What is the economic crisis? Recession is considered a slowdown, as measured by GDP (gross domestic product). A negative GDP lasting two or more quarters will be a recession. An economic depression is a long-term downturn in economic activities, it is a more severe downturn than a recession in economic activity throughout a normal business cycle. 5 Things To Learn This Economic Crisis.
1. Difference between recession and crisis
- A financial or economic crisis is when a country or more than one country has an impact from abnormal increases of numerous unemployments.
- Retrenchments execute by the employers are numerously happening, stock market crashes, financial units bankruptcies including sovereign debt defaults, currency crises, and other financial bubbles, even the stability of the government.
- It can occur due to more than one factor, it happens with a combination of a few factors.
Epidemic, pandemic, influenza, hurricanes, widespread flooding, insect infestations, and crop diseases can affect the supply and demand of the food and prices in the market. A limited supply will cause rising prices, consumer spending will be reduced, thus business income will be affected, till then the unemployment rate will rise too.
According to Investopedia:
A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets are overvalued, and can be exacerbated by irrational or herd-like investor behavior.
The National Bureau of Economic Research (NBER) has a more expansive definition of a recession:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
2. Past Economic Crisis record – What are the signs from the past?
- The NYSE bubble burst violently Oct. 24, 1929.
- Share prices collapse after a period frenzy of investing in the speculative market, people even borrow more money to buy more shares.
- The market wiped out a great amount of both individual and business wealth.
- The crash even led to the Great Depression, the greatest and largest economic recession in modern world history. It lasted for a dozen years. The stock market eventually closed at almost 90% fall from its 1929 peak.
- The recession came about because of increasing gas prices caused by OPEC’s rising oil prices, and embargoing oil exports to the U.S.
- OPEC members started an oil embargo targeting countries that backed Israel in the Yom Kippur War, a barrel of oil up from $3 to $12 per barrel.
- The higher prices and uncertainty led to the stock market crash, the Dow Jones Industrial lost about 45% values.
- Due to high-interest rates to curb economic inflation, a severe global economic recession occurred.
- The crisis lasted for 12 quarters, unemployment was above 10% for 10 months.
- The U.S and Japan exited the recession relatively early, longer effects contributed to the Latin American debt crisis, the U.S. banking savings, and loan crisis.
- President Ronald Reagan
- the 40th U.S. president, his biggest missions were to encounter the worst recession since the Great Depression when started serving.
- He cut taxes and induced more spending to ease it, but that also caused the national debt to double up during his eight years serving in office.
- This crisis started in Thailand, known in Thailand as the Tom Yum Gong crisis.
- The Thai baht collapsed after the government was forced to float the baht.
- Due to a lack of foreign currency to support its currency peg to the U.S. dollar.
- Capital flight happened, it occurs when assets or money rapidly flow out of Thailand.
- The country had to bear a burden of foreign debt that caused the country bankrupt.
- Southeast Asia and Japan also encountered dropped of their currencies and dragged down the stock market values.
- The September 11 attacks caused the economic recession that lasted for eight months, began in March 2001 and lasted through November.
- Terrorists attacked the World Trade Towers, destroyed the buildings by explosives bombs, New York Stock Exchange closed immediately till September 17.
- The Dow dropped 617.70 points when the stock market reopens again.
- The attack causes the United States went into recession, it lasted till 2003.
- The unemployment rate peaked at 6.3%.
- According to economists, this is the most severe economic crisis since the Great Depression.
- The warning started in 2006 when housing prices started falling and mortgage defaults began to rise.
- The obvious downfall sign was being disregarded.
- In 2007, the subprime mortgage crisis finally hit.
- Lehman Brothers, the global financial services firm being caught in tremendous trouble and declare bankruptcy in the same year.
- Lehman was the 4th largest investment bank in the United States after Goldman Sachs, Morgan Stanley, and Merril Lynch.
- It was operational for 158 years since the year 1850.
- Over leveraging risk-taking by banks has become a great reminder globally.
- Consumers suffer from the value dropping of their houses. In 2008, about 2.6 million U.S. jobs where removed.
3. Immediate Consequences
- The consequences of the financial crisis are leading to a huge drop in the unemployment rate and GDP (Gross Domestic Product) per capita.
- Loss of jobs will have a low morale impact on lower-income families and individuals’ health and well-being.
- Salary being reduced, some households are not able to sustain the cost of living and continue fulfilling the debts.
- During the recession period, unemployment will cause consumers to spend lesser.
- Business revenues will be affected.
- Small businesses will close down and not able to strive through the crisis.
- The interest rate will be low during the recession period.
- The government encourages spending, low-interest rate allows consumers to be easier to borrow money from the bank, to buy properties and run businesses, more money will go into the market.
- When more money goes into the market, it helps to recover the economy.
4. Protect your money in Buffet’s way
Warren Buffet is known to be a good investor who can spot companies that will strive through all kinds of crises in the economy. In this one of the letters to shareholders, he has emphasized his three principles. I think we can also apply them to personal finance as well.
A secure stream of earnings
Staying in a long-term stable job can build a good reputation in the industry. Have your reliable medical and life insurance policy covered. Make sure a good stream of earnings from the insurance company is ready if anything unfortunate should happen to you.
- Any form of investment or money allocation that is liquidity assets, your money allocations should easy to be withdrawn.
- There are emergency funds that it enough for six months, for you and your dependents to access.
- For example, cash in the bank and money in the stock market.
- Assets like property and fixed deposits take a longer time to convert into cash.
- Buffet also suggests that we can also save some extra money, wait for the good opportunities, or a discounted price of the stock market, to buy in some good deals.
5. Not to spend more than you have
Not to ask you to live a frugal life, but at least to be smart with your money. Spend wisely with a budget always, spend within your means. Just to make sure you are ready to handle any kind of economic crisis that going to happen to you.
Takeaways – 5 Things To Learn This Economic Crisis
- A significant decline in economic activity spread across the economy is a sign of economic crisis
- There are signs and history crisis we can reference from
- Be prepared for the worse scenarios, and get ready to embrace the unexpected crisis in life to come
- Use Buffet’s way in personal finance and investment to dance in the rain during all kinds of crisis
- Not to spend more than you have
How much more do you need to prep for the crisis? Let’s have that discussed below, I would love to know more ideas of how to secure our money when things happen!