The Real Cause of Recession

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The Real Cause of Recession

Another Update: People are asking me what they can do in the recession (if anything). I should mention this post about how to make extra money in a recession I read the other day. Yes, it is legit.

2009 Update: I wrote this post over a year ago. Since then the economy has tanked and people want to know if what I say here still stands. In fact, it is now more than ever important.

One of the major freezes on the economy is low consumer confidence. This is something that a stimulus package can’t save us from. As long as the average American wants to save and not spend businesses can’t make money.

The media is helping to perpetuate this crisis and every time they say “financial crisis” a business somewhere closes its doors.

As someone who has a significant interest in both economics and business, I’d like to share with you my thoughts on the upcoming recession, as well as some business tips you might find helpful.

Cause of Recession

I believe there are very few legitimate reasons for a recession. For sure, all the big spending on easy credit done during the good years take a toll on spending, which of course reduces how much cash is going around.

But a recession is really a social epidemic–a state of mind held by the population at large and certainly propagated by the media. Sure, it sounds insane, but bare with me. After the economy booms for around six years, economists love to start predicting the fall of the marketing, citing the long accepted market cycle diagram. Although the first few rounds of speculation get ignored, the extended period of good times start to make people wonder when it’s all going to crash. Being accustomed to this cycle (6 years of good, 2 of bad) is really a self-fulfilling perspective. As soon as recession rumors begin, the media spreads it like wildfire.

Once news starts spreading, the vicious circle starts: investors as well as consumers start thinking twice about spending big, which in turn shows as a minor decrease in spending; as soon as the decrease is released, it turns into huge news that the initial recession speculations were correct. Enter big expenditure cutbucks across the country, which ultimately causes the recession.

The cycle I’ve described is analogous to Oprah Winfrey going on her show and saying “I have a feeling Book X is going to get a million more sales next week, because it’s a great book”. The pattern of causality is more obvious here: Oprah’s speculation was the cause of the increase. In effect, the media confirms any rumor of a recession and is the cause of the subsequent decrease in spending.

How does a recession end?

The same way it starts. As investors become convinced that the recession is ending, they start to become more liberal in investment (if prices have hit rock bottom, it’s a good time to buy right?). Again, the feeling that the recession should be ending soon is what causes the speculation that it is ending. Soon as the news gets on it, the country starts getting out their wallets and going nuts.

In fact, the huge boom we see after a recession is thanks to the enormous capital war chests corporations get from investors who’ve been patiently waiting to invest.

Invest during a recession - make huge profit

OK, so if I think a recession is purely psychological, am I going to cut down spending and start penny counting? You bet your ass. Even though I think the recession is caused by people thinking this way, I’m not planning to turn the economic condition of the country around singlehandedly. Still, knowing how people think during a recession works to my advantage.

I’m psyched for this recession. Why you ask? So I can finally out earn my dad. My dad is an old school kinda guy. He laughs at my internet businesses. My sites bring in a few thousand a year, not a bad hobby the way I see it. Still, my dad’s hobby is real estate and he makes a few hundred thousand a year.

A lot of people get turned off by a bad experience with real estate. Real estate works the same as stocks–buy low, sell high or sit on your ass and collect dividends. The key here is timing. So what can you, recession savvy webmasters do? Start looking into investments. Recessions are great times to start buying up properties dirt cheap. And I mean dirt. In fact, if you’re really looking to stinge out, go foreclosure shopping (believe me, there are going to be no shortage of these).

The same principle applies to websites. If anyone is willing to sell his/her site, it’s going to be when the revenue pool starts drying up. Don’t think the internet is immune to recessions; there’s still a good chance we’ll see lagging revenue in the years to come. If you were looking to scoop a site, or even better, a domain name up your chance is coming.

Investing heavy vs Investing light

This is one of those times I wish I started this blog a few years ago. My thinking has always been to invest smart in the good times, then cash out heading into the slump. How am I going to leap frog my dad? Slowly picking up all the properties I can afford to carry. I have a moderate amount of cash behind me, so I can start buying in a few months, before the general public starts to spend.

The only problem here is that anything you acquire now, you’ll need to be able to sustain loses on for a year or two. If you’ve set aside enough money for recession spending, then you can engage in heavy investment. If you’re not planning on cracking your piggy bank open, focus your attention on one or two assets. A mix of online and offline investments is best. A word to the wise: incurring loses for more than a year is harder than it sounds. As soon as the value of your property jumps, you’ll be tempted to sell. It’s comparable to a family friend who sold a downtown surburb building for 5.5 million and watched it be resold two years later for 9. On the other hand, an uncle of mine held onto several million dollars worth of Bre-X shares instead of selling and watched his gold money turn to nothing.

For the more risk adverse, try the bond market during a recession. The interest is decent, but protecting your money against deflation is the real gem here.

Get your portfolio together and join me in counting down the days to the full blown recession.

  1. I cannot agree with you more…I’m so glad someone else thinks the same way. Its a stupid catch22 cycle, the people think what the Media tells them to think. People get scared, stop spending, the problem escalates.

    If the media didn’t report on an “economic crisis” there wouldn’t be one.

    Comment by Lachlan — October 19, 2008 @ 4:23 pm
  2. hmmm… so that’s why when government finds aliens and crazy stuff that they hide it from media… coz media causes being to panic and go into mass hysteria!!! Oh the stupid media… when will they ever learn! and woe is the gullible public for believing!

    Comment by Will — November 20, 2008 @ 5:48 am
  3. Excellent analysis and tips. Maybe the recession also serves as good reminder for people to save money instead of buying so much stuff that they don’t really need. :)

    Comment by Kenibatz — December 1, 2008 @ 9:57 pm
  4. I agree with you

    I am doing a speech about how to stop Global Warming and recession is a big part of it, this website has given me a lot of info

    Comment by urminder daffu — February 8, 2009 @ 9:45 pm
  5. Do you folks really believe it’s just the media? I don’t disagree with everything said here but how are people supposed to spend when their homes are in jeopardy and people are losing their jobs at an unprecedented rate? What is happening here is different than another 6-year cycle. And there is no end in sight. Not everyone is hurting, but there are more people in a crunch now than since the 1930’s. You can’t invest your $ or spend it if you’re having trouble making ends meet. The author isn’t in the same situation as people really feeling the crunch and to blame the press is pretty short sighted.

    Comment by lilly — March 2, 2009 @ 11:44 am
  6. Oh the media and the majority of UK citizens havent got a clue what is really going on and how to deal with it..
    It’s a shame we will have to end up with the Conservative party because of this..

    Comment by Fabian Nunes — March 2, 2009 @ 2:53 pm
  7. @ Lilly

    As I said before it is NOT just the media. My article was just showing the part the media plays and the psychological effects of a recession.

    Of course there are other major players but I was just illuminating a factor that often goes unnoticed.

    Comment by MJ — March 2, 2009 @ 4:03 pm
  8. In Australia, I’ve heard the same sentiments expressed from a number of sources, including the Federal government. I concur with everything you say and have thought the same thing for many months now.

    Before there was a downturn in Australia, I was wishing the media would just shut up, otherwise they’ll cause a recession. Now ofcourse they have.

    Some months ago, some quarters of the media here, were even bleating that they were just reporting the facts. The reality was they were reporting facts, but prophesizing a glooming future. This is not reporting the facts. They were putting their own negative spin on everything.

    @Lilly - Sure there’s a recession now and some people are hurting, but its how we got in this position this blog is about.

    Comment by Tim — March 3, 2009 @ 2:13 am
  9. i think government policies are also a very big cause ogf this recession and a poor person is vry much effected by this recession

    Comment by pranay — May 25, 2009 @ 12:19 am
  10. I think the study of economics will in the end turn out to be a purely psychological discipline.

    Probably rendered to a minor sub study of Behaviors in the group of emotions cobbled under a heading like “Confidence” and including specific emotions like Greed & fear.

    Even the most basic of Economic principles eg price level inverse to supply level is really just an example of an emotional / behavioral outcome that replicates itself in a number of other non economic human activity.

    The point being that a more concerted effort to take economics less seriously as its own separate & increasingly mystifying science and to see constructs like supply scarcity as just events that will trigger an inevitable and predictable emotional consequence leading to outcomes of price level or value.

    To see bubbles as a mass psychological greed hysteria and/or recession as a mass loss of confidence leading to Fear then will we be able to better see the warning signs, understand the underlying causes and know the likely reactions and apply suitable [psychological] remedies.

    The natural human self interest impulse unchecked is greed.

    It was allowed to run unchecked by an equal and opposite fear and that caused us to go over the top with respect to having things.

    Having homes we really couldn’t afford to pay off or having a value that wasn’t really there in the derivatives of derivatives that were created to satisfy the self interest to sell something to have even more.

    Fraud, a lack of focus by legislature &/or maybe just a preoccupation with one of our other psychological indulgences helped keep the fear watchdog busy.

    Were the yanks, whose sub prime mortgages are identified as the epicenter of the quake that shook the world, just too per occupied with global power or revenge to see & check the cancer of self interest eating away at their economy ?

    Simply self interest, a most human drive, (on mass) was allowed out of the cage. As parents if we noticed it in our children we would know the remedy.

    It is a psychological problem we all instinctively understand.

    With GM about to hit the wall, which it should have done a while ago when the rest of the bad news was rolling out or should not be doing now because it will only dampen the momentum of a return of confidence, we are getting to an end point of the overwhelming fear.

    This recession is all but over.

    New shocks will be increasing absorbed by a populace now immune to the novelty of fearful news.

    a new focus on checking self interest is all around and confidence will restore and prosperity will rise again for a while.

    The inevitable cycle will follow not because there is some complicated or mystifying mathematical economic calculus at work but because, like our mums know, some of us will push the envelope of self interest again and test the boundary and if no one stops us, if there is nothing to cause us a fear to stop we will go for it.

    We will enlist others, who we need to assist us promulgate our own self interest and push some more and on…… until a bubble explodes.

    The shock waves of which will stun, cause fear and recession is again inevitable.

    Its a psychological certainty.

    Comment by rob — May 28, 2009 @ 6:33 am
  11. I’m going out on a limb and take a different perspective. Where does the media get their info from, surely they don’t suck this info from their thumbs. Firstly, you have to understand how the world and governments work. The real people in control is not a government, but the major banks. They control the flow of money. To then it’s all a game. Recessions does not exist. The thought is created by these bankers, filtered down to their monkeys(governments) and then filtered down to the media who is just looking for a big story.
    The media is just acting like the media.
    The real story here is, we as slaves are getting punnished for not borrowing enough and not spending enough. This cycle will never end. Unless the system collapses, and it will. It’s unavoidable. “They” will fall to their knees. And then slavery will end…
    I know I’m a bit extreme, but that’s how it is…

    Comment by KickerK — June 3, 2009 @ 4:54 am

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