The hyperinflation of the early 1980s provided a blueprint for the Fed’s actions today. To cool down an overheated economy, the Fed raises interest rates and tightens the money supply. This causes an economic contraction that eventually crushes inflation at the expense of a recession.
That’s how it was then, and today’s Fed is on exactly the same path toward what many saw as an inevitable economic downturn.
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Forbes predicts the storm will hit in late 2023 or early 2024. His logic is that history shows a one-year lag between changes in monetary policy and the real economic impact of those changes.
Others are predicting the recession to hit earlier, around mid-year — but one way or another, there’s a solid consensus that 2023 will bring economic turmoil.
The word “recession” conjures up images of 2008, when the hardest-hit neighborhoods had foreclosure signs like tombstones on every front yard on the block. But a 2023 downturn is likely to play out very differently — and surviving it will require different plans and preparation.
Unlike 2008, the fundamentals of the current housing market are healthy
In the run-up to the Great Recession, banks readily provided cheap and easy credit to underqualified borrowers to fund risky and irresponsible subprime mortgages under the most lax supervision. The result was a housing bubble that left banks and investors holding trillions of dollars in worthless mortgages and mortgage-backed securities when the bubble burst.
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In 2021, inflation pushed the housing market to record highs — but it wasn’t a bubble. Supply chain issues, inventory shortages, a lumber crisis, the COVID shutdowns, record-low interest rates and the rise of remote work have stoked inflationary pressures — but none of these pressures indicate widespread rot like the one that hit the real estate market just before the 20’s of the Great Depression.
The story goes on
“It’s not like 2008, because the growth that we’ve seen in recent years hasn’t been based on ARM mortgages going to people who couldn’t afford them,” said real estate professional Tomas Satas, founder and CEO of Windy City Home Buyer. “We’ll still see people turning their mortgages upside down and some foreclosures, but it’ll only be a fraction of what we saw back then. We have already seen the beginning of this market correction and know that real estate will continue to fall in value. However, this is more of a correction than a recession.”
If it’s a correction and not a crash, there are profits to be made
The events of 2008 were too fast and turbulent to bet on; but according to CNN, Moody’s and Goldman Sachs are predicting that 2023 will not see a thunderous crash like the one that took the global economy down in 2008. Instead, they plan a creeping “slowcession” or even a soft landing to stifle inflation without suffocating growth.
In any case, these more moderate scenarios offer opportunities to make money.
Satas said many of his peers are currently shorting property-centric stocks in anticipation of a downturn already underway. But shorting REITs and real estate ETFs is just one strategy for success.
“My personal plan to capitalize on the recession is to wait until we see the bottom and buy some properties,” Satas said. “It’s heartbreaking that people lose their homes sometimes, but it’s better to bail them out of a reverse mortgage helping a business than let them down.”
A recession will halt the unstoppable job market
During the Great Recession, unemployment peaked at 10% in 2009.
The December 2022 jobs report showed that the seemingly invincible job market is still holding out despite inflation, bear stocks and a cooling housing market. But if there is a recession, unemployment will certainly rise.
Whether it will return to double digits is anyone’s guess, but there are steps you can take now to protect yourself against the risk of losing your job later in the year.
“If you’re worried about job security during a recession, it can be a good idea to focus on building your skills and experience,” said Andrew Lokenauth, founder of Fluent in Finance, an investment and banking professional who is the lead held positions at Goldman Sachs. AIG and other large institutions. “This can make you more valuable to your current employer or make you more attractive to potential employers in the future. Also, consider networking and building relationships within your industry, as these connections can be valuable sources of support and opportunity during tough economic times.”
Keep your job if you can – and maybe consider another one
According to Fortune, it would also be wise not to change jobs now if it can help. If the recession comes early, you could be stuck looking for work during a shrinking job market. Even if you get a job before a downturn hits, you will be the bottom person on the totem pole at your new job and the most vulnerable to layoffs.
The good news is that people are much better prepared for a tough job market today than they were in 2008. Back then, the side-hustle culture was in its infancy, but today the gig economy is a force of nature. By starting a part-time job now — or at least planning one — you at least have an interim income that you can rely on if you lose a job in a few months, so you don’t have to rely solely on your savings.
Good financial hygiene is the best defense
One thing that’s common in all recessions is that it’s always better to be in tip-top shape when heading into a storm.
“To make your finances recession-proof, consider paying off expensive debt as soon as possible,” said Andy Kalmon, CEO of stock purchase plan platform Benny. “Something that’s also incredibly important when entering a recession is your credit rating. A person’s creditworthiness is more important when entering a recession because a recession puts people in more situations where they need to borrow or borrow. One of the most important ways to maintain good credit is to make payments consistently. Don’t stress yourself out with paying off the full amount at once, instead always have the money available for monthly payments.”
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This article originally appeared on GOBankingRates.com: How the 2023 recession differs from the 2008 recession and how you should prepare differently