When a recession hits, it can have devastating consequences not only for business owners and their employees, but anyone with a nest egg or even a little savings out away. How can you preserve your wealth in a time of economic upheaval?
Don’t Let the Coming Recession Catch You Off Guard
Now that many countries are starting the reopening of their economies in earnest, many people are optimistic that their financials and their lives will soon get back to normal. But the fact remains that there are still serious risks. The prices on stock markets around the world may give you the reason for optimism, but the truth is that these rising prices are completely divorced from the fundamentals of the underlying companies these securities represent. Many saw the low stock prices as a sale and decided to stock up on bargains. But the prices of these stocks reflect the short-term drop in earnings and cash flows and the uncertainty related to the path ahead.
The COVID-19 pandemic, while neutralized in much of the world, will likely continue for a while. There is no vaccine in sight and there is no guarantee that one will ever be developed. Many countries are experiencing a second wave of coronavirus, which is calling into question the reopening of their economies. Even those companies who have found ways to adapt to social distancing and online-only commerce have had to invest to support these methods, and these costs will be reflected in the next earnings report. Whether all of these costs can be explained away as the cost of doing business in a pandemic remains to be seen.
In the current economic environment, with unprecedented stimulus and interest rate reductions, it is hard to be able to get one’s bearings as to what value any asset has. Like a pilot flying through the night without being trained to read his or her instruments, it is easy to lose sight of the horizon and this disorientation can lead you to make poor decisions.
If you like this article, you will be glad to read one of our best articles, “Is Bitcoin A Safe Haven in Times of Crisis?” by Aaron Koenig
How Will the Recession Take Your Wealth?
Perhaps the most immediate impact on your wealth during a recession will be a rise in inflation. Given the massive increase in the supply of fiat currencies now underway, the same number of sellers chasing more dollars will mean that prices will go up. Add to that equation that new waves of the coronavirus may further interrupt commerce, it’s likely that those who are willing and able to provide a product may demand an even greater price for it.
Another way that the recession could hurt your wallet is through deflation. Since deflation is the opposite of inflation, you might wonder why that would be bad. Prices going down is good right? Well, not if you’re someone who sells goods for a living or works for a company that does. Thus, deflation can reduce earnings and put downward wage pressure on working people. As the revenues of companies shrink to reflect the greater value of currency, these companies still pay the same amount of money to workers and must thus adjust their payroll accordingly. Some sectors of the economy may experience more deflation than others, which could put even more pressure on businesses if they are earning less revenue, but still paying the same or even more for supplies. All of these factors affect companies, investors, and workers alike in a way that puts their money at risk.
The thing about deflation is that central banks won’t let such an economic state exist for long. They will invariably act by increasing the money supply. They do this in the hopes of getting the economy going again, but in doing this they also devalue the currency. So, even when the immediate problem is deflation, inflation is always a constant concern.
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How to Protect Your Wealth in a Recession
Fiat currency is the lifeblood of virtually every economy in the world. There can be no denying this. Central banks know they hold the key to the economies of the world by controlling the supply of the currencies the world depends upon. Being so vital to the economies of the world, fiat currencies are used as mere tools of manipulation to shape economic behavior. Such currencies do not serve well as stores of value.
Asset classes like stocks and bonds are also dubious, as they are priced in exactly these same fiat currencies. One can never know whether a stock goes up because its real value actually went up or whether the value of the currency in which it is priced went down. Through many years of quantitative easing, the bond market is propped up directly by newly-printed money. The fact that interest rates are near zero makes it all the more ludicrous to suggest that government bonds have any real value.
The best way to protect your wealth against inflation is to put that wealth in an asset with strict limits on its supply. Only a currency that can’t be devalued at a whim, in order to influence its holders to get more of it just to break even, can be a suitable store of value and safe haven in times such as these. The best example of this type of asset is cryptocurrencies like Bitcoin.
The COVID-19 pandemic has caused tremendous economic upheaval. The world is optimistic, but it is not out of the woods yet. Don’t be surprised when the second and third waves of the coronavirus pandemic, the many imbalances introduced into the economy, and the resulting interventions by central banks lead to a recession. Cryptocurrencies like Bitcoin provide the best utility as a store of value in the face of such economic uncertainty.