What is a Recession?
Going by a technical definition. Two consecutive quarters of negative GDP growth indicates that the economy is in a recession.
GDP or the Gross Domestic Product is a measure of all the goods and services produced by a country. The linked wiki article has all the technical details. In simpler terms, think of GDP as the value created by a country, measured in Dollars.
The recession that I am referring to here is the US recession. Today, 28th July 2022, the Bureau of Economic Analysis released the GDP numbers. The US GDP reduced by 1.6% in the first quarter and 0.9% in the second quarter. So, technically 2 consecutive quarters of negative GDP.
Politics of Recession
It is puzzling to note that after the release of the negative GDP numbers the market actually went higher.
There is no substantial news or discussions about recession on main-stream media. The reason is that no government wants to be associated with a recession. Even if their policies did not cause it.
In this era of low trust and fake news, there are efforts being made to change the definition of a recession too!
Real Impacts
Even if we don’t call a hurricane a hurricane it will do its job. Similarly, a recession will do what it has to do regardless of us debating on the right definitions.
So, what happens in a recession?
Recession is a feedback loop, so it is hard to point at a single reason that starts the loop. Here is a simple example of such a loop. In reality the relationships are quite complex.
Let’s start with demand. There is lower demand for goods and services which leads to lesser sales and profits for companies. Lower profits means less money to sustain the workforce. So, more layoffs. People who are laid-off or the ones who are afraid of getting laid-off tighten the belt and cut-down spending. When people cut down spending there is less demand.
Recession and FIRE
The 2000s Dot-com bubble recession, the 2008-09 recession and now the 2022 recession, all have one thing in common. When you are living through it, there is a feeling that the world is coming to an end. There is hopelessness and despair all around and more than anything there is fear in the air.
But, after the economy comes out of recession it seems like a small rough patch but only in hindsight.
Recessions can be distracting when you are pursuing FIRE. This is the time to hunker-down and focus on the mindset. If you are reading this, then it means you are at some stage of pursuing FIRE. This puts you in a way better position than people who have an expensive lifestyle and low savings.
More on the mindset in the next post.