<p class=“MsoNormal“>Recession is
a buzzword in the news right now, as due to a variety of factors—ranging from
the post-Covid-19 recovery period to the conflict between Russia and
Ukraine—one might be just around the corner for many countries in the world. In
fact, in mid-August, <a target=“_blank“ href=“https://www.bloomberg.com/features/2022-federal-reserve-recession-inflation-response/?sref=yEXR9lTX“ target=“_blank“>Bloomberg</a>
wrote that there was almost a 100% probability of a recession before the end of
2023. </p><p class=“MsoNormal“>The higher
interest rates needed to tame inflation were expected to trigger a period of
slow economic growth and high unemployment. <a target=“_blank“ href=“https://www.investopedia.com/articles/economics/08/past-recessions.asp“ target=“_blank“>Tight</a>
central bank monetary policy is often a catalyst for recession, but another
potential cause can be a surge in energy prices, which has also occurred in
2022. At other times, when consumers hold back on spending, or when the prices
of houses slip, the economy can also be tipped into a downturn. </p><p class=“MsoNormal“>Despite the
warning signs, not all traders have been convinced a recession is on the way.
In June, <a target=“_blank“ href=“https://www.bloomberg.com/features/2022-federal-reserve-recession-inflation-response/?sref=yEXR9lTX“ target=“_blank“>the
S&P 500</a>, which tracks risk assets, went on a rally, boosting economic
confidence. No one wants to believe in a recession since the results are
sometimes dire for people’s financial wellbeing, and we saw this fairly
recently during the 2008 recession. </p><p class=“MsoNormal“><a target=“_blank“ href=“https://www.investopedia.com/articles/economics/09/lessons-recessions-depressions.asp“ target=“_blank“>In
a recession</a>, demand from consumers and businesses goes down, which forces
companies to cut costs. As a result, workers have to be laid off, creating a
further drag on demand. Thereafter, the low production and sentiment feed off
one another, and the economy quickly loses altitude.</p><p class=“MsoNormal“>In <a target=“_blank“ href=“https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp“ target=“_blank“>2008</a>,
US unemployment reached 10% and nearly four million Americans lost their homes
in a downturn that spread all the way to Portugal, Spain, Greece, and Ireland. However,
each recession emerges in a distinct context and follows unique rules, so the
consequences are not always this bad. In addition, central banks have the
benefit of learning from historical recessions, and they try not to make the
same mistakes. In this article, we’ll take a look at some past recessions with
an eye out for relevant lessons—especially where <a target=“_blank“ href=“https://www.iforex.com/products/commodities“ target=“_blank“>commodity trading</a> is
concerned.</p><p class=“MsoNormal“>The US Recession
of 1973-75</p><p class=“MsoNormal“>Students of
commodity trading know that, after the American embargo on Arab oil, oil prices
mushroomed by a factor of four, which was a key factor in sparking this
downturn. The background to this 16-month recession was a period between August
1972 and August 1973 when inflation in the US rose from 2.4% to 7.4%. </p><p class=“MsoNormal“>The Fed
responded by doubling the federal funds interest rate to 10% by mid-year 1973,
and then adding on another 3% in the first half of 1974. The result was an
unemployment issue that outlasted the recession into 1975. One of the more
obvious lessons from all this goes out to the recession-doubters in 2022: the combination
of high interest rates and elevated energy prices can be difficult for the
economy to resist.</p><p class=“MsoNormal“>The Volcker
Recession of 1980</p><p class=“MsoNormal“>As 1979 was
getting underway, inflation in the US had risen to 7% due to dovish Fed
monetary policy aimed at <a target=“_blank“ href=“https://www.investopedia.com/articles/economics/08/past-recessions.asp“ target=“_blank“>solving</a>
an unemployment problem. At this time, the revolution in Iran led to a
ballooning of oil prices. </p><p class=“MsoNormal“>Fed Chair
Paul Volcker responded to the twin threats by raising interest rates from 10.5%
in August 1979 to 17.5% by April 1980, spawning a severe recession in which <a target=“_blank“ href=“https://www.bloomberg.com/features/2022-federal-reserve-recession-inflation-response/?sref=yEXR9lTX“ target=“_blank“>millions</a>
of people ended up out of work. Following this, however, came a long period of
good economic growth and low inflation, which was Volcker’s goal. His
predecessor, Arthur Burns, by contrast, was criticized for allowing inflation
to rise too high and stay that way too long. The result in that case was
stagflation, <a target=“_blank“ href=“https://en.wikipedia.org/wiki/Stagflation“ target=“_blank“>which is</a> a
period in which high inflation, high unemployment, and slow growth all
co-exist. </p><p class=“MsoNormal“>The present
Fed Chair, Jerome Powell, has responded to rising inflation in a way that is “Closer
to Volcker’s vigor than Burns’s anguished inaction”, even though he may have
not recognized the extent of the problem as early as he might have, says Bloomberg.
</p><p class=“MsoNormal“>A lesson to
draw from the 1970’s and 1980’s may be that the Fed should not spare the
economy the bitter medicine of high rates. Even though the human effects of
rates-driven recessions are painful and real, this is necessary to put healthy
long-term dynamics in place.</p><p class=“MsoNormal“>The 2008
Recession</p><p class=“MsoNormal“>Easy credit
and lenient lending <a target=“_blank“ href=“https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp“ target=“_blank“>standards</a>
in 2007 led homebuyers to borrow more than they could afford, resulting in bloated
home prices. Banks took these mortgages and sold them to investment institutions
on Wall Street, which converted them into financial instruments called CDOs
(Collateralized Debt Obligations). <a target=“_blank“ href=“https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp“ target=“_blank“>Home</a>
prices began to drop in 2006, and people were left with homes worth less than
they were currently paying. </p><p class=“MsoNormal“>Wall Street
banks soon found they had trillions of dollars of securities based on worthless
mortgages. In March 2008, stock markets around the world plummeted and investment
bank Bear Stearns went bankrupt. In September, the same happened to Lehman
Brothers. Millions of people globally felt the pain of the recession.</p><p class=“MsoNormal“>Ben
Bernanke, the Fed Chair back in 2008, <a target=“_blank“ href=“https://www.bloomberg.com/features/2022-federal-reserve-recession-inflation-response/?sref=yEXR9lTX“ target=“_blank“>answered</a>
the problem by cutting the federal funds rate to 0%, buying trillions of
dollars of bonds, and offering forward guidance (assuring the market that rates
would stay low in the short term). By March 2009, stability had been achieved
and then came a bullish rally on the stock market. Powell’s Fed may want to
take advantage of all three of these tools in months to come.</p><p class=“MsoNormal“>The bottom
line</p><p class=“MsoNormal“>Whether or
not a recession comes into full bloom, it’s important to follow the many
factors that can affect key commodity trading instruments such as wheat,
natural gas, and oil—all of which could be impacted by a recession. Armed with
this knowledge, you can make more informed trading decisions during the
best—and worst—of times. </p>
This article was written by ForexLive at www.forexlive.com.