Hard Times is defined as a period of economic problems or a time of difficulty, especially financial hardship. It can be caused by two broad sets of events.
- Economic Hard Times (country’s / state’s / local region’s)
- Personal Hard Times
1. Economic Hard Times:
Our weather goes through a cyclical pattern like summer, fall, winter, and spring. Similarly, our economies(country’s) also go through a cyclical pattern. In the case of economies, the cycle follows expansion, peak, contraction, and recovery. Over the years, these natural cycles have repeated multiple times in various countries of the world.
These cycles exhibit different economic behaviors. Some of these behaviors are named inflation, deflation, or stagflation.
a. Inflation:
Due to the finding of a natural resource or advancements in science and technology or the opening of new markets for goods, a country produces more economic output that leads to more wealth in the economy. More money causes prices of goods to go up.
b. Deflation:
High prices of goods bring more supply to the market. At one point, supply outweighs the demand that leads to declining prices. On the other hand, natural calamities or any uncertainty in the country causes people to spend less, which also leads to declining prices of goods.
c. Stagflation:
In some cases, a mixture of both inflation and deflation takes place. In this case, the economy does not grow and has high unemployment rates, but prices are still rising.
Let us consider an example of the US economy.
The economy is a self-balancing system if it is left to its own. Any turbulences in the economy will correct themselves in course of time. But in the last 20 or so years, two things are causing many instabilities in the US financial system,
- US Federal Reserve has resorted to excessive money printing and interest lowering exercises to intervene in the economy.
- Debt levels of the US (state and federal) have grown to a level that is not sustainable. It is continuing to grow at a rapid pace. Just for an example, in 2020 US government revenue was 3.42 trillion dollars, but the government spent 6.55 trillion dollars.
They resulted in one bubble after another like the dot-com bubble, housing bubble, student loan bubble, credit bubble, asset bubble, etc. In these bubbles, one or more asset classes rise to very high values before collapsing. To minimize the impact of the collapse on the economy, the US Federal Reserve prints more money and extends more credit. This cycle has been repeated few times and the debt bubbles have grown to sizes where it affects the very viability of the US financial system. It is on a path that is not sustainable for a long time.
As a nation, the US has 3 options for the future,
- Pay down the debt: With running huge deficits(between income and spending), this is simply not feasible.
- Cut-down the spending/expenses: No politician would go for cutting down the expenses like defense or social security, etc. It would be a suicide of their political lives.
- Debase the currency of debt (US Dollar)
So the most probable path for the US is, the debasing of the US Dollar. It may or may not happen overnight, but the erosion of the value of the US Dollar is the path forward. It will result in increasing prices of all essential items.
We heard about the hyperinflation of the Weimer Republic in the 1930s and the currency debasement of Argentina from 1998. A similar outcome is inevitable if the US continues its current path of debt build-up. Nobody can say when and how the crisis will be triggered.
This is an example of the economic crisis that affects the whole nation. In addition, we have seen localized economic busts that affect a particular region or a state. For example, an increase or decrease in the price of oil has affected the State of Texas multiple times. Moving of manufacturing jobs overseas has resulted in a region called – Rust Belt, comprising Northeastern and the Midwestern US States. This Rust Belt region saw a continuous increase in unemployment rates, a decrease in the overall population, and many deserted towns.
2. Personal hard times:
Economic hard times affect the whole population in the country or a state or a region. But personal hard times affect us individually and our families.
a. Health Crisis:
Medical expenses are the #1 reason for people to declare bankruptcies.
The common proverb “Health is Wealth” implies that our health is the most important wealth. Every one of us goes through some form of health crisis during our life. It is unavoidable. Though no amount of money or income can compensate or take away the pain from health issues, having sufficient money or income may allow us and our family to continue their lifestyle. In addition, secured income or money may provide us with different treatment options.
b. Income(Job/Business) Loss:
It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.— Harry S Truman.
Job Loss is the #2 reason for people to declare bankruptcies. Due to the financialization of our economy and the growth of globalization, no job is truly permanent. So every one of us has experienced a job loss personally or in our immediate circle of family or friends or colleagues. We all heard the phrase – Don’t put all your eggs in one basket. But when it comes to income, the majority of us do indeed put all eggs in one basket and rely on a single source of income.
c. Relationship Crisis:
Relationship issues like divorce or the death of a loved one can lead to severe hard times. It is also one of the top reasons for people to declare bankruptcies. The sudden removal of one income or any co-signed debt may result in severe monetary issues. It is impossible to predict the types of events that come our way.
d. Natural Disasters:
Every region of the US is prone to some form of natural calamities. These calamities have the potential to alter our well-laid plans and way of life in a heartbeat. Though we have many technological advancements that predict the probabilities of these calamities, it is impossible to predict the accurate timing of them happening. All we can do is prepare the best we can.
People may encounter hard times due to other factors like war, accidents, etc.
Both economic and personal hard times may result in any of the following(financially):
- Losing jobs or businesses resulting in complete loss of income
- Getting reduced income from jobs or businesses
- Losing personal possessions including homes
- Increase in debt due to unexpected expenditures
- Decrease in the value of personal investments
Though the occurrence of economic and personal hard times are mostly beyond our control, can we relinquish our responsibility completely? Don’t we need to take some preparatory steps for the sake of our loved ones?
What can we do to reduce the impact of these hard times?
We buy different types of insurances for various items like a house, car, personal health, life, business, etc. Similarly, it is necessary to prepare for different types of hard times.
We can find many suggestions on the internet on how to prepare for hard times. There are many valuable life-saving suggestions. But some of them are very extreme. So one word of caution is, whatever path we choose, it should be a balanced one. We should be able to sustain the methods mentally as well as financially.
The core principles of Breadnomics like having multiple streams of income (active and passive) and leading a simple life could help us weather these storms in a better manner.
Thank you for reading. Please share your thoughts below.