To choose a hardship for ourselves is our only defense against that hardship

How to Survive a Recession?

• Avoid taking on any unnecessary debts. The debts you have tried to reduce and consolidate into a lower interest rates bearing account.

• If you fear unemployment, start thinking what you might do as an alternative. Is it viable to consider working on a second income, such as online business?

• Do you have unemployment insurance to cover mortgage payments? If not, it would be worth taking insurance out now. ( Indians need to wait for generations)

• Don't panic. Firstly, the unemployment may not occur; there is nothing to be gained by worrying over what we cannot control.

• If you are made unemployed, the best solution is to be flexible in looking for work. Consider new avenues and skills that you could learn. Also recessions will be short lived; a period of temporary unemployment does not have to become permanent. During a pause, ways of improving skills and knowledge should be seriously planned out.

• Create a worst-case scenario Create a worst-case cash flow forecast. Predict how bad it could be if you lost your job or if your business dropped in sales substantially. Learn to live on less than your income. You may see pay cuts in your job during an economic recession, so look now for ways to trim your budget as much as possible. Compromise on your lifestyle. When everything doesn’t seem to work out for you, try reducing your lifestyle dramatically. Sell luxury car, move to a small house and cut down expensive dining and avoidable shopping.

In a very interesting article titled as “ Breezing through recession without Air conditioning" published in the leading US News Paper, it is stated that those people who were considering Air Conditioning as boon, are nowadays advocating a natural way of living in this way…….. The Allies won World War II without it (A.C.), and the great pyramids of Egypt were built outside in open-air (al fresco). Rather spend summer sitting in the lawn with kids and other family members. It is very therapeutic and at the same time, brings each other more closely. This is really the way it should be. An American lady is quoted to have said “You live with your windows and doors open, you use fans, drink lots of cold liquids and take it easy,” she said. “You come to realize that winter and summer is going to be kind of a bear but you dress for it, and you enjoy fall and spring very much. What’s interesting is you acclimate to it.”

The other thing is quality of life; if you have a place where you can go and have a picnic with your family, it doesn’t matter if it’s a recession or not, you can include that in your quality of life.- Jim Fowler

• Always strive to be the best, no matter which field of profession you belong to. Keep up your efforts without any frustration or else, you will be the first to be led to the exit door during a recession.
• Look for ways to minimize costs without compromising the business. There are always ways to cut costs and increase inefficiency. Some economists even go so far as to say that recessions are a good thing because they force the economy to become more efficient.
• If your business is particularly affected by the downturn, look to see whether you can diversify to reflect the changing economic environment. For example, if you specialize in selling luxury goods with a high margin try including some new product lines which appeal to people's desire for frugality. A fall in profits is likely to be cyclical. Therefore try to plan a financial plan to borrow at a low cost for the difficult years.

Preparation for a recession will enable you to react to changing times and take advantage of select opportunities. “Without a measureless and perpetual uncertainty, the drama of human life would be destroyed” Winston Churchill.

Recession is never a welcome event

1. A recession makes the survival difficult for new entrepreneurs and traders who have just entered the fray. Most new firms have high set up investments and before they have reached break-eve, a downturn in the economy could make them close down.

2. It breeds Monopolies. As the recession causes smaller and newer firms to go out of business then the larger dominant players will gain substantial monopoly power. In the long run this will lead to lesser choice and higher prices for consumers. This is a definite disadvantage of a recession.

3. It is usually said that the past is a predictor for the future. Basically, if there is high unemployment in present, then it is more likely to have high unemployment in the future. If people are made unemployed in a recession, it may take a long time for them to find work again. When they are unemployed they lose skills, become de-motivated and unproductive. Besides, in spite of getting unemployment benefits if any, many will see a substantial drop in income which makes paying bills and loan repayments difficult. It will force a change in lifestyle for many. The unemployed will spend less causing a further fall in consumption and lower economic growth. This makes economic growth more difficult.

4. In recession, the productivity of an economy is badly impaired. Firms can go out of business and therefore shut down their resources. Furthermore due to recession environment, there will be a significant fall in new investment. It can be detrimental to the long term development of an economy.

5. A recession is unnecessary to increase economic efficiency. The long term future of an economy can be best helped through stable growth, which avoids the extremes of boom and bust economic cycles.

6. Hard times turn spotlight on business ethics. The rising market covers a lot of sins and a falling market exposes one's nakedness. Ethical values take backseat and lack of confidence is witnessed at all levels of dealings. Idiots (politicians and those fed up with prosperity) are shielded for the results of ugly deeds and even encouraged to breed their idiocy further. Those who are engulfed in the mire of poverty are first stranded and then taught lessons about how to combat the tough time. Media and economists, who are basically responsible to send alerts of recession to society, cherish recession which fosters their importance. Great Management Guru Mr. Peter Drucker has rightly quoted, “ In all recorded history there has not been one economist who had to worry where the next meal would come from.”

Can a recession be avoided?

1. If there is a lack of aggregate demand in the economy, various policies to boost demand can be implemented.There are a number of strategies that can be implemented to help an economy to move out of a recession. The strategy adopted and applied varies and depends on the type of economic system and analysis followed by the country’s policy makers.

2. Government and Monetary authorities can try:

• Cutting Interest Rates (monetary policy) to try and boost spending and investment
• Cut income tax and / or increase government spending (fiscal policy) to try and increase Aggregate Demand
• Ensure stability in banking system and financial system and overcome worst impact of credit crunch on lending and housing market

3. Quantitative easing - increasing money supply – should be tried out. This may be necessary if the recession is so severe it creates deflation. Deflation has a powerful negative impact on consumer spending and economic growth.

If the fall in demand is moderate, these policies may be successful in boosting demand and avoiding a recession. However, if this is severe and if it is caused by falling house prices / assets, credit crisis leading to fall in bank lending, and then it is much more difficult to avoid a recession, because these create powerful decreases in economic activity. With falling asset prices, Japan tried everything to boost economic activity such as reducing interest rates to Zero percent, introducing expansionary policy etc., but struggled for many years to get out of a deflationary state of being. In this case the government can at the most minimize the depth and length of the recession. There are also significant time lags in these policies working. The recession still occurs, it can not be avoided. But, the recession may have been even deeper if the one or the other policies had not been implemented. No escape!!!

To be continued....

What goes Up must Come Down

The economy is a dynamic entity composed of various factors which interact with each other contributing to it’s over all health. It is a cycle which has its ups and downs.

There are five basic elements in an economy. They are producers, consumers, market, supply and demand. Producers of course produce the goods and services which are bought by consumers. We are all producers and consumers at the same time. We buy groceries produced by farmers, factories and other institutions. But we also produce labor or work which is also bought by the companies we work for. During the peak time in the economy, producers make the maximum amount of goods and services while the consumers also buy the maximum amount they can. This leads to a lot of money spent on goods and services leading to a bigger amount of demand. Since there is demand for more goods and services, producers can charge more for their products. This leads to higher prices which lead to inflation. When inflation reaches its peak, consumer demand for goods and services would start going down and since demand will go down, the suppliers will have an over supply of stocks or services. In other words, since people have stopped spending their money due to high prices, a surplus of goods and services has occurred in the market. When this surplus occurs, producers will have to cut production cost by either lowering their prices lest their customers buy from competitors or they lay-off workers in order to save on overhead costs. Unemployed workers will have even less money to spend, driving the producers to lower their prices even more. When prices are low enough, demand will again pick up and the cycle begins all over again.

Mr. Wesley C. Mitchell, more than 80 years ago, described how the “error of optimism at the heart of every boom grows in scope and magnitude. ... But since the prosperity has been built largely upon error, a day of reckoning must come. ... Then the past miscalculation becomes patent (evident) -- patent to creditors as well as to debtors, and the creditors apply pressure for repayment. Thus prosperity ends in a crisis."

Then, as Mitchell further adds, "The error of optimism dies in the crisis but in dying it 'gives birth to an error of pessimism. This new error is born, not an infant, but a giant; for the boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.'" This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession.

As sure as the spring will follow the winter, prosperity and economic growth will follow recession.


What happens in a ‘Recession’?

1. Decline in economic activity brings recession causing unemployment, fall in income, consumption and therefore production. It enhances tendency to save more among people. However, mere parsimony is not economy. Expense may be an essential part in true economy.

2. Economic stagnation takes place, wherein productive capacity keeps on rising due to technological development of economy, but income-derived(wage) purchasing power (not the one derived from loans) of people do not rise in equal proportion. Extra working hours may sustain the purchasing power but it also has limit. In other words, shortage of money arises with people who actually create demand say, lower and middle class people and governments.

3. In recessions, interest rates tend to fall. Because inflation goes downside and central Banks wish to try and stimulate the economy.

4. The government will also try to use expansionary fiscal policy. This involves cutting taxes and increasing government spending. It will cause higher government borrowing (higher budget deficit), because Tax Cuts tend to stagnate Government revenues, discouraging increased government spending. Expansionary fiscal policy may not work in the long run due to crowding out.

5. Governments may try out both lower interest rates and lower taxes.

6. The problem with lower interest rates is that it is causing a further devaluation of the currency.

7. Also lower interest rates may not actually help increase consumer spending if confidence is low. In spite of Central Bank’s strict instructions, neither bank can throw money overstepping the norms, nor can people be inclined to take loans and buy more.

8. There is a limit to how much the government can cut taxes because government borrowing is already quite high. As the reports reveal, US national debt is about 65% of GDP. In the recession this will definitely increase. There is huge loss of revenue to government in the form of direct and indirect taxes.

9. Stock Markets fall because firms make less profit. There is also the danger of business establishments going out of business.