The positive aspects of a recession
As Joseph Schumpeter passionately argued in his 1942 book Capitalism, Socialism and Democracy, recessions are a necessary evil in capitalist societies. Well, there are some arguments, that back up this theory. Although the word recession strikes fear into the hearts of people, recessions heal the economy from unrealistic developments and creates opportunities for investors. In the long run it is just a periodic downturn in the economic cycle and for some good reasons it seams.
Effects on the economy
Recessions correct economic imbalances and helps the economy to get back to a healthy, realistic, and sustainable rate of growth. The “job” of a recession is to clean the “fat” out of the system, mop up excess, and pave the way for the next expansion. However, there are always bankrupts, but in a recession the weak companies get put out of business and the strong ones are forced to optimize their business models and come out with better products. This brings job losses which are freed up to be efficiently used somewhere else in a flexible market. Recessions also eliminate these sorts of unsustainable bubbles like the technology bubble in the late 90s or the actual housing crisis. Of course, it hurts to lose a good paid job and suffer from financial loss, but it is necessary for our economy to become healthy once again.
The Stock market drops
Stocks markets go down in recessions, but as stated in one of my previous articles, Search for opportunities in crises, there are great opportunities in stock market declines. During periods of mass panic on the market all stocks go down for a while, because people like to panic somehow, I don’t know why. The important thing is, both good and bad companies go down. This means, that you can get high quality companies at a low price and with good long-term perspectives. That’s the time to position yourself to profit from these companies and catch the opportunity while it is there.
In fact, I even know a few investment guys, who are really cheered up and looked forward to the upcoming recession because of new investment chances.
Personal finance
According to a report by CNN, I found on moneysocket.com, the average American owes $10,000 in credit card debt annually. If people will ever recognise this misbehaviour, it maybe will happen during a recession. Although, I don’t believe people are easy to change, I think if suffering from financial loss, unemployment and hard times, maybe they start to think about there personal finances and learn something from it.
As we know from the past, a recession lasts for about 10 months, so good times will be back. Nevertheless, they are necessary and you will experience a few recessions in your life, so better be prepared. The important thing is not to panic and learn from crises. In fact, recessions can make you better and more skilled after all, just like they do with our economy on a regular basis.
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