Is It True Cash Is King During a Recession?

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This year has been off to a rocky start. While inflation is cooling down — standing at 5% in March, according to the Consumer Price Index — it is still a far cry from the Federal Reserve’s 2% target goal.

In turn, the Fed seems unlikely to pause its rate hikes for the near future, prompting recession fears and putting more pressure on Americans’ wallets.

What’s more, the turmoil in the banking sector following the failure of three banks is adding fuel to the fire. Several economists and analysts are now re-assessing their views about the odds of one unfolding sooner than anticipated.

For example, Goldman Sachs raised its estimates on the odds of a U.S. recession to 35% over the next 12 months, “reflecting increased near-term uncertainty around the economic effects of small bank stress,” analysts said in a March 15 client note.

Against this economic backdrop, it’s no wonder that many Americans might wonder whether the ancient “cash is king” mantra holds true.

Not Always the Best Option

“One thing is for sure: Cash can be useful. That doesn’t mean it’s the best option, but not always the worst either. It depends,” said Derek Sall, financial expert and founder of Life And My Finances. “Of course, holding onto cash during a recession or high inflation is one way of trying to protect yourself from financial risk.”

Sall explained that a recession means economic uncertainty and a decline in economic activity, which in turn results in businesses struggling to pay bills or meet financial deadlines.

“In this context, having cash on hand can provide a valuable lifeline, a buffer against financial risks and hardships until conditions improve,” he said. “In a way, control something you can control.”

Sall noted that consumers should keep in mind this isn’t specifically always the best option.

“A good example would be the recession in the 1970s [and] ’80s, when cash was quite literally something people did not want to have,” Sall said. “Prices were rising, skyrocketing. Who would want to buy a house at 17% APR? Which is why a lot of people opted out for bonds instead. On the other hand, during the Depression in the 1930s, prices went down dramatically. Holding onto cash was a smart move.”

Weigh the Pros and Cons

So, is cash really king? According to Sall, it depends on the economic conditions and your individual circumstances.

“While holding onto cash during a recession or inflation can provide a level of financial security and stability,” he said, “it’s essential to weigh the advantages and disadvantages of holding onto cash versus other investment options. Ultimately, the decision should be based on your personal financial goals and situation.”

Other experts note that while “being flush with cash is great at any time” this should be part of a more holistic approach.

“I believe that your credibility — your credit report — is just as important as cash. Keep your promises, and pay your bills as agreed,” said Steve Davis, CEO of Total Wealth Academy. “I do not see a distinct advantage to cash in a recession. Think of cash and credit as a 1-2 punch. They work together for you to build wealth at maximum speed.”

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