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What Is a Recession?

Presented By: EJ Cooksey | Friday, December 05, 2008 | , , , , , | Comments

World Recession PlungeImage by publik18 via FlickrIn its simplest terms, a recession occurs when there are “two consecutive quarters” of negative growth.

While most economists have been fickle in utilizing the term, it is nonetheless clear that our economy is in the throes of a recession. More importantly, however, is the fear that the recession will subsequently turn into a depression.

How does a recession occur? Well, when there is not enough supply to meet a specific demand (as in the case of oil), prices rise and spending becomes stagnant. This, in turn, causes companies to decrease expansion. No expansion means a decline in the work force and, consequently, unemployment rises. Consumer confidence dissipates, prices of homes decline, and everyone becomes affected.

It can also be suggested that the sub-prime mortgage crisis had a direct impact on the current recession. One can use the dot.com analogy to preface the seriousness of our current crisis. Remember when the stock prices for the internet industry increased beyond anyone’s imagination? Most people were buying these stocks because they felt the return on their investment would be phenomenal. It was - for a time, until the market turned sour on internet stocks and over five trillion dollars was lost, thus inviting a recession that affected companies worldwide.

Similar to the brokerage houses that were making money hand over fist today, the only people who profited from the internet stocks were the CEOs of these companies. Shareholders and everyone else were the losers.

Recently, economists have ascertained that the market will have five negative quarters. Others have stressed the importance of having on hand at least 18 months' worth of savings. Still others, concerned about the Rescue Plan’s execution, are worried that we may be headed for a depression.

Obviously, not everyone agrees as to what will eventually occur. They do agree, however, that until the banks' lending ability is alleviated, the stock market’s volatility will continue.

This global Rescue Plan was designed to give banks enough money so that they were not tied down by these toxic mortgages that prevented them from lending to one another. This is also why it is currently very difficult for an individual to obtain a car loan, college tuition loan, or other type of loan from banks.

Unless and until this plan begins to have a significant effect on the global economy, thus thwarting a total collapse of our lending institutions, this recession will continue. In other words, we are faced with economic uncertainty and must do what we can to ensure we are prepared for any eventuality.

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