Thursday, October 16, 2008

Repost: Recession: What it is and what it is not

I decided to repost an oldie but goodie from several months ago considering our current market and my new subscribers.
Enjoy. -Dave

Recession: What it is and what it is not
Recently a reader of this blog asked me what causes a recession.
The definition is pretty easy; namely a recession is when our economic growth is negative for six consecutive months. The actual cause of a recession is, in my opinion, fear.

Many people and companies are fearful right now. They are afraid of losing their jobs, they are afraid of losing customers and they are afraid things will not get better. Deep inside, we know things are constantly changing. Why it was just yesterday things were booming and many thought that would never end too.

Something I want to point out is the word "recession" is associated with "bad" economic times; yet, the definition is simply our growth has slowed down or declined slightly. That does not sound so bad does it? Here is where I think I may be able to shed some light on why the reader asked the original question. On a personal level things do not look good right now. Many have lost jobs or have more than one friend that has lot a job. Everyday we hear about a friend or friend of a friend that has lost their house to foreclosure. Gas costs more. Food costs more. Heck almost everything costs more but we are not making more money. Budgets are squeezed and folks are learning to get by with far less than we are accustomed to having.

When 25% of our population are experiencing what I just described they stop spending on anything but the necessities (the money they used to spend is called discretionary money). When they stop spending on crazy indulgences like eating out (at McDonalds), buying clothes (at Target) and entertainment (going to the movies twice a year) our economy feels it in terms of reduced earnings on Wall Street. When that happens we start to hear on the nightly news about how our economy is slipping into a decline. The news of a decline reinforces the notion that we are in economic trouble and even more of the population cuts back on spending. This reduced spending trickles down to wait staff at restaurants, car dealerships, movie theaters and even Wal-Mart.When will it end??

It is going to take some time for people to feel better about their lives and begin spending again. As I have mentioned in a previous blog, listen to your friends and neighbors. When they are eating out again, going to the movies and buying new cars you will see light at the end of the tunnel. One important fact I left out is in order to spend more you not only have to feel better but you need more money to spend. So we do need jobs to be more plentiful and such for incomes to rise to provide the additional cash needed to spend in our economy.

Have you heard the US dollar has lost value against most foreign currencies? While that is bad for people who save (and buy oil from foreign countries) it is good in that Europeans are encouraged to visit our country and spend money as everything here is literally on sale, everything. The infusion of outside spending may be just the shot in the arm we need. On the other hand, I hate simple solutions and so that will not be the only thing needed to push our economic growth into positive territory.

If that explanation helps you understand and feel better I am very happy to be of service. If you are happy right now, you may want to stop reading.For those of you still with me, I have a confession to make; I don't think we are in a recession, but not because I think like the US government idiots who claim inflation is nil and everything is fine.

I think where I live in SW Florida, we are in a depression. And that folks, is a whole lot worse than a recession. When I was a kid (late 70's) there was talk of the country in a recession and I asked my parents what a recession was. I cannot remember the answer but I do remember my follow-up question which is what is the difference between a recession and depression.

My parents told me about two people; one guy did not get a raise and was concerned about losing his job the other guy had lost his job and was about to run out of savings. The first guy was in a recession and the second was in a depression. The funny thing is the two guys were neighbors. My point is this, forget about labels on the economy as they are meaningless. The important thing is how are YOU doing? Are you in a depression? Do whatever you have to to get by. Things will get better in time. You may have to move or change careers. But things will change

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