Federal Reserve & Interest Rates

What is Recession?

Basically a recession is a decline in real economic growth and a decline in a country’s Gross Domestic Product (GDP) for half of a year or more.  In a recession, the overall economic indicators reveal severe changes, which typically includes a sharp rise or fall in prices (inflation or deflation).  If recession continues for an extended period of time, it is called a depression.

What causes a recession?

There is much debate over the causes of recession.  Economists and monetarists rarely agree on which factors are responsible for economic decline.  It is perhaps that there are several different factors, when experienced together, that cause tremendous economic decline.

Mishandling of the money supply, weather conditions, war, and the inflation of import costs (perhaps the decrease in the forex (foreign exchange) value of a country’s currency) could all be contributing factors to a recession.

What is happening now?

These various factors are alarming to consider, as they seem to describe current conditions.  Mishandling of the money supply is suspect, as facts and figures show an incredible deficit under the current presidency.  The current war has without a doubt taken millions, maybe billions, of US dollars, and it tolls our economy greatly.  The inflation of energy costs has yet to be stabilized.  Even with the recent rate cuts done by the Fed, inflation is still a variable.

The value of the dollar is still declining against the Euro.  An all time low of 1.41 was hit twice this month, and there are no signs of rebound just yet.  The Canadian dollar had some brief moments of equality with the US dollar, for the first time in about 30 years.

With all of these economic uncertainties, recession looks more and more like a possibility in the near future.  Residential real estate has also taken a huge toll on the economy.  If that doesn’t start to pick up, it can remain a destabilizing anomaly for a long time.

There is much rumor of a four year long recession about to come underway.  Former Federal Reserve Chairman Alan Greenspan says, “My own guess is the odds are less than 50-50 that we’re heading to a recession, but there is no question we’ve got significant pressure on home prices, which I expect to move down quite considerably lower.”

What can I do?

To prepare for a recession, there are several things you can do to secure yourself.

-Delay large purchases.
-Increase your savings.
-Cut down on spending.
-Know your business.  Some businesses are more inclined to experience great loss than others.  Research your market and expect consumer spending to decrease.  Try to determine the possibility of a lay-off in your company.
-Don’t panic.  Be a little frugal and you should survive.
-Find ways to make extra money and set it aside.

There is always a possibility that the economy will pull through.  The best thing to do is prepare for the worst and hope for the best.