What the heck is a recession?
Well we now know that we are officially in one, so what the heck is it? In simple terms, a recession is when the economy stops growing and for the most part, starts going in reverse. Technically it is described as two or more consecutive quarters of negative growth and job losses.

Why does a recession get worse?
As companies start making less money they cannot continue to hire people or employ some of their existing workforce and layoffs start to happen. You may buckle down and start to spend less because you are now either out of a job or worried that you soon will be. Guess what happens if we all stop spending? Businesses sell even less and profits go down even more and it all starts all over again with more layoffs.

So how does a recession end?
The short answer, when the reverse starts happening. For the most part, a recession will correct itself as interest rates drop to a level that encourages borrowing and spending again.

 Is this why interest rates keep dropping?
Yes. When the Bank of Canada drops the interest rates, it’s as if they are putting our money on sale. When things go on sale, people tend to buy.  Imagine that you borrow $100,000 at 7% to buy a home. Your monthly payment is about  $700. Today you can get a mortgage anywhere from 4 to 6%. So lets say you got a 4% mortgage today, then your monthly payment will be about $530.00. That’s almost $200 cheaper a month. This means that more people can now afford to get into the housing market.

So if it costs me less to borrow money, I more inclined to do so.
Exactly, when rates are low and money is cheap, people and businesses will borrow and start spending again. If we are all spending again, the economy will start expanding.

Isn’t credit and spending how we got into this mess to begin with?
It wasn’t that simple but more a deadly mix of easy money, predatory lending, an unsustainable housing boom, a lack of rules and regulations and the fabrication of complex and treacherous financial instruments that have basically caused this global recession

Last thoughts
Well we will come out of this, we always do but it takes time…………..

 

Rhonda Sherwood, CFP, FMA
Wealth Advisor
ScotiaMcLeod
rhondasherwood.com
itshermoney.com

Tags: recession, what is a recession, when will the recession end

This entry was posted on Thursday, March 19th, 2009 at 2:36 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.