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What is a Richcession? And Are We on the Cusp of One?

What is a Richcession? And Are We on the Cusp of One?

March 03, 2023

Most people know what a recession is and how one might personally affect them. But what about a richcession? (No, that’s not a typo.) A richcession is a newer term and concept that high income Americans should familiarize themselves with because the U.S. may be heading into one – and it may very well impact them. This article will explain what a richcession is, the reasons why one might occur, and how the affluent can potentially brace themselves for one. Keep reading to find out more about this new economic phenomenon.  

What is a Richcession?

Let’s start by defining this relatively new term. Recently coined by journalist Justin Lahart of The Wall Street Journal, a richcession is a financial buzzword that describes an economic downturn that impacts the wealthy more than the lower or middle class. It’s typically characterized as a recession that begins with stock market volatility, a currency crisis, or other money issues that disproportionately affect high-income individuals, reducing their disposable income while the rest of the population faces little to no impact.

Fewer luxury purchases are made during a richcession. For example, there may be a decline in the sales of high-end automobiles, jewelry, couture clothing, yachts, and homes. Everyday items like food and basic commodities, on the other hand, remain relatively unaffected and are still bought by consumers like normal.

Richcessions tend to be the result of a high jobless rate, uneven asset distributions, income inequalities, halting economic growth, and economic policies. In this case, government relief during the pandemic and wage increases for traditionally lower paying jobs have led to the lower and middle-class being more financially secure and buffered than usual.

To counteract a potential richcession (or recession in general), the Federal Reserve typically responds by increasing interest rates, which can lead to falling stock prices and a drop in household net worth for many investors. This is exactly what has happened in 2022 and so far in 2023. The Fed has raised interest rates 11 consecutive times since March 2022 to curb rising inflation, reduce borrowing, and cool an overheating economy – all in an effort to stave off a potential recession.

Is a Richcession on the Horizon? If so, Why?

Some experts believe that if the U.S. heads into a recession in 2023, which is currently expected by many, it might actually be more of a richcession 2023. In other words, the recession may noticeably impact the upper class – who typically ride out most recessions relatively unscathed – rather than the lower or middle classes.

There are several reasons for this. First, more than 1,000 tech companies laid off employees in 2022 alone, and this trend has continued into 2023. The tech workers being dismissed are, in general, white collar workers who had earned high incomes. Although many of these high earners have transferable skills that may enable them to move into other jobs, the wealthy will likely still feel the reverberations of these layoffs.

Another reason why an upcoming recession might affect the rich more than blue collar workers is because the stock market has dropped. Given that many wealthy individuals hold a good portion of their net worth in the market, this means that they’ll likely feel the hit to their pocketbooks more so than the average person. Combined with the ongoing layoffs, high-net-worth individuals may experience this recession more profoundly than they’ve experienced others in the past.

How Can the Rich Protect Themselves?

There are several steps people with wealth can take to help protect themselves during challenging economic periods. For example, since the affluent typically bear the brunt when the stock and bond markets drop, it can be a good idea for them to add more diversification to their investments. This means investing in a range of different stocks, bonds, and other assets like art, real estate, wine, private equity, cryptocurrency, and collectibles to reduce risk (rather than investing in only one company, sector, or asset type). Doing so can help insulate one’s portfolio during adverse market conditions.

Another move investors can potentially take is to hold cash reserves (i.e., keep a larger portion of one’s assets in cash to meet short-term funding needs), which can act as a cushion during a market dip. In addition, individuals should also consider staying focused on long-term strategies, continue seeking out undervalued opportunities, and consult with a trusted financial advisor prior to making any decisions. While a richcession can be disconcerting for even the most savvy and wealthy investor, taking proactive steps can help ease its financial impact.

The Bottom Line

It’s very possible that a richcession is on its way, and while the wealthy may be affected more than others, no one – despite their financial standing – will be able to avoid it altogether. In economic times like these, it’s generally wise for everyone, no matter their net worth, to build up their savings and further diversify their portfolio. Additionally, the wealthy can better safeguard themselves if they consult a trusted and qualified financial advisor who can help them make smart financial moves. Taking steps to maintain one’s personal finance security during a richcession or any economic downturn will likely provide a sense of confidence. Though it may seem challenging to accomplish this during moments of uncertainty, making strategic moves now can certainly pay off in the long run.