History teaches us that recessions shape our economy. Therefore, studying past recessions can show us where our economy is going.
America has suffered 43 recessions and panics since gaining its independence in 1783, Stacker reports. It’s important to note that “panic” is an old term for recession.
Studying these recessions can show us how the next recession could start and end. Savers and investors can examine those recessions to identify recession-resistant assets.
Additionally, some investors, like Warren Buffett, have made fortunes during recessions. Notably, Buffett built his Berkshire Hathaway (BRK.B) fortune by buying up cheap companies and stocks during the past few recessions. For example, he purchased the Burlington Northern Santa Fe Railroad during the 2007-2009 recession.
War Leads to Recession
In U.S. history, the best predictor of recession is the end of a war. Recessions followed the end of the Revolutionary War, the Civil War, World War I, World War II, the Korean War, the Vietnam War, and the Iraq War.
In fact, the end of World War II caused two recessions. The V (Victory) Day recession, which lasted from February 1945 to October 1945, was followed by a second recession, which lasted from November 1948 to October 1949. The V-Day Recession was one of the worst in American history. Investopedia estimates that between 1948 and 1949, U.S. Gross Domestic Product (GDP) shrank by 10.9%.
These recessions occurred because federal spending fell by 40% in 1946 and 38% in 1947. The government stopped buying war materials and released millions of men from the military. Moreover, the end of wartime price controls caused consumer prices to skyrocket. Similarly, the GDP shrank by 2.9% at the end of the Korean War as government spending fell.
During the Vietnam War, a rising federal budget deficit led to growing inflation. The federal deficit rose from 1.1% of GDP in 1967 to 2.9% in 1968. Meanwhile, inflation rose from 3.1% in 1967 to 5.3% in 1970.
The deficit grew because President Lyndon B. Johnson and Congress did not raise taxes to pay for the Vietnam War until 1968. In contrast, Congress increased taxes by 4% in 1950 and 1951 to pay for the Korean War.
Thus, the Ukraine War and a potential conflict with China could cause a recession. A recession is probable if a war ends quickly and Congress cuts government spending.
What Causes a Recession?
Any big cut in government spending can trigger a recession. Cuts in New Deal spending (stimulus) and lending curbs on banks caused the GDP to fall by 10% between May 1937 and June 1938. U.S. industrial production fell by 32% during the late 1930s recession.
RELATED: What Happens When Our Economy Enters a Recession?
High interest can also trigger a recession. The Federal Reserve triggered the April 1960–February 1961 recession by raising interest rates from 1.75% in 1958 to 4% by the end of 1960.
Federal Reserve Chair Paul Volcker triggered two recessions with interest rate increases. Volcker caused the January to July 1980 recession by raising interest rates from 10.5% to 17.5% to “tame inflation.” The 1980 recession ended when the Fed cut interest rates to 9.5% in August 1980. The infamous Double Dip Recession began in July 1981 when the Fed raised interest rates to 19% to tame 11% inflation.
The Federal Reserve raised interest rates twice in the summer of 2022 to curb inflation: 0.75% on June 15 and 0.75% on July 28. Thus, history shows the Federal Reserve can trigger a recession.
Oil and Recessions
History shows oil price increases can trigger a recession. The Arab Oil Embargo, which quadrupled oil prices, triggered a deep recession between November 1973 and March 1975.
The Oil Embargo Recession was one of the worst in America’s history. In May 1975, U.S. GDP fell by 3% and unemployment rose to 9%. By 1974, the Fed increased interest rates to 13% to stop inflation. The Iranian Revolution in 1979 and the First Gulf War in 1990 caused recessions by increasing oil prices.
Oil prices are rising because of the Ukraine War. Crude oil prices fell to $65.68 a barrel on Dec. 1, 2021, and rose to $119.98 a barrel on March 8, 2022, after war broke out. Oil prices have fallen since then, but oil was still selling for $93.384 a barrel on Aug. 24, 2022, Trading Economics estimates.
The United States and the European Union have embargoed Russian oil just as the Arabs embargoed their oil during the Yom Kippur War in 1973. Arab states embargoed oil to punish the United States for supporting Israel in 1973. In 2022, the USA and the EU are embargoing oil to punish Russia for invading Ukraine.
Is a Recession Beginning?
The historical examples show that a recession is beginning. In particular, the world is experiencing a major oil embargo similar to the one in 1973.
We are also seeing oil price increases that resemble those in 1973 and Fed interest rate increases. The U.S. is also increasing defense spending because of the Ukraine War. The U.S. Senate is trying to raise the defense budget from $813 billion to $847 billion, Politico reports.
However, Congress is not increasing taxes to pay for the spending. Similar increases in military spending without tax increases led to high budget deficits that triggered inflation and a recession in the late 1960s.
All the historical patterns point to a recession. However, nobody knows how long the recession will last or how bad it could get.
There is no way to protect all your assets from a recession. Conversely, you can protect your money by investing in recession-resistant assets such as gold and other precious metals.
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