Simplified Explanation: Recessions are a large downturn in the market, for two consecutive quarters. The year is broken up into 4 quarters (3 month increments - January to March, April to June, July to September, and October to December). If this downturn occurs, you can expect it to have a negative impact on your finances, whether it is losing your job, an increase in expenses, or losing some of your income. This could also affect you getting a loan for a home or car.
A depression is similar, but it’s deeper and longer than a recession. If this were to occur, you would most likely see a decrease in pay, increase in expenses, or loss of a job.
Real Life: In 2008, the United States experienced the largest housing bubble in over 50 years. One of the reasons for this is because President Bush held it off for so many years with certain economic policies. The price of houses increased the most during his administration in the last 50 years, excluding 2022. There were too many houses on the market, at such a high price, that the economy couldn’t sustain the high prices and loans that were too easy to apply for. In 2021, it is different; there are less houses for sale, and the prices keep going up. If the home builders came out and began building houses non-stop, it would still take them 2-3 years, at least, to build enough houses to put too many houses on the market.
For the past 100 years, we have had a new recession every 8 years. In 2008, we hadn’t experienced a recession in 10 years. Now, in 2021, we have been waiting for the next recession for 13 years and it as of July 29, 2022, it has been reported that we are now back in a recession. When COVID occurred, the media called it a recession, but though there were two quarters of downturn, no prices went down. The market had a small fluctuation, while everyone was under lock down orders, but it quickly came back (because of action the Trump and local administrations took to correct and open the economy). It is also possible that, even if he did nothing, since this wasn’t a true recession, the market would have still returned the same way when the lock down orders were released. Now you can see statistically what the lock down orders did, by looking at the economies of the states that locked down the longest. The economies of California and New York fell, and stayed down while the people were under lock down orders, as no one could do much in the way of commerce and business. Those states that lifted their lock down orders, such as South Dakota, Florida, Georgia, and Missouri, had economies that jumped, even though there were mask mandates in place. These people were able to get out and work, though, and according to the numbers, the rate of deaths from COVID were no different from California (though New York was significantly more than everywhere else, because people lived so close together). Even in lock down, the people couldn’t work as they normally did, and the economy in those areas suffered.
Now there are multiple types of recession, spanning from a housing bubble, to the stock market falling. Here are the different types:
- Boom and Bust Economy: This may occur after a previous year of an economic boom, or a year the economy went up substantially and inflated itself too high. The recession would be to balance it and cut the price increases. When this happens, banks tighten their lending/spending policy and lend less; the price of most things decrease a little, or stay where they are, which allows the market to catch up; and people’s confidence goes from high, in a boom, to low confidence, during a bust.
- Balance Sheet recession: This occurs when banks see a decline in their balance sheet, due to falling assets or bad loans, and so they restrict lending policy. During this time, we will see a fall in asset pricing, such as the housing bubble, when the price of houses decreased.
- A Depression: This is caused by a long and deep recession, where the output falls by over 10%, and includes a very high rate of unemployment.
- Supply-side shock recession: This is caused by a very rapid rise in a commodity price, that causes a recession, due to a decline in living standards. For example, in 1973, the world’s oil prices tripled, which sent the world into a recession, and a fall in disposable income. There was also a lack of output of oil, because of supply. Another example is after Hurricane Katrina, when the oil rigs were down for months, the price of oil and gas skyrocketed, doubling or tripling for months. The price did eventually drop, but people stopped spending to go on trips or buy more “luxory” goods, because it stayed high for a while, while the prices dropped.
- Demand shock recession: This is when there is an unexpected event that occurs and shocks the world, which drops confidence in the system, and a short-lived recession occurs. These events include the downturn caused by the 9/11 terrorist attacks, or COVID lockdowns. These normally do not last long, and quickly begin to incline, but the shape or direction of the market is different.
Economists around the world are all considering what will cause the next recession, and how it will look. Many economists believe it will be a mixture of things, such as low confidence in the economy, poor production growth, fall in the stock market, weak investment spending, political turmoil, and/or a war. Note: I wrote this book in 2020 and now in 2022, we are seeing that this has come true. Everything
Different shaped recessions: The artificial recession due to COVID and the lock downs were forecasted to be many different shapes, but in the end, turned into a V-shape recovery.
As you can see from the chart above, the survey shows CEOs and economists were wrong on the shape of the COVID economy. In the end, it was the least forecasted - the V-shape recovery - and returned quickly (showing it was an artificial recession or Demand Shock Recession).
When a recession does occur, and everyone is reacting or overreacting, stay steady and don’t let the world make you react. Instead, calmly make a decision that you will not react; this is normal, and you will overcome these issues. That is also why you will prepare for a possible recession, by creating an emergency fund and beginning a food storage, so you can live an intentional life.
Comments (0)
To leave or reply to comments, please download free Podbean or
No Comments
To leave or reply to comments,
please download free Podbean App.