Recessions
What are they and why do they matter?
Time to get into recessions! (not the receding hairline kind, more the declining GDP kind) A recession is basically a period when the economy takes a nosedive. This means that people are losing their jobs, businesses are shutting down, and the stock market is trending downwards.
Recessions can have a huge impact on our lives. If we're not prepared, we can end up struggling to make ends meet, or worse, losing everything we've worked hard for. It's like playing a game of Jenga and not having a solid foundation, you might end up losing everything! But don’t worry, the government has learned from the previous recession and has many policies in place to prevent recessions in the future, which we will talk about later
Past U.S. Recessions
Source: NBER
What We’ve Learned
The most recent recession happened in 2020! The COVID-19 pandemic caused widespread lockdowns, businesses closed, and people lost their jobs. But through this, we learned some valuable lessons about managing our money.
One thing we learned was the importance of having an emergency fund. Just like how your parents tell you to save your allowance, having an emergency fund helps you be prepared for the unexpected. You never know when you might need it, but when you do, you'll be glad you have it.
We also learned the importance of diversifying our investments. During this recession, there was a massive drop in many industries, but tech industries like Amazon thrived. Investing in only one type of stock or asset can be risky, but diversifying your investments helps you spread the risk and increase your chances of success.
And let's not forget about our spending habits. By cutting back on unnecessary expenses, we can save more money and invest it in things that matter to us.
Recessions vs. Depressions
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It's important to clarify that recession shouldn't be confused with depressions. While a recession is a period of economic decline that typically lasts for several months or even years, a depression is a severe and prolonged economic downturn that can last for a decade or more.
A depression is characterized by high unemployment rates, falling prices, and a decrease in consumer spending. It can have a devastating impact on people's lives, leading to poverty, hunger, and homelessness.
While a recession can lead to a depression if it gets bad, it's important to remember that we have measures in place to prevent this from happening. The government can implement fiscal and monetary policies to stimulate the economy, such as increasing the money supply or government spending.
In conclusion, while recessions can be scary, they also provide us with an opportunity to reflect on our financial habits and make positive changes. By having an emergency fund, diversifying our investments, and practicing good spending habits, we can navigate through recessions. Recessions are an inherent part of the economy’s cycle, and with proper intervention, they don’t have to turn into depressions.
