, Spanish and other languages to children around the world, makes his own salsa, has been known to enjoy a beer or two and has called Lubbock home for a few years, just to entertain the locals. Welcome to Raiderland, Major. We are going to feature some of his writings going forward. Some new, some old. Some rhyme, some don’t. When it comes to George, there’s no box. So… enjoy our friend and enjoy his writings! – Hyatt
