Recession ramblings – Part 1

The last recession had hit Sam pretty hard

If you have been reading the news or flicking through social media as most people do these days, you would have heard about this ‘oncoming global recession’ business.

A recession makes for great news because it’s a big complicated word with scary undertones which we don’t exactly understand. This week’s article will briefly discuss what a recession is all about.

What a recession is:

A recession is generally defined as ‘two consecutive quarters or more of negative GDP (gross domestic product) growth’. 

Too wordy? Well, simply put, a recession, from a technical point of view, is when the country’s GDP (gross domestic product – a Big Economic(™) term for the overall state of a country’s economy) is shrinking. In other words, a recession is basically a slowdown in business as usual.

What causes this slowdown?

That’s a good question that economists have spent decades trying to answer. But to keep it simple, recessions are natural happenings in the economic world because every period of growth is always followed by a slowdown. Basically, what goes up, must come down.

This slowdown happens at different times in different parts of the world to different degrees for different countries involved. The recent ‘Global Financial Crisis’ of 2008/09 mostly affected Europe and America (and parts of Australasia). Most Asian countries came out unscathed with their banks intact. Similarly the Asian financial Crisis of 1997/98 only affected Asian countries for the most part.

What triggers these slowdowns are often an unwavering belief held by businesses and governments that the good (economic) times will never end (hint: they actually do end). When you believe that the good times will never end, you are more inclined to take on debt (remember that debt can be bad!) because money is guaranteed to come in the future to service the debt. 

But then Something Bad™ happens – and that something can be War, Natural Disaster, A sudden increase in Oil prices, rampant currency speculation (which triggered the Asian financial crisis), failed investments in risky debt-based derivatives (which triggered the ‘Global’ Financial Crisis) or anything really. On a more current note – as of 2019 some folks think that the ongoing trade war between China and America will trigger the next financial crisis but hey, who knows?

Yeah, I’ve got no problem at all juggling all this money! There’s no way Something Badwill ever happen! “- Last words of Vizey, super cool serial entrepreneur.

Once that Something Bad™ happens, people in general lose their appetite for spending. When spending goes down, businesses make less money and they still need to service their debt and pay their bills. So they cut costs. The easiest cost to cut is often wages – so they let their workers go. These workers, now without a salary, have less money to spend, creating even more people who are not spending, taking more money out of the general economy, further sending the country into a recession.

When people are not spending, businesses aren’t selling and when businesses aren’t selling, the country’s economy isn’t doing too well, thus its GDP will shrink and ta-da we’re in a recession!

A recession can be a vicious cycle and can send a country into economic depression (which is a really super long recession) unless the Government steps in and provides financial stimulus to the economy to encourage people to start spending again. Some ways to do this is to lower bank interest rates (so that the average person doesn’t have to pay high home loan repayment rates and won’t keep their money in term deposits thus freeing up more cash to spend) or straight up giving money to people (although in most cases, specific industries – usually banks – are given a cash injection). 

So there you go: Recessions in a nutshell. A recession is many things but it certainly is not the end of the world. That being said, running around like a headless chicken isn’t going to help either.

As a headless chicken I can tell you that in a recession, running around like one of me isn’t going to help you.

The key is to stay prepared for when a recession hits so that you can weather the storm and come out of it still standing. How do we prepare for it? Well, we’ll discuss some pretty common sense tips in next week’s article for both the average person and small business owners.

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