China vs US: Whose economic policy will work?

FeaturedMoney

Written by:

 

Separate Ways, Worlds Apart

For many months, we have focused almost unilaterally on the path of tightening by the Federal Reserve, and what the next leg of that journey may look like. The concern has been, and remains, how much pain rate hikes, inflation, and quantitative tightening will inflict on markets.

 

Meanwhile, on the other side of the world, yet not far away economically, the People’s Bank of China (PBOC) is cutting rates to stimulate borrowing and growth. China is the second largest economy in the world by nominal GDP (U.S. being the largest), and the biggest consumer of raw materials in the world. According to data by the Wall Street Journal, China consumes about 15% of the world’s oil, and imports more crude oil than any other country.

______________________

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.

______________________

 

 

 

 

Not surprisingly, when a culmination of weak economic data and fears of a further slowdown resulted in the PBOC cutting rates on Aug 15th, Brent Crude Oil prices hit the skids.

After that surprise cut, the PBOC engaged in more cuts to key lending rates on Aug 22nd. But the global effect of slowing growth in China reaches beyond commodity markets. Regional currency markets have seen steep declines, and fears of ripple effects among China’s biggest trading partners have shifted front-and-center. This is all on top of a nosedive in Chinese consumer confidence, high and rising youth unemployment rates, and a crumbling property sector.

When the Lights Go Down

While the U.S. desperately attempts to cool inflation, driven in part by excess liquidity and ballooning money supply, China is attempting to increase liquidity. One of the most widely used measures of money supply is M2 , which can be summarized as cash, or things that can be quickly converted into cash such as money market securities.

A simple comparison of what’s happened in the U.S. with M2 vs. what’s happened in China is illustrative of the divergence in current policies.

 

What’s even more interesting to note is that China never went through the exceptionally large spike in money supply that the U.S. did, even during the depths of the Covid-19 crisis. Their stance would be that they prefer to prevent an increase in inflation by not injecting excess liquidity into the system, while U.S. policymakers may argue that the lack of policy support (in comparison) led to China’s current growth challenges.

 

I’m not here to argue one side or the other. If I’m being honest, I think we both have pretty serious problems to contend with. What I will say is that this divergence in Central Bank policies among the world’s two largest economies is something to pay close attention to. The chances of both monetary authorities having done it “right” and succeeding in bringing their respective economies back into balance, while simultaneously moving in completely opposite directions, is difficult to imagine.

Wheel in the Sky Keeps on Turning

One of the most counter-intuitive lessons every investor has to learn is that dislocations, although uncomfortable and at times nonsensical, create opportunity. In this case, that may end up being true, but not as of yet. As the song goes, truth can be found in the lyrics “Wheel in the sky keeps on turning, I don’t know where I’ll be tomorrow.”

 

Central bank policies may be different across regions, but economic weakness is something we’re dealing with globally. Despite the beginning of a stimulative cycle in China, there is still too much uncertainty surrounding some of the key parts of their economy for me to see this as “good assets on sale.” For now, let’s let China stimulate while we restrict, and do one of the other counter-intuitive investor behaviors…sit on our hands.

 

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and here. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available here.

More from MediaFeed:

Recession is unofficially here. How to survive & thrive

 

Gross domestic product (GDP) – a broad measure of the price of goods and services – decreased at an annual rate of 0.9% in the second quarter according to an announcement Thursday by the commerce department. That’s after falling at an annual rate of 1.6% in the first three months.

 

That could mark what some economists consider the unofficial start of a new recession.

 

While the United States’ most recent recession lasted just two months, ending in April 2020, current soaring gas prices, Russia’s war on Ukraine, and rising inflation have led some experts to predict the U.S. could slide into a recession as early as this summer.

 

This post will help you prepare for a higher chance of unemployment, investment losses and general financial instability, help you if you are living paycheck-to-paycheck, and have trouble paying your bills.

 

Rules for weathering a recession are good to follow no matter the economy, and come down to these points: Spend less, save, and earn more.

 

Here I am on WCCO CBS News giving these tips.

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

Depositphotos

 

The definition of a recession is a downturn in the economy. On a broader scale, this means that businesses lose money and industry produces less product for two quarters — or six months — in a row.

 

What does a recession mean for everyday people? Recessions are typically marked by:

  • High unemployment rate
  • Wages that do not go up
  • Lower housing prices
  • Downturn in stock market equities and other investments

Here’s all the things you can do right now for a recession.

 

Related: Inflation — pro tips for protecting your money

 

bedo/ istockphoto

 

Money impacts nearly every part of our lives. When we’re stressed about finances, our families, our relationships, and even our physical wellbeing suffers. If you get on top of your finances before a recession, you can maintain power over your life. This includes:

  • Budget
  • Savings + investing plan
  • Goals for earning more

Read: 9 ways single moms can make money and build wealth in 2022

 

Michael Krinke

 

If you want to achieve and maintain financial stability, spending frugally is a big part of the equation. Start by tracking your usual expenses, then figure out where you can cut spending. Commit to meal planning instead of dining out, cancel recurring subscriptions you no longer use, and curb unnecessary shopping.

 

Read: 7 easy steps to set up a budget (from a single mom of 2)

 

Ridofranz / istockphoto

 

A 2019 Federal Reserve report found that about 40 percent of Americans wouldn’t be able to cover an unexpected $400 expense. If you don’t have one, start an emergency fund so you have extra money even if you are laid off.

 

A stash of $1,000 is a good place to start, and aim for at least three months’ regular income.

 

designer491 / istockphoto

 

Why let your unused stuff sit in a closet when you could turn it into money? Learn more about selling through pawnbrokers and consignment shops, and sell your golddiamondsjewelry and silver online.

 

Gold, diamond and silver prices have been at record highs this year, with gold topping $2,000 in March for only the second time in 50 years. CashforGoldUSA.com is our No. 1 recommendation for selling gold, silver, diamonds, pearls, coins, flatware and other precious metals and gemstones.

If you want to downsize to save money, you can also sell your house for cash.

 

CrispyPork/ istockphoto

 

If you lose your job during a recession (or any time), it pays — literally — to have a side gig or backup job for an additional stream of income.

 

Check out our lists of best at-home career-level jobs, best high-paying jobs that do not require a degree, and 10 business ideas for moms.

 

istockphoto

 

If you have debt from credit cards, student loans, or other expenses, consider consolidating your balances onto a 0% balance transfer credit card or obtaining a low-interest personal loan to pay them down.

 

DepositPhotos.com

 

During a recession, there’s a greater risk that you could lose your job. That’s why it’s not smart to make major purchases or accumulate new debt you might not be able to pay off.

 

Instead, repair appliances and your vehicle, and attempt DIY home projects over financing new ones.

 

JackF / iStock

 

The very best way to build financial security is to make sure you have a job. Here is our list of best at-home, high-paying careers, which includes recession-friendly skills like:

 

DepositPhotos.com

 

Devise a plan for what you’ll do and where you’ll go if you lose your job or find yourself without a place to live.

 

Here is our list of government and other resources for low-income families:

Shore up your friendships and other social networks that can help you find work, resources, and share ideas for weathering the storm — not to mention get together and have fun!

 

DepositPhotos.com

 

We are not currently in a recession; however, the risk of recession has grown in the wake of Russia’s war on Ukraine, with rising gas prices and the Federal Reserve’s attempts to combat inflation by increasing interest rates.

 

The National Bureau of Economic Research Business Cycle Dating Committee announced that the 128-month expansion (the longest in U.S. economic history) ended in February 2020.

 

Photodjo / iStock

 

The jury is out on whether we are heading into a recession amid the conflict in Ukraine, though some experts predict a recession as soon as this summer.

 

Goldman Sachs in October estimated the U.S. economy grew 5.6% last year, but will slow to 4% in 2022, a slowing that contributes to Deutsche Bank strategist Jim Reid’s prediction of the next recession hitting in 2025, according to Yahoo! Finance.

 

istockphoto

 

  1. Businesses cut back spending in an effort to increase or maintain profits.
  2. Hiring stops or slows, raises and bonuses are tightened.
  3. Individuals, worried about their jobs and investments, spend less on everything from food to new homes, cars, and discretionary items like travel, gifts, home furnishings, electronics and clothing.
  4. Governments have less tax revenue to invest in their communities.
  5. The stock market, government debt, and home prices all continue to suffer under these economic pressures.

 

Prostock-Studio/ iStock

 

In general, during a recession there is less economic activity. Typically, the financial pinch follows the following flow when the stock market tanks and home prices dip.

 

A depression is a severe and prolonged downturn in economic activity, typically defined as lasting three or more years and/or a decline in real gross domestic product (GDP) of at least 10%.

 

An economic depression is characterized by:

  • High unemployment rate
  • Low inflation — or even deflation (when the price of items goes down)
  • Bear market for stock market
  • Credit defaults for individuals, companies and governments
  • Bankruptcies
  • Less available credit
  • The affluent tend to save more during a depression

 

stefanamer / istockphoto

 

While inflation does not directly cause a recession, steps taken to combat inflation can lead to a recession.

 

Inflation is a measure of the rising cost of goods in the economy, and it is often fueled by high production costs and increased product demand. When inflation surges too quickly, the Federal Reserve might hike interest rates to slow buyer demand.

 

As spending decreases following a rate hike, companies respond by dropping prices and slowing production, which could lead to layoffs or salary reductions. This decline in economic activity over several months is known as a recession.

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

Yingko/istock

 

A recession is part of a natural, healthy cycle of an economy. Some human behavior shows improvement, including:

  • People tend to save more money during a recession.
  • People shop less during a recession — which is good for the environment.
  • Interest rates are cut, which is great if you need to borrow money, including for a mortgage.
  • Floundering businesses close, which means that stronger businesses are more likely to thrive.
  • There are many financial opportunities from lower prices overall — including the opportunity to buy stocks, real estate and businesses at discounted prices.

Related: The shocking ways money problems can affect your health

 

Depositphotos

 

Of course, there are negative effects of a recession, the most common being:

  • Higher unemployment rates
  • Lower wages and salaries
  • Decreased home and stock prices
  • Increased government spending

 

DepositPhotos.com

 

Rich people love recessions since they are great opportunities to buy low and sell high, take advantage of a stressed job market and otherwise make coin. Here is what you can do.

 

Buy low, sell high — investing 101. Whether you are in the market to buy a house, or have cash to invest in the stock market, a recession is an excellent opportunity to buy now, and profit later. The key is to hold on to your investment until the market improves.

 

Kiplinger recommends these stocks during a recession:

  • Walmart
  • Dollar General
  • PepsiCo
  • Hershey
  • Lockheed Martin
  • O’Reilly Automotive
  • Diageo
  • Philips Morris
  • Church & Dwight
  • General Mills
  • Unilever
  • Clorox
  • Proctor & Gamble
  • Hormel
  • Costco
  • Kroger
  • McDonald’s
  • Rollins
  • Service Corp. International
  • H&R Block

 

nortonrsx

 

Most investors get scared when the stock market goes down, and quickly sell. This is 100% the worst thing to do. If you have investments in the market, sit tight. If you have cash on hand, invest now that stocks are at a discount, and profit when the market returns.

 

Learn about investing in a 401(k), IRA, through a robo-advisor or brokerage: How to start investing.

 

 

GaudiLab // istockphoto

 

When the economy is down, home prices drop, and interest rates also go down. This is a great opportunity to buy up real estate — whether for your primary residence, a second, vacation home, rental investment or an Airbnb property.

 

 

shironosov/istockphoto

 

Gold prices have historically risen during recessions. Gold has been considered a safe investment, and often climbs when stock markets fall. If you have old gold jewelry, gold coins or other gold items that you no longer enjoy, consider selling them for cash.

 

When you look at gold vs. inflation, gold is a low-risk long-term investment against inflation. Learn more about buying and selling your gold jewelry, coin and other items, as well as today’s gold price in this post.

 

DepositPhotos.com

 

It is always great to have cash on hand, at least a three-month emergency fund. Low interest rates on savings and money-market accounts during recessions mean that big stores of cash may be unattractive compared with other tools.

 

 

Deagreez / istockphoto

 

Recessions can be financial bonanzas for some people — mostly the rich. Opportunities during an economy downturn include:

  • Buy low in the stock market
  • Home buyers and real estate investors looking to purchase a house — especially first-time home buyers who benefit from low interest rates
  • Those looking to refinance debt, including a mortgage, student loans, car payments and credit cards
  • Employers who benefit from a large pool of people looking for jobs

 

grinvalds / iStock

 

Stockpiling items in a recession is a good way to save money in the long run. In general, these are some items to stockpile in the event of an economic downturn:

  • Canned goods like fruits, veggies, beans, soups, broths, and meats
  • Foods that can be frozen like meat and breads
  • Dry goods like rice, noodles, pasta, rolled oats, and seeds (kept in a cool, dry place)
  • Baking supplies like honey, flour, sugar, vanilla
  • Nut butters
  • Spices
  • Oils
  • Paper products
  • Water

 

Valeriy_G/istockphoto

 

In general, here are some no-nos (but common mistakes) during a recession:

  • Liquidate all your investments
  • Withdraw from your 401(k) or other retirement accounts
  • Co-sign for a loan or otherwise take on more debt than you have to
  • Avoid taking too many career risks
  • Business owners should avoid capital investments now

 

If you still have a job, here’s what you should do right now:

  1. Start an emergency fund
  2. Cut back on spending and pay down debt
  3. Sell unwanted and unused items to make extra money
  4. Consider starting a side gig for extra income
  5. Store food and water to save in the long term

If you have lost your job and don’t have a financial cushion, here is what you can do now:

  1. Focus on the basics: Rent, utilities, food and frugal living. Apply immediately for unemployment and other public programs. A budget is critical.
  2. Sell things you don’t need. Gold and jewelry, cars you can do without, clothes and appliances. You could also use consignment shops or pawn shops to get quick cash.
  3. Maintain your credit score — a low score means higher interest rates and digging yourself deeper in debt. Take steps to improve your credit: How to build your credit fast
  4. While you look for work, keep your skills current with an at-home side gig, or take online courses. Read: Best jobs for moms
  5. Take advantage of all the resources available and apply for my Single Mom Grant.

This article originally appeared on WealthySingleMommy.com and was syndicated by MediaFeed.org.

 

Drazen Zigic / istockphoto

 

 

fizkes / istockphoto

 

Featured Image Credit: Igor Kutyaev / iStock.

AlertMe