The Lesser of Two Evils

“Of two evils, the lesser is always to be chosen” - Thomas à Kempis, circa 1441

This blog follows the one I wrote in April on Cod Liver Oil drawing an analogy on why the bad taste of recession may in fact be good for you. To set the stage, let’s start with a short lesson in basic macroeconomics.

When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy or fiscal policy. Fiscal policy, which is often politically motivated, is controlled by governments raising or lowering taxes or increasing or decreasing spending.

Monetary policy, on the other hand, involves the management of the money supply and interest rates by central banks, which are at arm’s length from the elected government. To stimulate a faltering economy, the central bank will cut interest rates, making it less expensive to borrow while increasing the supply of money. If the economy is growing too rapidly, the central bank can implement a tight monetary policy by raising interest rates and removing money from circulation.

Leading up to COVID, interest rates were low, encouraging people to borrow money to buy things they normally couldn’t afford. High employment levels and the inflated value of the real estate and stock markets made consumers feel wealthier, which stimulated spending. Business firms respond to increased sales by ordering more raw materials and increasing production.

When COVID hit, the economy virtually shut down so governments had no choice but to put more money in the hands of consumers through tax cuts and targeted spending programs. With more cash to spend, demand increased leading to supply chain disruptions, which in turn contributed to price increases and inflation followed.

And here we are today. Central banks are now responsibly increasing interest rates to discourage spending, which will slow things down leading to a recessionary pause lowering inflation in the process. Think of it this way; every interest rate hike is like getting a vaccine booster shot. It’s never a pleasant experience. A sore arm or a mild fever may follow, but this is the price we pay for staying healthy. Controlling inflation through higher interest rates may lead to a recession, but this too will pass, and we will all be a lot healthier as a result.

Since the effects of inflation are far worse than those of a recession, we should actually contribute to making it happen and not fear it. The sooner we do this, the sooner we will get through it and the better off we will all be. How do we accomplish this it? Simple - stop spending money on things you don’t need now or ever or can’t afford in the first place. Put money into your savings.

For a deeper dive into recessions and what causes them, here is a link to a recent article in Forbes Advisor: https://www.forbes.com/advisor/investing/what-is-a-recession/.

David J. Angas, CEA

Senior Vice President, Financial Advisor

Family Wealth Counsel Advisor Group/Raymond James Ltd.

The views are those of the author, David Angas, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.