17 March 2008 3 Comments Print This Post  Email This Post

During the past few months, things have gone from bad to worse. The S&P 500 is down about 12% for the year. Job losses are on an upward trend. There are tons of foreclosures across the nation. Far too many people are realizing they are in an upside down situation where they owe more on their house than it’s worth. According to a report by CNN, the average American owes $10,000 in credit card debt annually. Food and gas prices are increasing steadily as the US dollar decreases in value. For the federal reserve, this is their worst nightmare. How does the average American survive if he or she has $10,000 in credit card debt, can no longer borrow against their properties as the price of basic necessities rise, and job loss is on the horizon? It’s a tough situation that none of us want to face, but in the long run, recession may just be good for us.

Economy

For the economy, a recession is a normal part of the business cycle. This correction process is supposed to “cut out the fat”, thus eliminating the weaker companies while the others come out much stronger. Not everyone agrees, but I think there is good logic in that. It keeps companies on their toes sort of speak. We can only discover our best strengths in times of adversity. Tough times require harder work, and more innovation from companies who may have been enjoying an easy ride. Think about the trade deficit with China. We want their stuff but they don’t want ours. Times like these puts even more pressure on companies to fix that problem. The US economy is like a great boxer in his prime. It’s been number one for a long time, but it starts to slip if it gets overconfident. A challenging opponent every now and then polishes the skills of great companies so they come out even stronger than before.

Society

For society in the United States, I truly believe that a recession would do us good in the long run. I think we’ve become a society thats become far too consumer driven. 20 years go you couldn’t walk into a Mercedes dealership and easily walk out with a luxury car as long as you had decent credit and any job under your belt. These days far too many of us are spending money we have yet to earn, putting everything on credit. Big purchases are now a question of whether or not one can afford the monthly payments rather than whether or not one can afford the object itself. After reading an article about kids becoming more materialistic in the UK, I’ve noticed that we’re much worse. If I see another 13 year old with a $500 Coach bag I’ll go crazy. Recession will remind everyone that its not always a smooth ride. We’ll learn to be more careful with our money, save for retirement, and better distinguish between want and need.

Personal

On a personal level, recession sharpens our money skills and reminds us of the important things. If I lost a good job while carrying a $5000 credit card balance and a mortgage on an overvalued home, I’d be in a heap of trouble. However, after some drastic measures and clever thinking, I’d likely survive and come out a much smarter person. There are more personal benefits as well. I came across an older article about how recessions are good for your health. Its true. We’ll likely eat out less during tough times and thats good for your health and your wealth. You may even make a habit of it.

All in all, I believe recessions are normal and sometimes they must happen. I don’t mind them because I can use this opportunity to invest in lower priced assets, sharpen my frugal living skills, and become a sharper businessman. Recessions are part of growing and getting stronger. They shield us from overconfidence. So if we’re in for gloomy times as Steve at brip blap sees it, be prepared to learn some very valuable life lessons and pass them on to your kids so they are prepared for tough times.