A recession is when a country or the world experiences two consecutive quarters (6 months) of negative real gross domestic product (GDP) growth.
According to the National Monetary Fund, gross domestic product, or GDP, “measures the monetary value of final goods and services—that is, those bought by the final user—produced in a country in a given period of time.”
If a country produces $10 million in goods and sells $11 million next time, but there’s a price increase, there’s no actual change in GDP. And that is known as real GDP.
The simplest way to explain a recession is this: a recession is a prolonged decrease in economic activity.
Usually, you see a high unemployment rate, whereas the price increases as you find fewer goods and services on the market.
In this article, we will talk about interest rates during recession and what the government and Federal Reserve do to offset them. Also, could there be a system that helps you stay on track in a financial crisis and improve your personal finances?
There is…but first:
What Happens to interest rates during recession?
The main question is whether interest rates rise or fall during a recession.
Usually, interest rates fall. Historically, when the economy grows, prices go up and the cost of living goes up with them. Interest rates go up to match it, and when a recession hits, they go down to stimulate growth. This period can last for several weeks up to a few years.
Entering Recession and What to Do?
Recessions are caused by a number of different things, such as changes in the global economy and the labor market. Out of previous recessions we’ve had, the most recent one was in 2007-2008, when there was an overextension of credit and debt on risky loans in combination with some other factors.
Economists argue that we will also enter a mild recession in 2023, as we’ve been flirting with it for the past three years. We can still agree that the US is not in a recession due to positive GDP growth in the last two consecutive quarters of 2022, but there are telltale signs that we are close to one.
For example, employees lose their jobs, and more people are pushed toward poverty, which is especially visible in California.
Before the recession starts and as it progresses, we feel the economic slowdown. Interest rates are usually on the rise before the worst-case scenario happens. The increase in near-term interest rates can tip the economy into a recession, which usually happens.
First signs of a recession:
- Consumer spending reduction
- Spike in unemployment
- Manufacturing slows down
- Wages drop or freeze
- An inversion of the yield curve (long term bonds have lower interest rates than short term bonds). Normally, investors receive higher interest rates for holding bonds for longer, but during the crisis, this is inverted.
Lifestyle Banking Helps You Gain Control
Starting your lifestyle banking journey during economic instability will prepare you for what’s to come. To start lifestyle banking, you only need to purchase whole-life insurance from trusted sellers, which will be used as the basis of your banking system.
As you cover your monthly payments (pay your premiums), you can ask for loans from the insurance company to invest elsewhere. One of the best things about this kind of system is that you will pay yourself back with the interest rates. It is best to align the interest rates you recapture with the actual interest rates to get the most out of it.
Why Start Lifestyle Banking Before the Recession Begins?
Waiting for the perfect moment, analyzing past recessions, and looking at the global situation is never a good idea. The conditions are never ideal.
Do you want to enter the homebuying process? Are you looking for an auto loan? Do you want to improve your personal finances? If yes, you can be way more efficient with lifestyle banking than with a new loan. Banks charge interest, but why wouldn’t you pay that interest to yourself?
And starting at the beginning of the economic recession is a smart move because:
- You will be able to sustain a recession more quickly.
- If you do everything right, you can start earning money after a few months.
- You are not dependent on your credit score.
- You can estimate the interest rate you want to recapture and Interest rate hikes aren’t affecting you.
Therefore, getting a whole life insurance policy can give you an edge and prepare you for what’s to come.
Recession (Economic Downturn)
To offset the negative impact of inflation, the banks raise rates, but once the recession hits, the interest rates drop. Remember that the Central Bank controls interest rate growth, but we will later talk about the role of the FED and the government and their attempts to mitigate risks and cushion the blow.
Low interest rates stimulate growth, i.e., businesses to invest and expand, and potential buyers to spend money. By introducing the lower interest rate, the governments are looking for a way to keep the economy going until we start coming out of recession. The moment a society hits its lowest point economically is known as the “trough.”
As a side note and speaking of the trough, there are four main stages of the economic cycle:
- Expansion (rapid economic growth, interest rates are low, increase in production)
- Peak (Peak economic growth, going down afterward)
- Contraction (less demand, oversaturated market, surplus supply, prices drop—might lead to depression)
- Trough (a low point of a recession, going up after this)
Interest Rates Are Low: What Else Characterizes the Recession?
Other than unemployment, there are drops in the housing and stock markets. When we talk about the stock market, stock prices go down when companies struggle to keep making money and keeping people employed.
The housing market can give us an indication that the recession is close. Usually, spring is an active time for homebuyers, and if it is quiet, the recession is knocking on our doors.
In a recession, the mortgage interest rate drops, and there’s less competition on the market as more people are looking to save rather than spend money. You must continue paying mortgage rates regularly if you’ve already purchased your home.
While lower mortgage interest rates may lure you into buying a home, you need to understand the risk.
Banking in Recession
Whether you are just starting with lifestyle banking or you’ve been earning for a few years now, there are plenty of advantages to using this system. It will help you combat inflation and allow you to get a personal loan (or more) from your insurance company without worrying about the deadlines for paying it back.
You also don’t have to wait for the economy to improve to cover your needs; go look for different housing or stock market opportunities.
If you are unsure about investing in a recession, you can wait for interest rates to increase. The interest rate increases after the lowest point. Investments or not, you can still earn money by paying interest back and focusing on compound growth, which lifestyle banking allows you to do.
Just by doing your daily activities without changing too much of your shopping needs, you can start paying yourself back.
You can decide to take a new loan or wait for the situation to improve; this is the freedom you get with lifestyle banking.
Exiting Recession and Economic Growth
With the economic downturn over, things are getting back to normal. In this recovery period and economic progression, interest rates tend to grow. This is a good time for everyone, but how you survived the recession depended on several factors, including your finances, balance sheet, and the ability to be your own bank.
As you can see, recessions affect interest rates and either go up or down depending on the economy’s state, the government, and the Federal Reserve.
Where to Go From Here?
On your personal finance journey, you are probably wondering what to do next. As the economy opens up, bond prices become lower, the housing market opens up, and it becomes easier to borrow money or take a new loan from your insurer. Mortgage rates will rise in a rebounding economy, and more people will be looking to buy homes.
Lifestyle banking is a system that allows you to have control despite what’s happening in the market. Outside factors can either reinforce or weaken your investment decisions, but the interrupted growth of money is inevitable if you do everything right.
Continue to treat your expenses (whether it is your debt or a large purchase) as assets (by charging yourself interest), and you will see steady growth over time. With the economy opening up, everything becomes much easier.
The Role of the Federal Reserve and the Government in a Recession
The Federal Reserve plays a major role in our country’s economy. They directly influence interest rates. In the past two recessions, the FED cut real interest rates by five and six points to reduce the damage and reduce unemployment.
The goal of the Federal Reserve and the U.S. Central Bank is to keep prices from falling and keep the economy from going into deflation.
With the monetary policy tools, the FED can lower interest rates for increased demand during the low point. This stimulates people to spend more money, making money circulate via open market operations, including quantitative easing (introducing new money into the money supply by a central bank.)
As for the government, they can either increase spending, reduce taxes, or take other measures to keep the economy alive. They do the opposite during inflation, which is something we can see now—in 2022, the US saw its worst inflation in decades, which has continued until now.
Investing During Recession
Investing during a recession isn’t necessarily a good or bad idea, but one does need to be careful. You need to have a strong financial position and understand the risks of investing in a time of instability. On the other hand, recessions and financial crises also open up opportunities for people.
Long-term investors who put money in during times of instability (2020–present, 2007–2008, or 2001, right after the 9/11 attack), have done well. Still, they’ve had a strong portfolio, experience, and financial stability.
Consider what to invest in and research the market well before you do so. Some markets are performing better than others, which is also useful to investigate.
Lifestyle Banking Allows You to Invest in Yourself
Not only does lifestyle banking allow you to overcome a difficult financial period, but it also lets you dictate your spending, puts you in control of taking and paying off loans, and increases your cash value.
With lifestyle banking, you think of your expenses as assets and make money by recapturing interest rates. Every time you spend, you put the money aside and let your cash value grow without interruption (because you are taking loans and not using money from your policy).