The Coming Great-er Recession: Why This One Will Hurt More Than the Last Benjamin Way Follow Apr 2 · 10 min read

Americans’ finances never fully recovered from the banking collapse of 2008; even a “mild” recession could push us to the brink. A layman’s guide to some key numbers.

The American stock market is in its longest bull run in its history. For the uninitiated, a bull market is when stock prices are raging, and a bear market is when they are going into hibernation. This record run is the kind of thing that the current President likes to brag about — true, and it sounds good, but it is actually probably a negative thing. Bull markets can be driven either by an actual increase in productivity over the period, or by overly-optimistic leveraging of income and assets, or some combination of the two.

Large “market corrections” are circled in orange. The “recessions” starting in 2000 and 2008 are circled in red.

A “market correction” occurs when the over-leveraging surpasses production by too much for too long, resulting in mass defaults on payments of loans. The loss of assets to creditors results in a tightening of credit markets, restricting additional leveraging, thereby reducing both aggregate demand because people have less access to spending money, and aggregate supply because firms have less access to business loans. This results in a net decrease to domestic production, down toward the “true” level where it should have been if people hadn’t been overly exuberant during the boom years. A decrease in production typically means a decrease in employment hours and wages, which is the main way the pain trickles down to everyday Americans, although pension funds and home values take hits as well.

A “recession” occurs when the scale of default is so great that creditors themselves start going bankrupt, causing a drastic shock to credit markets even as consumer spending plummets. This combination of factors lowers revenue and credit for businesses, forcing many to close, putting more people out of work, and exacerbating the problem of default and reinforcing the recessionary cycle. This proceeds until the losses to creditors from people defaulting on loans are outweighed by new, reliable payments from new loan applicants. Because new loans are restricted during this period and people don’t have good incomes to make reliable payments, that would likely happen when defaults finally drop off, meaning the maximum number of people’s finances have been destroyed.

A “recession” a.k.a. “bear market” is the mirror version of a “boom,” and it includes an overly pessimistic attitude that paralyzes investment and spending, pushing stock values even below the “true” production level, ultimately requiring another “correction” to bring values back up to where they reasonably should be. Where that “correct” level really is, nobody knows for sure, and that’s why there is a stock market for betting on it. But, experts agree that the “correct” level is currently a little to a lot beneath the ground we were standing on, even before Coronavirus hollowed it out further.

Behold, this sample rainbow of trend lines! Quite beautiful, and often quite predictive. But, which if any is the “true” production floor? Place your bets! Also, look at the scale of the crash that just happened!!

Alright, so the stock market is down by a gigantic amount, and that already impacted the 55% of Americans who own stocks. Unfortunately, not only could the market easily continue to crash, but also, the stock market is a leading indicator of future troubles. Notice that the stock collapse of the Great Recession was finished in about two years, but signs of the economic pain still linger.

For example, consider the following:

The blue bar is peak median household wealth before the Great Recession.

The yellow bar is what median household wealth would be if we were at the same level, adjusted for inflation.

The red bar is where we actually were in 2016, the latest data available.

In short, unless the bottom half of Americans saw their wealth increase by about 50% over the last 2–3 years, then they currently have less wealth at the start of this recession compared with the last one. This is important, because the bottom 50% of households are the most likely to experience suffering as a result of a recession, and that likelihood is increased the less wealth they are starting out with.

Luckily, people who lose their income do not have to rely only on wealth; they can also rely on credit. A quick look at debt levels reveals that this is also going to work against us:

A couple of things worth noting here. Firstly, debt levels are higher now than they were last time, which is that first hump in the graph. That is bad, because what it means is that everyone is starting out this recession with higher credit card balances than they started with last time. Also note that last time, mortgages made up a higher proportion of debt, meaning a higher rate of collateral was involved. Banks are set to take a bigger loss this time, because there is no collateral on college or consumer debt like there is on a mortgage, and that will result in even tighter credit markets for the same proportion of defaults. On the plus side, not as many people are set to lose their homes, although this is partly because many never got theirs back from the last crash.

You’ll also notice that debt levels decline during a recession, which seems counter-intuitive; remember, this is because people are going bankrupt, which eliminates their debts — and the banks’ assets. Meanwhile, debt levels increase during a bull run as people leverage their incomes into unsound financial investments, or worse, into unsustainable consumption, setting up the next crash. And, here we are!

(Quick aside, if everyone and the government saved up money instead of accumulating debt, we would have slow growth punctuated by “crashes” that went up instead of down. Imagine that!)

Moving right along, let’s consider the Labor Force Participation Rate.

This is one of the most important economic measures that never gets mentioned, but it is the number to which the unemployment rate is a mere footnote or corollary. Unemployment counts only the people showing up regularly at the unemployment office divided by the total work-age population, whereas the labor force participation rate simply takes the number working divided by the total work-age population.

Thus, if half of all the people working lost their jobs and did not go to the Unemployment Office, the unemployment rate would remain unaffected. And if all of the people previously unemployed gave up looking as well, then the unemployment rate would fall to 0% even though the number of jobs fell by half. Meanwhile, labor force participation would record the entire loss of jobs. If the labor participation rate is not included, unemployment measures are almost meaningless.

Note that although currently “unemployment” is at “historic lows,” the actual labor force participation rate has declined by a twentieth, which means we are millions of jobs short of where we were last time. Employment is at 158 million, but it would be at 164 million if we had the same participation rate for our increased population. This shortfall increases the strain on people during a recession, because each income earner has a higher average number of dependents. Each job lost can thus be expected to impact a larger number of people than in the Great Recession. The difference is fairly marginal, but it will contribute to rather than detract from other factors expected to worsen the human cost of this next recession.

Unfortunately, we are still not finished with our discussion. We turn now to U.S. public debt:

Check out that rate of growth starting in 2001 and kicking into high gear in 2009! In the last twenty years, we have more than quadrupled our debts accumulated during the previous two-hundred years. Who owns public debt? The public, of course.

During the period 2008–2019:

Private household debt rose from $40k per person to $44k per person.

Federal public debt rose from $29k per person to $69k per person.

Combined personal and federal debt rose from $69k to $113k per person.

This has important implications for credit markets. For instance, banks considering a person’s income for a long-term loan will have to factor in the higher probability of future tax increases to pay down debts, reducing that person’s effective future income and thus eligibility for loans. Furthermore, this means that the federal government has already soaked up much of the available supply of credit, meaning that interest rates will have to be higher, crippling recovery and growth prospects. Further still, this increases the risk of inflation, forcing banks to raise interest rates even higher to compensate for lost profitability.

We really should have tried harder to pay down our debts during this record market expansion, or at least avoided adding hundreds of billions to it every year. Now, every dollar of stimulus today will take a dollar plus interest out of our paychecks during the next recovery, and we still aren’t even done paying off the last stimulus.

That is assuming we can get somebody to front us the money to cover recession spending. Do you recall the “austerity measures” of the EU zone during their currency crisis? We even talked about them here, and did a big government shutdown show. Do not be overly surprised if those kinds of austerity strings start to come attached to money lent to the U.S. government. Pause and take a moment to consider the human life implications of raising taxes and cutting government programs at the bottom of a recession. Unfortunately, that may be the price we pay for having refused to take austerity measures during the bull run.

And finally, let’s talk about the federal deficit.

As a point of clarity, the debt is the total amount we owe. The deficit is the amount we add to our debt each year.

The years of greatest concern here are 2008, just ahead of the banking collapse, and 2019, where we stand today. Our deficit is already twice as high in 2019 as it was in 2008.

How does the federal deficit interact with GDP? Put simply, we decrease GDP by the amount we collect in taxes and we increase GDP by the amount we spend. Thus, if the federal government is running a deficit, GDP is propped up by the amount of the deficit. If the government is running a surplus, GDP is actually artificially deflated, with potential to spring up rapidly in a pinch as that surplus is reassigned. That would have been nice to have about now.

Instead, we are already supporting the economy to the tune of $500 billion per year more than last recession, if tax revenue doesn’t fall, which we know it is going to do as incomes evaporate. That was before the $2 trillion unfunded stimulus bill was passed, putting us in the $3–$4 trillion deficit range, if no more spending bills are passed before the year is out. The whole U.S. economy was only $21 trillion before COVID-19, so repaying this kind of amount will require massive taxation or massive inflation later, either of which will worsen the pain of the recession or cripple the rate of recovery, whenever the mood for austerity sets in (hopefully during the recovery).

Very interestingly, this bipartisan establishment solution also puts us near the border of socialist command economy territory, as the government is now directly managing perhaps 20% of total production and income, plus currency and credit markets. Will we be able to maintain the same efficiency as a competitive system would? We never have before, but now we’ve got better data, models, and computers, and a lot more analysts, so perhaps the day is coming. Oh, what’s that? The 2 trillion dollars were rushed out so fast that the bill was signed before it was fully written? Okay, never mind. Maybe they correctly guessed efficient outlays during a period of mind-bending uncertainty?

In conclusion, the numbers for wealth, debt, and employment for U.S. median households and the U.S. government itself are all worse this market cycle, and, thus, we can expect more economic pain from this next recession than from the last, even if it is “average” by income reduction standards rather than “severe.” That is, people have less of a cushion this time, so even if they lose the same amount of income, it will hurt more.

All of that was true before the advent of the Coronavirus epidemic, on account of which millions of people in the U.S. alone have had their work hours eliminated or slashed by social distancing measures, and productive capacity has been rapidly (and therefore inefficiently) redeployed to manufacture medical equipment and stay-at-home goods and services. This is an appropriate moral and ethical response to a potentially cataclysmic epidemic crisis, but it comes with a price tag nonetheless. The economic damage from these measures are as yet unknown, but could be monstrously extensive. Already, unemployment claims have surged by millions — although this is partially due to an expansion of the program. There will be cascading effects. If there had been any doubts about whether markets were headed for recession, those doubts were laid to rest alongside the first American victims of COVID-19.

Although it is never time to give up hope, and never time to panic, the responsible thing to do now is to prepare for the worst.

What can you do to prepare for the next recession?

Do not count on the government to ameliorate this recession

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