by elmads

Introduction

A recession is defined as two consecutive quarters of negative economic growth.

A lot of things can cause this, such as supply and demand shocks like during the 1970s (oil crisis) and the 2020 Pandemic (global economic shutdown), financial overleverage and panics (the US panic of 1907 and the 2008 global financial crisis), wars (world wars 1 and 2), economic euphoria (Dot-com bubble of 2001 and the tulip mania of 1635), and the mix of all of these things.

Recessions happen, and it is a normal circumstance in an economy. Why? Because an economy consists of human beings. Individuals with emotions make decisions based on their own wants and needs, as well as their own interests. Decisions that, if made collectively by the people, would have a significant impact on the overall economy.

Money allocation, credit, behaviour, emotion, personal goals, family aspirations, corporate aims, government decisions, and a lot more. When we consider all of these factors, we can see that an economy and its people rarely remain in constant economic equilibrium. Meaning, an economy will always go to both ends of the spectrum: exuberance and depression, extreme greed and fear.

It rarely stays longer in the middle. As a result, the historical average of a recession every 7-10 years—primarily in developed countries—. 

It’s Not A Matter Of If We Will Have A Recession, It Is A Matter Of When We Will Have A Recession

Though recessions are said to be a normal part of the economy, predicting when they will occur and what will cause such an economic disaster is a difficult and impossible task.

Even professionals, educated individuals, or persons with PhDs cannot accurately predict the exact time when such an event will happen—it’s like predicting the weather. Experts can only collect data, extrapolate it, and make assumptions based on the information they have. The next steps and actions they then take are mostly based on the trends, their knowledge, and their skills.

This is why indicators have long been used by economists to help them make economic forecasts; however, even with such advanced knowledge and skills, most economists consistently underperform. This just shows us that forecasting what will happen in an economy is impossible because they have to take into account the cause and effect of everyone’s decisions—individuals, corporations, and governments.

“Forecasts create the mirage that the future is knowable”

– Peter Bernstein

If you want to learn more about how difficult it is to make accurate economic forecasts, I highly recommend reading Howard Marks’ September 2022 memo titled “The Illusion of Knowledge.” – https://www.oaktreecapital.com/insights/memo/the-illusion-of-knowledge

How Do Recessions Impact Individual Lives?

What are actually the things that could impact our lives when a recession does happen?

1.) Job Loss

in a recessionary period, the productivity (GDP) of the country shrinks. The velocity of money exchanging hands decreases, attributable to less spending, less hiring of companies, less demand for products and services, and also less government spending. The causes for a recession to happen are different, but the general effect usually rhymes with past economic contractions.

When a corporation sees their profit fall, they will most likely be focused on capital efficiency. They would take a defensive financial stance, where saving more money is important for the survival of the company.

They will reduce the costs of their business operations. The easiest and fastest way for them to do this is by laying off their employees.

They could sell some of their assets first, such as their property, plant, and equipment, but this takes time (finding a potential buyer). It’s easier to lay off employees than do the latter, which in turn would help the company to pay less on employee salary costs.

The unemployment rate will increase. Not to mention that job hiring demand can also decrease in a recessionary period due to the cost-saving priorities of companies.

2.) The Cost of Living May Rise in an Inflationary Environment or Fall in a Deflationary Environment

Regarding creeping inflation, the cost of living always increases faster than our salaries, most noticeably in an inflationary crisis period. This itself is already a major problem for us.

In contrast, don’t wish for the latter—deflation. Though it is wonderful to have falling prices of goods and services, the long-term effect it brings is disastrous and is even worse than increasing inflation. The central bank’s monetary policy and the government’s fiscal policy can more easily control rising inflation than falling inflation. It’s literally a depressive spiral that can cause irreversible ramifications for an economy.

Here’s a simplified cycle of extreme deflation.

• It is a cycle in which if the price of goods and services falls,
• Then revenue and income of companies will decline as well,
• This will force them to allocate capital efficiently (fewer investments for growth, more capital savings for survival—the fastest way to save money is to lay off employees).
• Increasing unemployment means there is also an increasing number of individuals who don’t have any income flow.
• Less income would lead to less spending on goods and services.
• Less spending by the people will lead to further declines in revenues and income for companies.
• More lay-offs could happen
• More people will lose their jobs (companies will freeze hiring, and corporate bankruptcy will increase).
• As an economy’s spending falls, the spiral continues.
• Prices continue to fall, unemployment rises, and the economy remains depressed.
• Money flow stagnates. Individuals with disposable income are more likely to be sceptical of local businesses and the economy. This could push them to pull out their investments locally and place them overseas.
• Foreign investors will avoid investing in depressed economies because it makes no sense to invest in a country that is stagnant or, worse, declining.
• People’s dissatisfaction with corporations and governments would continue to grow.

The pathways of inflation and deflation rhyme at the start, but there is a certain point where they fork from one another. The latter is usually the scariest and most difficult part to control (as was the case with the 1929 Great Depression), and central banks and governments rarely find their footing again to control that downward spiral.

This is one of the many reasons why governments and central banks now intervene immediately (often late) with fiscal and monetary policies when they detect signs of higher and faster-than-usual inflation or deflation. The trade-off is controlled and better long-term economic activity in exchange for a short-term recession and pain.

That being said, not all causes of a recession are the same.

Black swan events or greed, anyone?

3.) Some Industries Will Suffer

Either because they contributed to the economic downturn or as a result of it. If your industry got significantly hit and would take years to recover, then your source of income would also be dragged down with it. Possible lower earning power than what you previously had pre-recession. For example, the airline industry has not yet fully recovered its pre-pandemic earnings level since the covid19 pandemic.

It is projected that the airline industry will be able to completely reach its pre-pandemic levels in 2024, as per S&P Global Market Intelligence (https://www.spglobal.com/marketintelligence/en/news-insights/blog/industries-most-and-least-impacted-by-covid-19-from-a-probability-of-default-perspective-january-2022-update).

That’s 4-5 years of stagnation for the said industry, only if they will actually recover in 2024. From the global lockdowns in 2020 (less demand for flights) to the oil crisis in 2022 (increased operating costs due to elevated oil prices), it’s unfortunate and not a good start of the decade for the global airline industry.

How To Survive a Recession?

Being aware that a recession will eventually happen in the future, if not soon, is a first good step. This helps us accept the natural order of the world, the good and bad, which maintains the balance. This would give us the insight to prepare for a crisis before hand in order to financially survive it when the time comes.

Recognising that a recession is inevitable, if not imminent, is a good first step. This helps us accept the natural order of the world, the good and the bad, which maintains the balance. This would give us the insight to prepare for a crisis before hand in order to financially survive it when the time comes.

1.) Improve and Expand Your Knowledge and Skills

For some of us, having a good career with a stable salary or a business with a profitable cash flow can lead to complacency. We tend to think that nothing can go wrong, and that we will always be financially stable where we are now. This can be true for some, but for the most of us, it isn’t. As I’ve explained in the section “How do recessions impact individual lives?” of this article, the economic crisis trickles down into almost every corner of the economy. Sectors and industries will be hit, governments will also feel the burden, and individuals will be hit the hardest. Mass layoffs tend to happen.

If you happen to be one of those people, where will you then be able to find a job that could provide food on the table for your family? Sure, you can apply at other companies within your industry, but what if most companies in your industry freeze their hiring? Then, most probably, you’ll jump into other industries.

This is where having other skills outside your main career would prove very useful for you to have, like knowing how to code, being able to teach different languages, copywriting, buying and selling products that have demand even during economic downturns, writing, and others more.

Thanks to our technological advancements, having additional knowledge and skills can be easily used to achieve additional cash flow. Enter freelancing, which has established itself as a well-known way to supplement one’s income. Even if there is no economic downturn, there are individuals who take advantage of its benefits by doing side gigs on top of their main careers.

You should continue to find where opportunities lie, and take a job or side gigs from it.

In the previous COVID-19 pandemic induced recession, work from home, online jobs, and freelancing suddenly gained traction. If a recession occurs next year, what and where do you believe the next opportunities will be? Continue to read and learn (upskill) in order to gain the vision and skills to seize such opportunities. 

2.) Spend Less Than What You Make and Save Money

(Emergency fund, Rainy day fund and Life/Medical Insurance)

This is a no-brainer. The best time to do this is when the economy is in an expansionary phase. Why? This is because, by the time an economic crisis occurs, it is usually too late and too difficult to save. Corporations, and governments tend to try to allocate capital efficiently, and by doing so, unemployment rates tend to increase (layoffs happen). Cash flow is cut off, while those who were not laid off may still see a reduction or removal of some of their employment benefits.

When good times are rolling, you should be doing the opposite of what most people do, which is mindless spending. That is, you should save more and look for ways to make more money during good times. That’s a contrarian point of view.

3.) Cut Costs

Always be prudent and consistent in saving money; you might need to trim off all of your discretionary spending and just focus on your utter basic necessities of life.

You might need to unsubscribe from your online subscriptions (Disney, Netflix, NBA, Amazon Prime, and others) and just leave one.

Instead of paying for a gym membership, you could switch to body weight training (callisthenics), running, cycling, and other activities that do not require a monthly fee.

Mindful grocery spending means removing those extra snacks or desserts from your list of groceries (this is beneficial for your health and fitness as well) and adhering to your grocery list (not buying the things that are not on the list is key).

Reduce your electricity usage by simply turning off the lights when not needed, as well as other appliances at home (like the air conditioning unit and television).

You could consider taking public transportation rather than your car to further cut fuel costs.

Instead of eating out once a week, try once every other week or once a month. Cook at home instead of ordering takeout.

There are a lot of ways to cut costs, but the only problem with this is the psychological and emotional damage it can bring to a person or persons, which varies individually. Some can handle different levels of frugality, while others just find it extremely hard to do so.

Delay all of your wants if you’re in a tight monetary situation. It might take years, and I know it’ll be hard, but we’ll learn a lot of things from it. So, in the next recession, we’ll eventually be prepared for it.

In a business and company point of view, cutting costs is normal; they prefer to delay their short-term investments and growth prospects than to lose the whole business at all. It is taking 3 steps backward in order to be able to take 10 steps forward.

4.) Renegotiate Your Debts / Debt Settlement

If you have debts, whether you personally borrowed them from someone or from lending institutions like banks, try to renegotiate them with them.

Let’s be honest and realistic here. There are a large number of individuals globally who are in debt and learning how to manage it would not just be helpful to achieve a debt free life but would also be financially liberating. Certainly, no one wants to reach more than 60-years-old and still have debts on their name. Not to mention that economic recessions happen roughly every decade. So, how could a person with large amounts of debt survive such an event in his/her financial life? On top of that, money is also hard to come by during recessions.

Enter debt settlement, also known as debt adjustment. You negotiate directly with your creditors in an effort to settle your debt for less than what you originally owe.

There are companies you can employ for this, where they will act as a middleman between you and your creditor. They will be the one contacting and arranging the settlement, but then they will charge you for their services. Again, you’re trying to save as much money as you can to survive a recession. Therefore, you should be doing this yourself.

Firstly, contact your credit lenders either by phone, email, and postal mail. Constantly try to negotiate a debt settlement if possible. This takes time and a lot of effort. Unfortunately, this does not ensure that your lender will agree, but it is worth a shot.

At the end of the day, trying to do something to make your life easier in the long run is better than not doing anything at all.

Remember, if you don’t ask, the answer is always no.

If you’ve borrowed money from a person, please contact that person whom you owe the money. If you cannot pay that person immediately, then update him/her why you won’t be able to pay him/her in time as promised.

Remember, you have a financial commitment to the persons you owe money, thus as a financially responsible individual you have the obligation to update them and keep in touch with them relating to your owed money. If needed be, renegotiate your debt with them in a respectful and sensible manner.

It is EXTREMELY RARE to find borrowers/lendees who are financially responsible, accountable, and with integrity. If you owe money to someone now, I do hope that you are one of these financially responsible, accountable and with integrity individuals.

5.) Liquidate Your Investments, If You Have One (THE LAST RESORT)

Do this ONLY as a last resort. Why? because your investments shouldn’t be touched until you reach the main purpose for which you invested the money in the first place. This is also the reason why securing our financial core (Cash flow, Debt Management, Emergency Fund, Rainy-Day fund, Life & Medical Insurance) is very important before investing our hard-earned money.

There is no point in investing our money before we have a stable financial foundation. Let me explain: when a recession occurs, most assets worldwide decline due to economic contractions, corporate earnings fall, demand and supply imbalances occur, economic cashflow reallocates, investors become wary and place significant amounts of money on the sidelines, and people try to save more.

With this in mind, if an emergency happens, you’ll need liquid money. There are two ways for you to get that money as soon as possible: either go into debt or liquidate your investments. If you do the latter during an economic downturn, your initial capital investment may be less than what it was. Like, for example, your initial $10,000 investment a year ago could now just be worth $8,000; you surely wouldn’t want to realise a loss on your investments, but because you don’t have any emergency funds and you need money ASAP, you don’t have any choice but to cash in those losses.

I understand your point, Evan, but why did you include it and even title it “Liquidate Your Investments”? if you don’t suggest people do it? it’s counterintuitive! Yes, you are right. Nonetheless, my main point here is that if push comes to shove and you don’t have any liquid money but have investments that can be liquidated immediately, then go get it. You have to survive the recession no matter what. Bounce back from this pain, feel it, learn from it, and become a better person tomorrow than you are today.

To Sum It Up

Recessions are normal events, but this doesn’t mean you shouldn’t prepare for them.

Life is too hard to not learn from it and take action to get ahead of it. We get better from every hardship, we become knowledgeable from every failure, and we emerge victorious in every difficulty that we overcome. Feel the pain now, but never lose hope that our lives will be better and brighter in the long run.

• Improve and Expand Your Knowledge and Skills
• Spend Less Than What You Make and Save Money 
• Cut Costs
• Renegotiate Your Debts / Debt Settlement. 
• Liquidate Your Investments, If You Have One (THE LAST RESORT)

“We must practice temperance now, in times of plenty, because none of us know what the future holds- only that plenty never lasts.”

– Ryan Holiday

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.