Lots of folks are starting to panic a bit now that the stock market has shed roughly 15% in the last 10 days. And rightly so. We haven’t seen the market tank this bad since the recession started back in 2008. But this time it’s a little more interesting. Well, maybe scary is a better word.
Unlike the recession of 2008, we don’t have the same mechanisms at our disposal to try and quell the panic and stimulate the economy. We’re also starting off in a worse spot. Interest rates are near 0%, and they can’t go any lower. The government has already printed trillions of dollars out of thin air to “stimulate” the economy, which failed to work. The credit rating has been downgraded from the highest level of AAA to AA+ by S&P, which means there is significant concern on their part that the government debt is starting to get out of control. We now have a 100% GDP to debt ratio which is increasing year over year. Consumer confidence is at an all-time low. Unemployment is at 9.1% and holding steady. In case you didn’t know, that’s all bad.
Even worse yet, if the United States slips back into a second recession before it has recovered from the first, we could see huge losses, not only in the stock market, but in private sector and public sector jobs. The outcome of which will be much worse than the first recession because as I mentioned previously, we are starting off in a worse spot.
One could easily make the argument that we have already entered a second recession. The GDP has decreased to 1.3% and unemployment has been steadily increasing. The national trade deficit has increased. The dollar has also been declining for months. To top it off, the consumer price index is also trending negative, providing more evidence that the economy is going to start slowing down even more. And today, the market dropped -634 points, the 6th largest drop on record. Most economists now give the United States a 50-50 shot of a double-dip recession.
I’ll make this prediction: If we have entered a second recession, it’s going to get really bad. Jimmie Carter bad. Unemployment could easily hit 14%. The stock market could easily lose 40% of its value. We would most likely enter a period of stagflation, where the economy actually contracts while interest rates climb. Government revenues will decrease leaving the Federal Reserve all out of options, but one; print more money. This will make matters immensely worse in that inflation would set in very quickly. A second downgrade on US credit would be probable. Interest rates would start to climb making it more expensive to borrow money. The government would be forced to make huge cuts in entitlement programs and defense spending just to service the debt. States would lose revenue due to foreclosures and a high unemployment rate. They too would be forced to make drastic cuts in spending and entitlements such as pensions.
Sound unlikely? During Jimmie Carter’s era, inflation hit 18% per year. Military pay increases were frozen. The prime interest rate hit 21.5% which caused home mortgages to exceed 16%. There was an energy crisis which lead to long lines at gas stations.
Eventually, the country would correct itself and get back on its feet. Ronald Reagan was able to pull the country out of similar economic conditions he inherited from Jimmie Carter in a little over 4 years. I however have little confidence that the government we have today would be smart enough to fix these problems. It will be up to the People to vote out the folks who got the country into this mess. That means removing political figures from both sides of the isle.