Personal Finance Blog by Debit versus Credit

Breaking News: Recession Since Dec 2007

December 2, 2008 | Filed in: Miscellaneous | 1 comment

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It’s a shame that sarcasm is so difficult to convey over the web.

Most of you have likely heard by now that it’s official: the U.S. has been in a recession since last December. My question now is, does this surprise anyone out there? I’ll admit that I’m actually a little surprised it’s already been a year. It does make sense though, especially when looking at consumer spending last Holiday season. It didn’t increase by much.

Looking at a history of past recessions (since WW2) it’s interesting to note that the majority of them lasted no longer than a year. It’d be nieve of me to believe that because they didn’t often last longer than a year in the past that this one is just about over now, but it is an interesting statistic nonetheless.

Many economists believe that this recession could end sometime in the second quarter of 2009, which could potentially make it the longest economic downturn since the Great Depression. What’s interesting about that is this would make some of the doomsday-callers partially correct in their prediction that this would lead to another Great Depression. Obviously it hasn’t turned into that at this point, and hopefully it won’t, but they would be right at the very least in the length of time of this downturn.

Just some interesting information. Any thoughts?

Tags: Economy, housing bust, recession

Why Another Rate Cut Could Do More Harm Than Good

November 17, 2008 | Filed in: Economy | 1 comment

It’s clear that the root cause of the financial difficulties that we’re facing in the United States is not related to credit being too expensive. It’s quite the opposite in fact - credit is cheap right now but many banks are actually cutting back on lending. So what gives? Why are we sliding into a recession when the Fed has done just about everything that they could to avoid the “r” word?

To be honest with you I don’t truthfully understand everything that’s gone wrong to put our nation and the world in the situation that it’s in. It’s been a long and a drawn out process that some say has been 25 years in the making. Therefore it’d be near impossible for me to cover such a heavy topic on a blog.

Another Rate Cut May Be Near

Something did catch my eye while I was skimming the financial headlines that’s basically directly related to this current crisis and I want to talk about what I read and what I think about it. The Federal Reserve of the United States recently alluded to the fact that they may be making another rate cut in December.

What?

Didn’t we already establish that credit is not expensive? If you remember the last time the Fed cut rates to where they are at now I complained about the rate cut. I was a little annoyed, but to be honest now I’m upset. I think the central bank has forgotten some important details about the current crisis. They’ve forgotten that the American consumer has a great deal of influence in the state of the economy.

Let’s talk about this. I want to hear your opinions and I want your feedback, but more importantly I want to tell you why I think that another rate cut would be foolishness of foolishness.

Why Another Rate Cut Won’t Do Any Good

Another rate cut truly won’t have any affect on how willing financial instituations are going to be to lend money to one another. They aren’t likely to lower consumer loan rates. They will however have a near-immediate impact on consumer savings rates. You think your savings and cd rates suck now? Another rate cut will drop those even more.

It seems to me that these cuts are being made on a purely psychological basis. Almost as if they’re saying that they’re willing to do anything to get the economy back on track. That’s great and all, but is this really going to excite the average consumer? Are they going to see another rate cut and sigh a sigh of relief thinking that their money is going to be safe and we won’t go into a deep, dark recession? Not likely.

Uncertainty Leads to a Recession

The cause of just about any recession goes far beyond actual slowdowns in lending and consumer purchasing. It’s almost always intensified by uncertainty.

People are afraid right now. Truly afraid. If that’s the case then does it seem best to drop rates? I’m actually of the opinion that leaving rates the same could be more beneficial than a rate cut.

The news reports rate cuts nowadays as if they are some sort of super relief element used by the Fed to stop a recession dead in its tracks. Therefore the consumer thinks that a recession is a likely scenario. They stop spending and they start worrying. Suddenly we’re facing a recession. Why? Self fulfilling prophecy.

My Hypothesis on the New Psychology of Rate Cuts

I’m proposing then that a rate cut is more devastating (psychologically) to the average consumer in times of financial crisis than it would be to leave rates the same. By cutting rates the Fed is signaling that they’re afraid and they don’t know what’s going to happen. Let’s leave rates alone for once and see what happens.

You never know.

Tags: Economy, Federal Reserve, Rate Cut, recession, saving

Recession: A Self-Fulfilling Prophecy

October 9, 2008 | Filed in: Personal Finance | 4 comments

It’s no secret that to many around the world the sky seems to be falling.  There is even talk of a new depression - in fact a recent poll by CNN showed that 60% of Americans think we’re likely to end up in one.  A depression!  Can you imagine?  The great depression was a terrible time for our country and the economy.  Unemployment was around 22-25% - literally one in four Americans were out of work.  As of right now unemployment is hovering at about 7% which may be on the high side for our tastes, but comparatively speaking is a fantastic unemployment rate.

I don’t wish to make light of a serious situation, because the economic crisis our country - and by extension the entire world - is facing is nothing to be taken lightly.  It’s a complex problem that’s been in creation over the last decade or so.  However it’s important to remember that this is not the first time we’ve faced economic crises and it will not be the last.  We will pull through this and we can only hope to be stronger and better because of it.  It’s important to remember that the best thing for our country right now is for the people not to hoard their cash, for businesses not to hoard their cash and for the government not to hoard its cash.  The government is doing a fine job with this task (some might even argue they’re doing too well, but that’s for another time), but as individuals and businesses we have been doing exactly what we should not be doing: hoarding our cash.

It comes down to this: a recession is a whispered and spoken fear of ours that is (unintentionally) a self-fulfilling prophecy.  We are afraid of it and we do exactly what needs to be done in order for it to come to life.  If we are to avoid a deep and serious recession then it’s important that we are educated on what should be done to try to avoid it.  Here’s a list of some things you can (and probably should) do that can help to lighten the crisis that seems almost unavoidable at this point.

1. Don’t Hoard Your Cash. Taking it out of the bank or long-term investments and putting it under your mattress is a stupid thing to do.  I repeat, stupid.  Don’t do it.  Your money is insured in the banks and credit unions and if you’re in it for the long-term in the stock market then you should know it’s impossible to time the markets.  I’ve lost a bundle this year with my 401k and other investments, but it doesn’t matter because over the long-run I’ll still pull in a decent (10-12%) return.
2. Don’t Watch The News. Seriously.  They thrive on bad situations and always know how to throw an even more negative spin on things.  Avoid watching the news day in and day out and you’ll avoid unneeded stress and worry.  This will help you to keep your head cool.
3. Stay Rational and Calm. As I mentioned earlier you need to keep your head cool.  If you become upset you will become irrational and irrational people ALWAYS do things that they regret doing at a later time.
4. Pay Down Your Loans. Paying down your loans will free up cash for banks to use and will also help to get yourself out of debt.
5. Buy That New iMac You’ve Been Eyeballing. That is assuming you have the cash to pay for it.  But now is as good a time as ever to buy things that you want and/or need.  Plus if you actually do buy an iMac it’ll help me indirectly by helping Apple’s profit margins and therefore my Apple stock.

It all comes down to rationality.  Don’t be irrational and don’t make stupid and emotional decisions.  We will all get through this ok, but only by keeping our heads about us.  Good luck out there!

Tags: great depression, recession, self-fulfilling prophecy, surviving a recession

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