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Why You Shouldnt be Afraid of the Current Economic Recession

Although the word recession is being used more now than ever, very few people are familiar with its technical definition.....

Although the word recession is being used more now than ever, very few people are familiar with its technical definition.  It occurs when there is a meaningful decline in the economy which usually lasts for several months. This is visible in terms of consumer spending, employment, industrial production, real income and wholesale trade. A technical indicator of this is 2 consecutive quarters of negative growth which is measured by the country's GDP or gross domestic product. This is the technical definition of an economic recession.

Experts say that an economic recession is normal because it is part of the ongoing business cycle and that things usually improve within 16 to 18 months.

During the business cycle, there is a period of recovery, expansion, slowdown and then recession. During recovery, the GDP of a country starts to move up. When the GDP grows robustly, this is the time that the economy is considered to be expanding. When consumers are not purchasing goods and services at their normal rate of purchase, we are said to be in a slowdown. Because there is weaker demand,the slowdown eventually morphs into a recession.

The last economic recession occurred in 2000 and 2001, and featured three quarters of negative growth followed by three positive quarters, and then five more quarters of sub par growth. Experts say that the same trend is likely to be seen again right now.

One solution that the government usually turns to is lower interest rates to help stimulate the economy. Just last year, the Federal government slashed interest rates three times towards the end of the third and fourth quarter year so that overnight loans between banks could be borrowed at 4.25% which happens to be its lowest in the past 2 years.  As this article is being written, many are anticipating that interest rates in the short-term could be brought down as low as 0%

What makes the economic recession different from what occurred after the Second World War is that this one is caused by falling home values and a crisis of confidence among fixed income investors.  So when someone tries to get an economist to provide a "recession definition", it is more difficult than you may think. Events differ from period to period and from economic cycle to economic cycle.  This additional complexities are also what make a quick resolution more difficult, as we cannot stricltly rely upon the tactic of the past to guide us through the crisis.

Despite the fact that the country has endured this cycle time and again, for over 50 years, there is still no way to predict when it will happen, or exactly how long it will last. Some use the stock market as an indicator. Others use the inverted yield curve which uses yields on a 10 year and three month Treasury securities and the Fed's overnight fund's rate. The unemployment rate is also another factor which makes up the index of leading indicators.

There are people in the Bush administration who did not want to call it an economic recession because that word will inevitably make people panic, but there are others who are brave enough to admit that it is here, and that our job now is to contend with it. Since it is going to be some time before the economy recovers again, everyone is well advised to stay calm, save more, if possible, and look for long term investments if you are financially able to, as the rebound from a recession typically offers outstanding returns to investors.

Apart from the war in Iraq, the economy is going to be one of the most critical issues that President-Elect Obama will have to address, and he has already started to lay the groundwork for that.  He and his economic team will have to find a way to reduce the unemployment rate, help people save their homes from foreclosure, and address a lot of other financial issues that affect the average American household.

An economic recession lasts months at a time. If it should continue for a much longer period, then this is called a depression, which is something that the entire world, and not only the United States, experienced at the end of the First World War. This lasted for up to 4 years, that many hope will never happen again. That would be our short term definition of an economic windfall.

In summary, you should realize that an economic recession is not necessarily an economic collapse which we will never recover from.  It is part of normal economic cycles which have occurred in the past, and will occur in the future.  In fact, many people take advantage of certain conditions which exist during recession to excel financially in a variety of ways.

You can learn everything that you need to know to survive and thrive during an economic recession at our site Economic Recession.

While you are thereFree Web Content, make sure to pick up a copy of our newest release...

How To Profit From an Economic Recession

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K Harrigan

Economic and Personal Finance Advice both provide free, relevant, useful advice to help the average citizen navigate through both good and bad economic times.

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