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Recessions: 10 Facts You Must Know

Time-frame of a typical recession

The average length of recessions is 17.5 months. The long-term average covers the 1873 recession that lasted 65 months. It also includes the Great Depression, which lasted 43 months.

Since WWII, recessions have become less harsh, lasting an average of 11.1 months. In part, it is because bank failures do not mean that you lose your life savings.

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Recessions: 10 Facts You Must Know

Recessions: 10 Facts You Must Know

https://www.kiplinger.com/slideshow/investing/T038-S001-recessions-10-facts-you-must-know/index.html

kiplinger.com

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Key Ideas

Understanding recessions are vital

Recessions are part of the fabric of a dynamic economy. The average investor fears recessions because they mean lower home prices, lower stock prices, and less or no work.

Several things can cause, or worsen, a recession — soaring interest rates, or ill-conceived legislation. If you understand recessions, you will have many opportunities to look forward to when the recession ends.

Naming a recession

Recessions are really "depressions," but the term "depression" seems too terrifying. After the Great Depression, economists began to use the word "recession" instead.

The 2007-09 recession involved a financial crisis, high unemployment, and falling prices, and was named the Great Recession. Our current recession is still without a name.

An official recession

A standard measurement for a recession is two-quarters of consecutive GDP contraction. But the official arbiter of recessions and recoveries, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), prefers domestic production and employment indicators instead. Other signs of the recession include:

  • Declines in real (inflation adjusted) manufacturing, wholesale-retail trade sales, and industrial production.
  • Extended declines in production, employment, real income, and other indicators.

Time-frame of a typical recession

The average length of recessions is 17.5 months. The long-term average covers the 1873 recession that lasted 65 months. It also includes the Great Depression, which lasted 43 months.

Since WWII, recessions have become less harsh, lasting an average of 11.1 months. In part, it is because bank failures do not mean that you lose your life savings.

Recurrence of recessions

Since 1857, a recession occurred about every three-and-a-quarter years. The government used to think recessions should work themselves out.

Since WWII, the average between recessions is nearly five years. The last economic expansion, starting at the end of the Great Recession, lasted 128 months, which means we were overdue for an economic retraction.

The harshest recession

The recession of 1873 was known as the Great Depression until the 1929 recession started.

The recession of 1873 started with the failure of Jay Cooke & Company, a major bank. It caused knock-on effects of bank failures across the country and the collapse of a bubble in railroad stocks. The recession ended in 1877.

The worst effect of a recession

Losing your primary source of income is the worst effect since jobs are increasingly hard to find in a recession.

That is why it's essential to have a few months' salary in cash as an emergency fund.

The best time to buy stocks

Historically, the best time to buy stocks is when the NBER announces the start of a recession.

The NBER takes at least six months to determine if a recession has started. The average post-WWII recession lasts 11.1 months. By the time the bureau announces a recession, it is nearly over. Often investors are quicker to spot the beginning of recovery long before the NBER does.

Spending your money

The best thing to do with your money during a recession is to pay off your credit card debt.

Paying off a credit card that charges 18% interest is equivalent to getting an 18% return on investment. You may not get that from most other investments during a recession.

Early warning signs of a recession

An inverted yield curve is a more solid predictor of economic downturns than the stock market, consumer confidence, or leading economic indicators index.

An inverted yield curve is when short-term government securities, such as the three-month Treasury bill, yield more than a 10-year Treasury bond. It shows that bond traders expect weaker growth in the future.

The Federal Reserve

The Federal Reserve does not want to start a recession because part of its dual mandate is to keep the economy healthy. But, the Fed's dual mandate also includes keeping inflation low. A cure for rising inflation is higher interest rates, which slows the economy.

For example, in 1981, the Fed raised interest rates so high that three-month T-bills yielded more than 15%. It did end inflation at the price of a short and sharp recession.

SIMILAR ARTICLES & IDEAS:

Recessions come and go
Recessions come and go
  • A recession is "good" or "bad," depending on who it impacts and how badly it affects them.
  • In the last thirty years, a recession has come and gone somewhere in ...
Recessions are far from equal
  • Banks are better able to handle a financial crisis than a decade ago. The 2008 recession was about the housing market and shares, which affected higher income groups.
  • The present crisis seems to be hitting the lower-income groups, the vulnerable workers, young, and less skilled. It is similar to the late 70s, early 80s recession, which affected young and unskilled workers.
  • Another lesson from 2008 is that recessions don't always lead to significant numbers of job losses. Layoffs were concentrated among a small number of people, and they stayed unemployed for a long time.
  • In this recession, far more workers will be at risk if social-distancing rules remain in place over a long period.
GDP during a crisis
  • A drop in GDP was expected during the 2020 lockdown. Shops and businesses were closed, and the total value produced by goods and services decreased. In turn, this affected the staff of those businesses earning less money.
  • Furloughs. At its peak, about nine million people in the UK were paid a furlough - the government paid 80% of their salaries, and the employer could choose to top up the rest. Other countries have similar state-backed furlough schemes. These schemes will be coming to an end, and employers will have to decide if they have to lay off employees permanently.
  • The losses are not yet crystalising. People are taking mortgage and credit holidays. It means the losses are pushed further down the road. The financial sector bubble will burst, and we will see real turmoil again.

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A shift in measuring well-being
A shift in measuring well-being

People in societies such as ancient Greece, imperial China, Medieval Europe, and colonial America did not measure people's well-being in terms of monetary earnings or economic output.

Measuring well-being: people vs money

The turn toward financial statistics means that instead of considering how economic developments could meet our needs, it instead is to determine whether individuals are meeting the demand of the economy.

Until the 1850s, social measurement in 19th-century America was a collection of social indicators known as "moral statistics," which focused on the physical, social, spiritual, and mental conditions of the people. Human beings were at the center, not dollars and cents.

Measuring progress and prosperity

What led to the pricing of progress in the mid-19th century was capitalism.

Capitalism is not just the existence of markets. It is also capitalised investment, where elements of society and life - including natural resources, technological discoveries, works of art, urban spaces, educational institutions, and people - are changed or "capitalised" into income-generating assets that are valued by their ability to make money and yield future returns.

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The Great Depression
The Great Depression

.. was a devastating economic collapse which started in the US in 1929, lasting a decade. Europe was already struggling post the WWI recession, while the US was thriving. As borrowings and stoc...

Wall Street Down

On 29th October 1929, the infamous crash of Wall Street happened, where 30 million dollars were lost in a week, leading to customers rushing to withdraw their money, known as the ‘bank run’.

The entire world felt the capitalistic fall and realized that a boom leads to a bust, eventually. The disastrous effects felt around the world showed how economically interconnected the world had become.

A New Deal

In 1933, then-President Franklin Roosevelt promoted his recovery path of Relief, Recovery and Reform, to give shape to the slow and arduous reform process that will take decades.

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Fantasy and economics
Fantasy and economics

Underlying our fears of robots stealing our jobs are more basic anxieties about money. We're using fantasy to confront fears

Sci-Fi has become a measure to assess what's happen...

Economic metaphors
  • The Hunger Games gave us a neo-Depression dystopia where media-obsessed elites torment the starving lower classes.
  • The Expanse is about class warfare.
  • The 1950 Foundation series was partly about saving the galaxy with sound economic programs.
  • The 2012 novel Three Parts Dead, was a mythical reimagining of the 2008 financial crisis. The author, Max Gladstone, said you couldn't tell a story like the financial crisis with realism. You need fantasy to explain it.
The dark side of science fiction

The “dark” kind of science fiction deals with the foundation of economics, which is scarcity. There is a fear that poverty will come faster as automation continues to devalue human labor.

People are experiencing scarcity or are afraid of it on a regular basis. Writers are turning to economists to make their financial worlds more plausible.

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Seeing Isn’t Believing

Most of us have heard stories of hardships and catastrophic events of the past, like the great depression, or the dot-com bust, but haven’t lived through it, and not experienced the real pain of th...

Blind Spots

In the world of investing, having gone through a traumatic experience first-hand makes the difference between a cautious investor and a blind one. The scarred investor cannot think in the way the fresher, who hasn’t experienced the turmoil can. 

Our unique experiences impact our vision in ways we cannot comprehend on the surface.

Learning From The Past

Different generations have different investment risk appetites, with the younger generation wanting to take bigger risks and going into uncharted waters without any experience.

The New Generation, who hasn’t experienced turmoil and loss, are good at getting rich. However, the older, scarred generation is good at staying rich due to their general pessimism and conservatism. There is a need to balance the two aspects while taking an investment decision. People with different experiences aren’t necessarily smarter than others but just have a different worldview.

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Investing

... is the trading of your money today for a lot more money in the future. It is a high yield over the long term.

What happens to your money

Banks don’t like to give away their money. That mindset is reflected in the interest rates of checking and savings accounts of 0,5% and 0.9% avg. annual interest respectively.

When you deposit your money in the bank, the bank turns around and invests that money at 7% a year or more. After they collect their profit, they give a tiny shaving of it to you.

Portfolio and Diversification
  • Your portfolio reflects your long-term wealth building investment strategy – not the short term. It includes everything you own. Your retirement accounts, your investment accounts, even your home are types of investments.
  • Diversification is a way to describe owning multiple types of investment assets. Diversification is smart because you both protect yourself from failure and position yourself to take advantage of multiple robust methods for building wealth.

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Side Hustle to Make More Money

You don't have to sacrifice all of your free time to start a side hustle, use the time you’re comfortable with and make a little bit of progress every day. 

Take Action

Get to working on improving your finances today, not tomorrow. Reading the steps and thinking you’re capable of doing it but postponing it is just an excuse, an unprofitable one.

Communicate With Your Partner

Talking about your financial goals, and scheduling time once a month to go over your finances together can prevent money from affecting your relationship.

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Decline Explained

Currently, we observe decline all around us, whether it's the stock market, travel, or jobs.


There are three different Types Of Decline: Narrative, Physical and Technical/Leg...

Physical Decline

.. is when there is a loss of machinery, infrastructure and people, be it from war, or natural disasters.

The rebuilding of physical decline can also provide a powerful economic boost. This can also lead to inflation, as the capacity to make goods has been destroyed.
Losing people due to war or a calamity is the hardest to recover from.

Technical Or Legal Decline

..is a type of decline in which due to a personal narrative, circumstance or condition, the work terminates, and one's identity is no longer able to survive.


If a business suffers bankruptcy, or if a person has defaulted or is arrested, a certain 'absorbing barrier' is reached, and all potential of any future activity is shut down.