What the Recession Will Do to America
“Follow me outside, Mr. MacIntyre.”
The HR woman who had hired me was standing outside my cubicle. I hadn’t seen her since the interview.
I was busy, holding a stack of CD-ROMs full of clinical trial data for my supervisor.
I nodded down at the stack. “Sure, can it wait for me to finish?” I asked.
“No, Mr. MacIntyre,” she said, and literally made a finger-beckoning gesture with her hand that had impractically long, red acrylic nails.
“Please follow me outside right now.”
I handed the CD-ROMs to my supervisor on my way out of the office, who was grateful for them. I had just done her a favor and went above-and-beyond my job description to help her with a project.
I stepped from the office’s fluorescents into the bright, hot Southern California sunlight.
Before I could even see properly, the woman stuck out her hand and said, “I’m going to need your security badge.”
Reader, I was being fired.
I must have looked like someone kicked my puppy.
“Don’t look like that, Mr. MacIntyre,” she said. “I do this every day.”
Those words, “I do this every day,” have been living rent-free in my mind for the past 14 years.
She asked me if I had any personal effects left in my cubicle. She left me outside to go get them. I never even got to say goodbye to my supervisor and coworkers.
And there I was, in March 2008, standing outside one of the office buildings on the sprawling Amgen campus in Thousand Oaks.
Jobless. With no idea what to do.
I wasn’t the only one.
People were, indeed, losing their jobs every day.
In 2008, in the aftermath of the Great Recession, 2.6 million people lost their jobs. Millions more would lose jobs in 2009.
Today, in 2022, we’re staring down the barrel of another recession.
If you want to split hairs with me (I’ll explain what I mean in a moment), this will be the first “real recession” since 2001…
Which means that many people working today were not working or do not remember what a real recession is like, or how it will affect them.
And since many public officials and economists are saying that a recession is “not likely”...
I’m going to show you 1) why it is just about certain to happen at some point in the next few years, and 2) why it is necessary to take proper steps to prepare for it regardless of what you’re doing.
How We Ran Toward the Edge of an Economic Cliff, Screaming Like Excitable Idiots
Now, to save you some space and get to the good stuff (and so you have context for this conversation)…
Here is a link to a piece explaining what the Fed is doing, and my prediction for when it will stop.
Here is my one-act play explaining the last 14 years of the Fed’s monetary policy decisions, and why things are happening now in the way they’re happening. (A lot of people say this is the best content we’ve put out so far.)
Here’s an explanation of how the supply chain crisis is causing this mess, and how it causes inflation in the short term but can cause deflation in the long term.
And here’s an explanation of both what a recession is, how it affects you, and why it might not matter that much to properly prepared investors.
But to save your index finger from having to click a bunch of links, here’s a succinct explanation of what’s happening in the economy:
Coronavirus happened. Quarantines and lockdowns ensued.
Many people couldn’t leave the house. So they weren’t spending money. (Demand went 📉)
Businesses need money to operate.
To survive, businesses shut down operations and fired millions of people.
Businesses still had lots of inventory left over to sell to people. (Supply went 📈)
The government paid people directly, made it harder to fire or evict people, and gave out bridge loans for businesses to maintain their staff.
With offices shut down and remote work expanding, everyone and their mother decided to move out of cities. (Housing demand went 📈)
Vaccines shipped. Lockdowns lifted. Everyone rubbed the sleep from their eyes and wanted to buy stuff. They also had a ton of disposable cash, so they did buy stuff. (Demand went 📈📈📈)
Businesses had no way of knowing when this would happen. Inventory plummeted as people bought things up. Restarting operations, supply lines, and rehiring takes a long time, so nothing was getting made. (Supply went 📉)
As a result, costs to make and ship things went 📈📈📈. Despite this, demand kept going 📈📈📈.
Supply could not keep up with demand. So businesses passed on their expenses to consumers. Too much money chased too few goods. (Inflation went 📈)
To control inflation, the Fed began withdrawing support of the markets and making debt even more expensive for businesses. Why? Because the Fed can’t print food, it can’t print factories, it can’t print cars. In other words, it can’t increase supplies of things. But it CAN suppress demand.
Less demand means businesses get less money to operate.
To survive, businesses will shut down operations and fire millions of people.
(Credit to Lyn Alden)
This is how the next recession will begin. It has perhaps already begun.
Were mistakes made over the last couple of years?
Oh… oh yeah. Yes.
But everything is easier to see in retrospect. I’m not going to sit in an armchair and wax philosophical about what went wrong and who’s responsible.
(Why? Because we all are, if you get down to it. WE LIVE IN A SOCIETY after all.)
So let’s be proactive and try to understand how and why this upcoming recession is different… and what we can do about it.
A Real Recession May Not Be Inevitable, But It Might Be Necessary
That subhead was originally “A Real Recession May Not Be Inevitable, But It Might Be a Good Thing in the Long Run.”
But my bleeding heart is showing…
There is no silver lining to people losing their jobs. To families losing their income.
It sucks. Period.
In order to control inflation, the Fed has basically made job losses a certainty.
After all, the Fed has no control over supply. But it can affect demand.
That means the pain coming to regular people is about to become really really real.
But I’m marketing myself as the Finance Daddy…
Not the Finance Crybaby.
And as adults, sometimes we need to make decisions that hurt a lot now for the sake of long-term health and stability.
(Anyone who has ever been on a fat-loss diet knows what I’m talking about.)
While I think the Fed sucks (it totally sucks), right now I think it’s making “adult” decisions.
You won’t hear this from a whole lot of politicians…
But economies sometimes go through rough patches! Sometimes they have to!
While the Great Recession was triggered by the financial crisis (predatory lending and irresponsible practices), and while the 2020 recession was triggered by the Coronavirus lockdown…
The recession of 2022 or 2023 (or 2024) will be a return to normalcy, sort of.
It will be the first “real recession” caused by a natural rough patch since 2001.
If you’ve ever heard of the “debt cycle” and “business cycle,” they’re called that for a reason…
The amount of debt and the size of businesses go up and down. Pretty regularly. Recessions used to occur once or twice a decade.
But the Fed and U.S. government has been doing everything it can to soften these downturns.
Doing everything possible to avoid the downturns creates unintended consequences and perverse incentives.
(Here’s a shower thought: Would Bitcoin exist if not for the 2008 crisis and the Fed’s questionable monetary policy decisions thereafter? Hmm…)
Sometimes it can cause worse situations down the road…
Inflation, for example.
But worse than that: In a capitalist system, bad businesses, bad actors, and poor management are SUPPOSED to be punished sooner or later.
Being bad at business should lead to bad outcomes.
But in an economy where you have nearly infinite access to cheap debt and capital?
And in a financial market where there is no decent alternative to investing in equities, so growth-desperate investors push asset values higher and higher, which allow unprofitable companies to tap their equity as another cheap source of capital?
Well, then there’s no incentive to run a good business.
To use an analogy…
To teach someone, you need to offer carrots to reward good behavior and threaten hitting them with a stick to punish bad behavior.
After 2008, the Fed dumped a bunch of carrots into the economy and removed most of the sticks.
(If you want a good reason, but not the only reason, why socialism is so popular among people under 40, it’s this: These generations have only ever known an economy where these self-correcting mechanisms fail to trigger, allowing some of the worst business practices to continue unchecked.)
And in all this talk of carrots, sticks, and perversity…
Investors – people like you, but mostly institutions and fund managers – serve an important function.
They decide where to move their money (i.e., “deploy capital”) in order to maximize productivity and output.
They want the biggest, safest bang for their buck.
If they can rely on governments continuing to prop up markets and companies in perpetuity…
Investors cannot properly fulfill this function.
Whether it’s due to greedy people chasing absurd and unrealistic profits, the mandate of passive index funds, or profound ignorance...
Investor money simply follows where people think they’ll make the most money – even if what they’re buying is completely divorced from economic reality.
This leads to insane asset bubbles (I’m looking at you, NFTs) that don’t actually create anything productive in an economy.
By productive, I mean this:
If a company raises investment dollars to build a widget making factory, guess what? Now everyone in that economy has access to widgets (for a fee).
If investments chase after the same pile of unproductive assets, like certain digital tokens, guess what? The only thing happening is money moves from one hand to another. Most people end up poorer, except for a few lucky people.
Now, in NORMAL circumstances…
Recessions and downturns act to kill off the weakest businesses and least productive assets in an economy.
And in this process, good businesses can grow to take advantage of the void (and consumer demand) left by those bad businesses.
“Survival of the fittest” is… well, it’s a stupid and oversimplistic way to put this.
But evolution and growth only occurs because of adversity and the environmental pressure to adapt. This is true in biological and economic systems.
Businesses that can survive and adapt, thrive.
Those that can’t? Well, they’re supposed to die.
And by die, I mean go bankrupt so their productive assets can be sold to surviving businesses and so their staff can be released to pursue other work.
“But people can’t just have their jobs disappear!” I hear you say. “What about The People getting ratf***ed by forces outside their control? They didn’t deserve to lose their job.”
Well, here comes another unpopular opinion:
Recession Job Losses Can (Sometimes) Be Necessary, Too
At Amgen, I worked a mainly clerical, administrative job that only existed because of FDA and FTC regulations.
I wasn’t making or discovering or disseminating medicines. My job existed because Amgen got in trouble for encouraging doctors to overprescribe medications. I did nothing productive for the company or for society.
It was what David Graeber called, in his book with the same title, a Bullshit Job.
A bullshit job, by his definition, adds nothing to the productive output of the economy but which exists mainly for vanity, for compliance, for prestige, to dilute workload, or for no discernible reason.
Like a medical billing specialist. Or a lobbyist. Or a store greeter. Or most lawyers and compliance jobs. Or middle managers.
According to Graeber, the vast majority of jobs are bullshit jobs. Their lack of meaning or fulfillment presents a “profound psychological violence” that leaves “a scar across our collective soul.”
I pointed this out, in my report on intrapreneurship, by drawing a distinction between jobs that are valued and jobs that drive value.
I was pretty resoundly ridiculed by an old friend of mine for saying this.
I don’t blame him…
Nobody likes hearing that, in all likelihood, the thing they’re doing for most of their waking hours is a meaningless exercise that mainly exists due to the caprice of rich people who make decisions that have little or nothing to do with the interests or wellbeing of their employees.
But… yeah. It just kinda be that way.
(Don’t look like that. I do this every day.)
But: This is WHY I encourage people to look for ways to reposition themselves out of functionary roles and try to align themselves with the moneymaking side of a business’ ledger.
It is easier to ask someone in a moneymaking role to step up and take on some functionary duties than it is to ask someone in a functionary role to take on moneymaking duties.
So if a business owner or manager has to make a choice between cutting functionaries or putting the whole business at risk due to expenses being too high?
It’s the functionaries who get cut. The same people who think they’re important but aren’t.
Because here’s the thing about recessions…
They give businesses an opportunity to shed underperforming workers and get rid of unproductive jobs.
The U.S. economy is at full employment, making it hard for businesses to attract new or better employees.
This makes attracting workers more expensive, since businesses need to compete with each other for the same labor pool.
“Why don’t businesses just pay people more?” I hear you cry.
Because if a recession is coming, businesses will not have the money to pay these people shortly after hiring them.
Full employment also makes it harder for businesses to get rid of bad or less-productive employees. After all, mediocre employees are still better than zero employees.
In the event of a recession… businesses won’t be able to justify paying for mediocrity.
To wrap this all up…
We’re about to see lots of bankruptcies. Way more than 2021.
But the YouTuber Economics Explained put it best, in my opinion…
Recessions are painful. For everyone.
But pain is an evolved, critical signal in a biological system.
It tells you what NOT to do. It tells you that something needs to be fixed.
Government stimulus and quantitative easing and ultra-low interest rates are like painkillers.
They can help us survive times when pain is debilitating…
But they’re addictive. And the side effects? Can be lethal.
And painkillers don’t do anything to resolve the issues causing the pain in the first place.
Now that the economy is having its painkiller drip cut off, it’s going to be laborers and consumers who feel this pain. Unprofitable and poor-quality businesses, too.
So what can a regular person do when the recession hits? Or even before it?
Well, here’s the bitterest pill of this issue…
If you’re not driving revenue for your employer…
If you’re not necessary for the growth and function of their business…
If what you’re doing is a “nice to have” for a business and not a “need to have”...
You have a target on your back.
Start working on your resume.
P.P.S. What did I do after getting laid off from Amgen? I roamed around a bit. I traveled to New Orleans with a volunteer group called the Dirty Hands Caravan, organized by the actor Sean Penn. I almost joined Army OCS. I moved to San Francisco and worked at the Virgin Megastore for a few months. I got into grad school. I began teaching college courses while getting my degree. I got into another grad school. I worked as a professor, writer, and waiter at Books & Books Cafe in Coral Gables, Florida. I lived in Los Angeles; Champaign, Illinois; Miami, Florida; West Palm Beach; Westchester County, New York; and Baltimore. I got a job in financial publishing in 2015. And then things took off. I got really good at identifying and writing about interesting investing opportunities. This attracted the eyeballs of the bigwigs in my parent company and they started investing a lot of dollars and resources in and with me. I made a lot of money. I started a family--became a daddy in the literal sense. I started a few businesses. And here we are.
Things worked out for me.
I hope you’ll take the steps to prepare so, no matter what happens, things will work out for you, too.
