If you turn on the news today, you likely only see bad
news regarding the US economy.
Inflation at 40-year highs.
Global Pandemic still lingering.
War in Eastern Europe.
Massive supply chain disruptions.
Growth stocks down 50%+.
Many people are asking themselves: Is this the end of
times?! The answer, as always, is likely no. In fact, we can look back in
history to help us tell a story of what could be seen in our future.
Rewind back to the 1940s when America found itself
fighting in World War II. This massive event did not come without great expense:
Not only did it cost the country dearly with human capital, lives lost to war,
but the capital expenditure for the war made it the costliest war, to this day,
in the history of the United States. According to data from the Congressional
Research Service, in today's dollars, World War II cost $4.1 TRILLION dollars,
or roughly 4x the size of Amazon. For context, a Pentagon report says the U.S.
has spent $1.5 TRILLION on America's longest war: the war in Afghanistan and
other anti-terror campaigns in Iraq and Syria.
How did we pay for this? By printing money, of course!
The M2 Money supply grew 17.79% during the War, a growth rate the country
hadn't seen again until….March of 2020 when the country was locked down due to
COVID-19. M2 Money grew to a peak of 26.79% in 2021 and has now subsided
considerably in 2022 to below 10% growth.
Not unlike what America is experiencing now, inflation
shocked the system after World War II ended. In 1947, inflation jumped to over
20%! Supply shortages and pent-up demand were primary drivers. The United
States went into a mild recession and inflation declined relatively quickly
along with GDP.
Unfortunately, after inflation finally subsided, America
found itself back in conflict in the Korean War in 1950 that lasted three years.
What happened financially? Again: M2 money supply grew, supply shortages came,
pent up demand grew inflation, we went into mild recession. Sensing a theme
here?
You see, every time inflation has spiked above 5%, nine
times since 1940, America has ended up in a recession. The United States is a
consumer economy; our GDP is reliant upon spending on goods and services and
the growth of those expenditures. When the Fed raises interest rates, they are purposely
trying to slow demand for goods and services to ease prices of those goods and
services, but it is nearly impossible to lower inflation while avoiding a
recession.
And that's ok.
Despite four recessions from the end of WWII to the late
1950s, the US economy grew 37% overall during the 1950s and the S&P 500 had
its best decade in history. Not every recession is the Great Depression or even
the Great Financial Crisis. Most of them are mild and are needed to shake free from
the excess spending and valuations we see in a booming economy.
What also may bring you hope is Americans have never been
in better shape to withstand a recession. There are currently 12 million job
openings and 6 million unemployed. Labor markets are hot, and wages have grown.
Credit card debt as a percentage of disposable income is below pre-pandemic
levels which shows Americans paid down their debt through the pandemic. Nearly
66% of Americans own a home and have seen their total equity in those homes grow
by $7 TRILLION from the end of 2019 until now. Americans have cash on hand and
aren't overleveraged like 2008.
No one can predict what Vladimir Putin will do next that
could potentially start a real World War III but we could be seeing "World War
III" when it comes to what happens to the American economy after record levels
of M2 supply growth and that may not be such a bad sign for the next decade of
growth.
Sources:
- https://www.nasdaq.com/articles/money-printing-and-inflation%3A-covid-cryptocurrencies-and-more
- https://moneywise.com/life/lifestyle/financial-facts-about-world-war-ii
- https://www.whitehouse.gov/cea/written-materials/2021/07/06/historical-parallels-to-todays-inflationary-episode/
- https://www.longtermtrends.net/m2-money-supply-vs-inflation/
- https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/table/
- https://tradingeconomics.com/united-states/home-ownership-rate
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