How to survive the recession

“Money is better than poverty, if only for financial reasons.” (Woody Allen)

By now it should be clear to all but the craziest of optimists that we are in a recession, at least in US. What is not clear, however, is the severity of this recession and if this will turn into a depression. A technical recession is defined as the economic decline in two or more consecutive quarters. This means that the real economy instead of growing, contracts. This economic decline may involve a general decline in employment, investment and corporate profits. Recessions can be accompanies by inflation or deflation.

	How to survive the recession
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Sometimes when people are uncertain about their economic security, they tend to save, or at least moderate their spending. When the consumers, that are you and I, refuse to spend money, demand falls below the supply putting a downward pressure on the prices. This is called deflation. As an example one can think of housing prices. Today the demand for housing has suddenly dried-up, putting sever pressure on supply side (sellers) resulting in a marked reduction in prices (US, UK, Norway, Sweden, Etc).

Now if millions of people lose their jobs or think that they are going to lose their jobs and reduce their spending, the resulting decline in prices becomes circular. This means that as prices fall, so do the corporate profits which result in laying-off more people which results in more unemployment and insecurity which reduces consumer spending. This downward spiral if goes unchecked results in a depression. The depression of 1920s was deflationary.

One of the most recent deflationary recessions occurred in Japan. Japan's recession, which started in early 1990s (US and others also experienced the same recession), continued into the 2000s, with deflation being the main problem. Once deflation got hold of Japan it didn’t let go until 2005. By 2005 the yen had 103% of its 2000 buying power. Funny thing about borrowing money in deflationary period is that it doesn’t pay to borrow money, even at 2 percent interest rate; since the asset that one is buying with the borrowed money keeps depreciating in real value.

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