This week we are talking about recessions. Everyone hates recessions, and people do not like to talk about them very much. But it is one area of finance, that when we look closer we learn some things that are very interesting. In fact, I will be telling you how we can end all recessions forever. Watch now!
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Let us start with why people hate recessions. It is important to understand the impact recessions have on people’s lives.
- Recessions cause pain.
- Recessions are big.
- Recessions are scary.
- Recessions are unexpected.
We all know what it is like to have family and friends lose their jobs because of this big uncertain event that is impacting the whole economy. That is scary. When it is happening we just want to get through it. When it is over, we want to forget about it. So people do not talk about recessions that much. But recessions are just like any other money issue. The first step to solving any financial crisis, is to take a closer look at it.
Let us look at the definition of recession. A recession is described as a “decline in GDP for two consecutive quarters.” This is a clear and simple definition, but there is a problem. This definition does not provide any explanation for how a recession forms, why it happens, and how we can prevent it. This definition is like looking at your personal finances every month and saying you are struggling every month without asking why. You might be struggling because your budget is off, you are not controlling your costs, or you simply do not have a financial plan. So I want to look at the concept of recessions and ask the question “why?” Why do recessions happen?
I want to start with a core concept that might shock people. Recessions are disappearing. We just went through the Great Recession in 2008 and it was pretty bad. But when you compare that with recessions from the past, recessions have been a whole lot worse. Economic data does not really go back that far, but when you go farther back in history you see horrible economic events like the Tulip bubble, or the Great Depression. If we go back even further we had what are called the “Middle Ages.” The Middle Ages experienced very major economic recessions across Europe. The Middle Ages started with the fall of the Roman Empire which shattered the currency system of the time. Then you had the plague called the “Black Death” that killed a third of the population of Europe destroying the economy. These recessions were bad. And when you start looking at data of all these recessions throughout history, you do notice a trend that recessions seem to be getting less intense.
Given that historical context, I would like to offer a different definition of recession. Recessions are negative growth caused by poor financial choices. The reason recessions seem to be disappearing is because we are getting better with money. We can react faster and we have more robust financial systems. If you study what happened in the 2008 recession, the cause of the recession was people making poor financial choices. People were buying houses they could not afford and the banks were acting recklessly. Both those issues have been addressed with new laws and regulations. Even during the recession, we were able to recover faster. When the global financial system was on the brink of collapse, some very smart financial people in Washington DC made decisions that stopped the recession from getting worse. It may not seem like it sometimes, but we are getting better as a society on dealing with money problems.
People forget that economic data is a reflection of real people doing real things. Humanity is smarter about money today than we were in the Middle Ages, and so recessions are also better. As we continue to get smarter and smarter, it is theoretically possible to end all recessions forever. That is just theory. As a practical matter, there are a lot of hurdles to overcome to make that happen. But I want to open people’s eyes to the possibility that this can happen.
This new definition of recession shows the important role of finance people. This definition identifies the cause of recessions as poor financial decision making. If you know the cause, it also points you to the solution, which is to make better financial choices. You make better choices through financial education. Your job is to help society progress along this journey to improve financial decisions and end recessions forever.
You might think I am overly optimistic. But let me tell you a story. In the 2008 recession, I was working on a $100M hotel property sale in Los Angeles. I was smack in the middle of one of the real estate hot spots when the recession hit. And I remember every single aspect of that recession. It was scary, but we made our way through it and made the sale. That experience is in my bones. And I can tell you for certain that the knowledge I gained during that recession helps me when I am making financial choices today. Every time we as a society go through these struggles, we get better, so that the next time will not be as bad.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.