How Certain is 2023 Financial Crisis?
A 2023 Financial Crisis is very likely in America’s future, but it will take time to come. While we often want bad things to be done and over with, long preparation time will be valuable to those with foresight.
A 2023 Financial Crisis could be avoided, but that is highly unlikely. The only policy measures that could avert a recession would worsen inflation, setting the stage for an even worse downturn sometime in the future. Fortunately, Federal Reserve Chairman Jerome Powell and most of his colleagues have decided that a return to low inflation should be their top priority.
Jackson Hole Speech by Powell on 2023 Finiancial Crisis
In his Jackson Hole speech, Powell said, “History shows that the employment costs of deflation are likely to rise over time as high inflation becomes more entrenched in wage and price setting.” early anti-inflationary efforts would far outweigh the damage caused by mistakes in the opposite direction. So, in uncertain circumstances, the Fed will keep monetary conditions tight.
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Assuming the Fed continues to tighten, when will a recession hit the United States economy? Figures for the third quarter of 2022 suggest that the recession did not hit as real GDP grew by 2.6% (annual rate of change). This preliminary estimate is subject to revision as more data becomes available.
Monetary Policy Changes vs Real Economic Changes
The time lag between monetary policy changes and real economic changes is roughly one year. This is a simplification of what is actually a distributed delay, with some small effects early, increasing effects, and then tapering effects. Even worse for forecasters, the magnitude and timing of the effects are not identical from episode to episode. The time lag for the current tightening of monetary policy could be shorter or longer than the historical average.
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Arguments for a shorter lag – meaning an earlier recession – include that the Fed announced its tightening plan well in advance of its actual action. Prior to 2004, Fed policy changes were not announced. Major financial institutions have employed “Fed watchers” to dissect evidence of policy changes. As a result, for most of the historical period, private responses came only after the Fed changed policy. However, this time everything was different. The Fed announced its intention to tighten in December 2021, and long-term interest rates rose before the Fed actually did anything. This bodes well for a recession to occur soon after the Fed begins to tighten.
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Another argument for a shorter time lag comes from the global economy, in which most countries are simultaneously tightening. One indicator, which includes 54 countries, shows that almost all are tightening monetary policy. As the world has become more connected, current changes in politics are having bigger and faster impacts.
Advantages of 2023 Financial Crisis
On the other side of the options, the biggest argument for the economy’s slower response to monetary tightening is high consumer bank balances. During the pandemic, spending has decreased due to lockdowns, but income has increased. Stimulus checks went to most families, working people got a raise, and those who were laid off received emergency unemployment insurance that in many cases more than compensated for lost wages.
Savings above the normal trend increased for a year, then began to decline as people slowly spent more money relative to their earnings. By my estimate, accumulated excess savings now stand at $1.5 trillion, an amount that is declining by about $90 billion a month. At this rate, consumers’ bank balances will return to normal in 16 months.
Another good reason to expect a long time lag before monetary policy triggers a recession is the excess of demand for labor relative to the number of unemployed. As companies reassess their hiring plans, their first step will be to eliminate open positions, not lay off workers. Of course, reactions vary by company and industry.
Growth of Money Laundering During 2023 Financial Crisis
Money laundering works through two channels. First, higher interest rates dampen some economic activity, particularly housing construction, auto sales, and business capital expenditures (both structures and equipment). Second, a fall in demand reduces the income of people who worked in interest-sensitive sectors. Right now, in November 2022, there is a clear decline in housing construction, but consumer spending has not fallen. If employment does not fall in response to the tightening of monetary policy, then consumer spending will not fall and either there will be no recession or very little.
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A later recession is most likely, starting in late 2023 or early 2024. Forecasting the timing of a recession is much more difficult than the eventual arrival of a recession, so this forecast should be taken with a grain of salt.
What can businesses do now to prepare for a 2023 Financial Crisis?
The best first step is emergency planning. Outline the steps that should be taken, such as reducing staff, reducing capital expenditure, tightening credit terms and so on. Every industry and business is different, so a general list will not apply to every organization.
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With contingency plans outlined, senior management should determine what the trigger points for action will be and who will take responsibility for the various actions.
Finally, contingency planning for a recession should include opportunities for growth. In every recession, some company acquires productive assets cheaply, increases market share by becoming more adept at changing conditions, and hires great talent that competitors have laid off or undervalued. A growth plan for a recession can set a company up for big profits in the subsequent recovery.
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