lessons from past recessions | Forexlive

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Recession is a buzzword in the news right now, because due to various factors, ranging from the post-Covid-19 recovery period to the conflict between Russia and Ukraine, we could be just around the corner. of the street for many countries in the world. Indeed, in mid-August, Bloomberg
wrote that there was an almost 100% chance of a recession before the end of 2023.

The higher interest rates needed to control inflation were to trigger a period of slow economic growth and high unemployment. Tight
central bank monetary policy is often a catalyst for recession, but another potential cause may be a spike in energy prices, which also happened in 2022. At other times, when consumers curb their spending or when house prices fall, the economy can also tip into a downturn.

Despite the warning signs, not all traders are convinced that a recession is on the way. In June, the S&P 500, which tracks risky assets, rallied, boosting economic confidence. Nobody wants to believe in a recession because sometimes the results are disastrous for people’s financial well-being, and we saw that quite recently during the 2008 recession.

In recession, consumer and business demand declines, forcing businesses to cut costs. As a result, workers have to be made redundant, creating an additional drag on demand. Thereafter, weak production and sentiment feed off each other, and the economy rapidly loses altitude.

In 2008, unemployment in the United States reached 10% and nearly four million Americans lost their homes in a recession that spread to Portugal, Spain, Greece and Ireland. However, each recession emerges in a distinct context and follows unique rules, so the consequences are not always so severe. Moreover, central banks have the advantage of learning from historical recessions, and they try not to make the same mistakes. In this article, we will examine some past recessions with an eye on relevant lessons, particularly where commodity trading is concerned.

The American recession of 1973-75

Commodity trading students know that after the US Arab oil embargo, oil prices increased fourfold, which was a key factor in triggering this downturn. The background to this 16-month recession was a period between August 1972 and August 1973 when inflation in the United States rose from 2.4% to 7.4%.

The Fed responded by doubling the federal funds interest rate to 10% in mid-1973, then adding another 3% in the first half of 1974. The result was an unemployment problem that survived the recession until 1975. One of the most obvious lessons from all of this goes to skeptics of the 2022 recession: the combination of high interest rates and high energy prices may be difficult for the economy to resist. economy.

The Volcker recession of 1980

As 1979 began, inflation in the United States had risen to 7% due to the Fed’s accommodative monetary policy aimed at solve
an unemployment problem. At that time, the revolution in Iran led to a spike in oil prices.

Fed Chairman Paul Volcker responded to the double threat by raising interest rates from 10.5% in August 1979 to 17.5% in April 1980, causing a severe recession in which millions
people found themselves out of work. After that, however, came a long period of good economic growth and low inflation, which was Volcker’s goal. His predecessor, Arthur Burns, on the other hand, was criticized for letting inflation rise too high and stay that way for too long. The result in this case was stagflation, Which one is a period in which high inflation, high unemployment and slow growth coexist.

Current Fed Chairman Jerome Powell has reacted to rising inflation in a way that’s “more akin to Volcker’s vigor than Burns’ anguished inaction,” even though he doesn’t may not have recognized the scale of the problem as soon as it might have, says Bloomberg.

A lesson from the 1970s and 1980s might be that the Fed should not spare the economy the bitter medicine of high rates. While the human effects of rate-induced recessions are painful and real, it is necessary to build healthy long-term momentum.

The 2008 recession

Easy credit and forgiving lending standards
in 2007 led buyers to borrow more than they could afford, leading to soaring home prices. Banks took these mortgages and sold them to investment institutions on Wall Street, who converted them into financial instruments called CDOs (Collateralized Debt Obligations). House
prices started to fall in 2006, and people ended up with homes that were worth less than what they were paying now.

Wall Street banks quickly discovered that they were holding billions of dollars in worthless mortgage-based securities. In March 2008, stock markets around the world crashed and the investment bank Bear Stearns went bankrupt. In September, the same thing happened to Lehman Brothers. Millions of people around the world have felt the pain of the recession.

Ben Bernanke, chairman of the Fed in 2008, replied
the problem by cutting the fed funds rate to 0%, buying up trillions of dollars of bonds, and offering forward guidance (assuring the market that rates would stay low in the near term). By March 2009, stability had been achieved, then came a bullish rally in the stock market. Powell’s Fed may want to take advantage of all three of these tools in the months ahead.

The bottom line

Whether or not a recession hits, it is important to track the many factors that can affect major commodity trading instruments such as wheat, natural gas and oil, all of which could be affected by a recession. Armed with this knowledge, you can make more informed trading decisions during the best and worst times.

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