What's a Recession

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An economy is working when spending creates paychecks. That happens as long as everyone feels good about getting money. See the left picture at the bottom. When that feeling starts going away, spending starts going away. The more the feeling goes away, the more the spending goes away.

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The more spending goes away, the more the economy shrinks. If it shrinks long enough, if you slow your spending long enough, government will call it a recession. That's uncomfortable, but not bad. If you seriously stop your spending, government will call it a depression. That's bad. See the right picture at the bottom.

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Government starts the clock on a recession when the Gross Domestic Product (GDP) shrinks significantly for a few months. See the National Bureau of Economic Research description of a recession. This isn't bad if the shrinkage is small. But the bigger the shrinkage, the worse the problem, the harder the fix.

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A normal recession is actually a good thing. It's "taking out the trash." It's causing the businesses that really aren't of value to us, the consumer, to go out-of-business. It's making room in the economy for businesses that are of greater value to us.

 

It's uncomfortable for most. It's painful for some. It's best for everyone. It results in a stronger, more survivable economy. The "weeds" will be pulled, making room for the "grass" to grow.

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Don't panic over a recession. It's a normal thing. It's a healthy thing. It's getting a cold, getting over it, and ending up with a better immune system.

 

Just don't stop your spending badly enough to cause a depression. That's not a cold. That's pneumonia in the ICU.

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It's your spending that will decide which happens. Note, I said your spending, not your saving. Your spending is what you do to get out of a recession. Saving is what you do before a recession happens in order to be able to get out of it. If you increase your saving in a recession, you'll help get to a depression. To increase saving, you have to decrease spending.

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Saving is for when the economy is good. Spending is for when it's bad. It may sound backwards, but it's not. You use the good times to help make it through the bad times.

 

Saving and spending money has the same purpose as storing and eating food. To survive the bad times, be wise in the good times.