Recent news has caused upheaval in financial markets globally. The international coronavirus pandemic is impacting both markets and governmental responses as well as normal changes in global markets. Investors and researchers of all types and sizes are attempting to understand and adapt to the risk of economic downturns and even currency collapses everywhere. In this article, Rory Brown, Lydian founder will discuss some of the warning signs and indicators of possible economic collapse.
Significant Stock Market Losses
Traditionally, researchers have considered stock market valuations to be a look ahead of six months or more into what businesses are expecting to happen in the future. Sustained drops in market values generally indicate that corporations are expecting lower profits and earnings down the road. When businesses have strong reasons to expect lower revenues they are less likely to take out loans for capital investments or to hire new employees. Because of the modern worker’s reliance on market-based retirement funds, substantial equity losses in markets directly affect their expectations about their retirement options. As a result, consumption is often reduced, adding further to the recessionary effects of market losses.
Runaway Federal Debt and Deficit Spending
The US federal debt has grown at unprecedented rates since the 2008 financial crisis and shows no signs of slowing down anytime soon. Governmental debt operates as a tax against the earnings of taxpayers in the future. As much as deficit spending has become the go-to short term fix for current economic concerns, if the US dollar loses its power as the currency that is always in demand around the world, managing the debt would quickly dominate federal spending at the expense of every other mission the federal government has undertaken.
Treasury Yield and Demand Crisis
Treasury bonds issued by the US government have traditionally been considered an absolute safe haven for investors seeking security and low-risk opportunities to avoid market disruptions. Because the interest paid on treasuries is low, investors usually only buy them when the perceived risk of economic downturns is high. Short term treasuries usually pay less interest than long term bonds. However, there have been instances in the past where the rates flip as a result of economic uncertainty, typically signaling an upcoming recession. In a significant currency crisis where the US dollar is devalued and in trouble, decreased demand for US treasuries could signal an impending crisis for the dollar as the world’s reserve currency of choice.
Growing Inflation
Some inflation is usually considered a positive trend by researchers. However, when monetary supplies are increased through stimulus programs and reduced interest rates, the risk of price inflation increases. The main defense that governmental central banks have against spiking inflation is increasing interest rates for borrowing money. When mandated and naturally occurring interest rates increase quickly, economies face the risk of meltdown as current commercial and consumer debt can become difficult or impossible to manage. Increased default rates can couple with substantial decreases for the demand of new capital investment to slam an economy into a complete standstill.
About Rory Brown
Rory Brown currently serves as a Managing Partner of Nicklaus Brown & Co. and was a co-founder of VirtualBank in 2000. VirtualBank began as an early adapter of technology creating platforms and interfaces for customers of financial institutions to access financial accounts and records through the internet. VirtualBank has grown to be a multibillion-dollar company, named “Best Online Bank” by Money Magazine. Rory Brown is also the co-founder of Lydian, which garnered him recognition by Ernst & Young as Financial Service Entrepreneur of the Year. Mr. Brown received a Master of Business Administration from the University of Charleston and is a Certified Public Accountant. He has focused on financial technology and investment management for over 30 years. In his spare time, Rory Brown studies the history of the Lydians, the first people to use gold and silver coinage.
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