Are You Ready for a Real Recession?

May 23, 2023

by Charles Hugh Smith Of Two Minds

In a real recession, what seemed safe and rock-solid melts into air.

We haven’t had a real recession in forty years (1981-82) and so only those who were in the workforce back then have any experience of how far and how fast things we think are solid can unravel. What’s a real recession? In the most basic terms, a real recession is an organic, i.e. unmanipulated by central banks, completion of the credit cycle, also known as the business cycle.

The credit / business cycle is intuitively easy to understand. When the cost of borrowing money (a.k.a. the cost of capital) declines and credit standards loosen so more enterprises and households can qualify for loans, the incentives to borrow and spend / expand increase. Lenders start making more money because they’re lending more, and borrowers expand their enterprise, buy assets such as bigger homes and retailers sell more goods and services to borrowers who can now access new sources of credit–home equity lines of credit, higher credit card limits, etc.