Let’s talk about bear markets and bank runs. They’re not exactly a picnic for most of us, right? But what if we tried to find a silver lining in a situation where the Fed might wipe out the middle class? Extreme situations can sometimes offer us a clearer perspective and help us make better decisions.
First off, we need to understand a few things. The Fed seems to care more about its reputation than the middle class. The Fed Governors are all wealthy, so they’ll be okay even if the economy tanks. To them, the economy is just a bunch of numbers, not real people.
We’ve been warned about the potential economic disaster if the Fed Funds rate exceeds 5% and stays there despite slowing inflation. Yet, on May 3, 2023, the Fed hiked the rate by another 0.25% to a range of 5% – 5.25%.
It’s like they’re playing the role of both the villain and the hero. First, they create a problem, and then they swoop in to fix it. People tend to remember the most recent actions, so this strategy might work in their favor.
The last time the Fed Funds rate hit 5% – 5.25% was in 2007, right before the global financial crisis of 2008, which ruined millions of lives. I lost about 35% of my net worth in six months, but it also led me to start Financial Samurai in July 2009. We can’t control what happens to us, but we can control how we react. So, let’s try to find the bright side if we end up in another deep recession.
The Upside of the Fed Wiping Out the Middle Class
I’d much rather have a bull market and a strong middle class. The middle class is the backbone of society. Even the rich like to think of themselves as middle class because it feels good to be part of the majority. But given the circumstances, let’s try to find some positives.
With the Fed Funds rate at 5% – 5.25%, we can expect more bank closures, layoffs, and a significant slowdown in GDP growth over the next six months. We could lose up to two million jobs over the next year.
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Less focus on prestige, money, and status. The middle class often feels miserable because of the constant desire for prestige and status. When you’re struggling financially, you don’t have the luxury of seeking prestige or status. Instead, you focus on survival, which helps you focus on what really matters.
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Improvement in the student loan problem. The student loan problem exists because too many high school students pay exorbitant tuition fees for a college education that isn’t worth it. With middle-class incomes at risk, parents and students will be forced to choose more affordable colleges or trade schools. This could lead to a better alignment between cost and benefit, improving a person’s finances and mental health.
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Better consumption and financial habits. When you have less money, you’re forced to spend less and make do with what you have. This can strengthen your frugality and survival skills. Your financial habits will also improve after going through economic devastation.
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Fewer cars, less pollution, more travel, and world peace. With a weaker middle class, there will be fewer cars on the road, reducing pollution. Air travel and accommodations will also become cheaper. The more we see of the world, the more empathy and understanding we will have for other cultures, which could lead to world peace.
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A chance to start anew. Millions of jobs will be lost, and millions of people will need to find new jobs. This could be an opportunity to try something new.
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Less overcrowding in schools and more time with your children. With a weaker middle class, there will be less overcrowding in schools. If one parent loses their job, they might want to homeschool their children or provide more supplemental education.
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Rekindling of current and lost relationships. When making money becomes harder, we tend to focus on the things we’ve been neglecting, like our relationships. It is during times of crisis that relationships grow strongest.
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A renewed focus on our health. Some jobs are physically and/or mentally unhealthy. Losing your job could literally extend your life. Use your time away from work to heal your body and mind.
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A change in political power. If the Fed destroys the middle class, the political party in power tends to lose. This often leads to new ideas and compromises.
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Borrowing costs will go back down. During times of economic calamity, there will be a flight to Treasury bonds, the safest asset class. As a result, Treasury bond yields, mortgage rates, and student loan rates will come down the most.
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Inflation will finally decline. Once the middle class is beaten up, inflation will finally be conquered. This is what the Fed wants, which means it will finally stop hiking and maybe even start cutting.
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Easier to generate more passive income and retire earlier. Higher rates make it easier to generate more passive income. Earning more passive income also makes it easier to retire earlier if you wish.
The key is to be slightly above the middle class. If you’re part of the mass affluent class, then you have an above-average net worth and income for your age. This allows you to survive unemployment longer and/or take advantage of better prices and opportunities during a downturn.
What are some other upsides if the Fed decimates the middle class? Let’s try to find as many positives as possible.
