Welcome to the world of credit cards, bank loans, high money circulation, and financial freedom. While the days of the Great Depression have long passed, recession and financial crises are still prevalent. In a modern world of credit cards, government benefits, and stimulus checks; recognizing modern economic collapse can be tricky. Money is constantly in circulation, yet there are terrifying reports on national, private, and individual debts.
What exactly does this mean you may ask and how can I recognize recession in today’s society? Whatever your financial bracket, here is a guide for understanding a modern economic collapse.
Economic Recession Definition
This term is used all the time on the news, in the papers, and financial reports. What exactly is an economic recession? Does it mean high inflation rates or an increased cost of living?
There is a lot of speculation and theories on what an economic recession means as different experts and economists have tried to define such a broad term. There are varying factors such as falling Gross Domestic Profit (GDP), high unemployment rates, to the state of business cycles.
According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Simply put, a recession is a massive slowdown in economic activity. A slowdown in economic activities can have dire consequences if not helped/recovered in a decent timeframe.
The Difference Time Makes: The Great Depression Vs the 2008 Recession
The Great Depression
If this period were a Dickens novel, the worst of times would be the most apt description. Now, this term may be hazy to some depending on the year you were born. For others who witnessed it, it was an era of hardship, loss, suffering, and devastating economic downturn.
During the worst economic downturn in history, millions of Americans were unemployed, and nearly half of the banks had failed. With no jobs, savings, and income, thousands of people lost their homes and wound up on the streets or dead.
It is the longest and most severe depression ever experienced by the Western world that sparked fundamental changes. It ushered in new policies in economics, macroeconomics, and social security, and paved the way for a better future.
The 2008 Recession
Another period of economic downturn, but not as severe as its ‘great’ predecessor. This recession period was made obvious by a spike in poverty and unemployment. Beginning in 2007 and lasting until mid-2009, it started in the United States and even spread to other countries.
What caused this global recession? According to some experts, the recession was inevitable. It was caused by cheap credit and lax lending standards that led to a real estate boom, followed by it popping. This meant that many banks was holding millions of dollars of worthless investments with no one paying them back.
What does a 21st Century Recession Look Like?
In the modern world, it is harder to detect and officially declare a recession. With numerous policies, social security, and mass printing of money, detecting these signs can be difficult. However, here are some telltale signs to watch out for. Some of these could lead to what is called a local recession, instead of a national or global recession.
High Unemployment
One of the first obvious indicators of recession is high unemployment rates. During The Great Depression, unemployment rates rose to a high of 24%, that’s almost 1 in 4 people without a job. A recession is a decrease in economic activity; and activity, and labor starts to decline as companies sell less and then begin laying employees off. This means there are less people with even less money, and they certainly are not going around spending the money they do have. If you are ever in doubt about the state of the recession, keep your eyes on the unemployment statistics.
Increased Homelessness
During both infamous recessions, thousands of Americans lost their homes and savings. Accommodations were substandard (during the Great Depression) consisting of tin and cardboard homes. New studies have confirmed that the increased cost of housing and standards of living is a key factor in our current state of homelessness. The Covid Pandemic of 2020 did not help any chance of recovery as many lost there jobs and still are having trouble recuperating.
Continued Money Circulation
Although money makes the world go round, too much of it can be a problem. I know what you are thinking, why is that a problem? We all need more money. Well, too much money in circulation can lead to the government initiating higher inflation. Although inflation can sometimes have a positive effect on certain areas of the economy, it can also create more adverse effects. Too much inflation can stop people from purchasing certain goods or services, and hoarding money to wait out this periods recession.
High National Debts
If a country has high national debts, that is never a good sign for the economy and the nations citizenry. High national debts hinder long-term economic growth and less economic opportunities for the individual. This fosters less business investments and deflates the exchange rates of the U.S. Dollar.
Stimulus and Forgiveness Packages
Do not let these promising words bring false hope. While the ultimate goal of these packages is to allow the government to stimulate a struggling economy. The immediate effects help the lower income homes, unemployed, and struggling families. This initially puts an influx of money and people spending that money out into the economy.
Forgiveness allows for lowered interest, the cutting of taxes, pauses on loan payments, etc.. This is an alternate way to help the masses without actually fronting any money to the population. It also means people will have more income at their disposal.
The potential negative effects include adding to the national debt, falsely stimulating the economy and adding heavy burdens to the loaning institutions. Due to these potential negative impacts, the use of stimuluses and forgiveness plans are only brought out in serious economic distress.
Stock Market Downturn
This one is obvious. The stock market crash of the 1920s led to The Great Depression in combination with other factors.
The stock market enables traders and investors the opportunity to profit. A healthy stock market increases personal wealth, and improves spending, and is a benchmark for a nation’s finances. Similarly, if the stock market is underperforming, that might be a sign of a potential problem with the economy.
Increased Inflation
Inflation is a general rise in the prices of goods and services; which fluctuates continuously. This essentially means that it is taking more money to purchase less goods. This is dangerous for the companies, individuals, and the GDP of a nation. High inflation boils down to the loss of purchasing power of the nation’s currency. If you are feeling the effects of inflation this is a signal that the rates are too high, and that the economy is in distress.
What does Modern Personal Financial Distress Look Like?
Financial distress means an individual cannot make sufficient revenue to fulfill their current financial obligations. This means they normally have less money put into the economy. However, especially now, in the post Covid era, personal financial distress is more common than you think; these are some of the noticeable diagnostics.
Possible Unemployment\Underpayment
If you get let go or fired, and are struggling to find a job, this can lead to excessive stress to keep up with bills and necessary costs. Unemployment is not the only thing to consider, you could be being underpaid for your current position, causing you undo stress in a even more stressed economy.
High Credit Usage/Bad Credit Score
The importance of a good credit score is often one thing you learn a hard way. A poor credit score can have noticeable consequences such as higher interest rates, fewer loan options, trouble getting housing, etc.
High credit usage is another tell-tale sign of personal financial distress. When relying heavily on credit to pay for your lifestyle, especially basic bills, signifies trouble with cashflow and not being able to pay bills with your current income stream. This then leads to high usage and a bad credit score. It becomes a vicious cycle until ones financial income improves.
Taking Out Loans
Personal financial distress is a cyclical trap, meaning it is hard to break. If you are taking out loans or using loans to pay other debts down, this is a dangerous sign. It is one thing to run up credit cards, but as soon as secondary loans are needed, a vicious cycle could be cultivating. Millions of people every year drown in debts they cannot pay back in a reasonable pace.
Living Paycheck to Paycheck
Statistically, 63% of Americans are living paychecks to paycheck. This figure is increasing with the rising inflation. This means millions of Americans are in personal financial distress. Living paycheck to paycheck means you are just barely making ends meet. While being able to afford your bills and buy your necessary items is more than a lot of people in this economy can do, feeling so tight is a precursor to financial distress. This also means you likely cannot prepare for any emergencies.
Filing Bankruptcy
While it is true that filing bankruptcy can help someone drowning in debt, it also means starting over. Your credit score, your financial history, and your financial reputation. Declaring bankruptcy is tedious and may also lead to loss of property depending on your circumstances. For instance, if you still have payments on a vehicle, claiming bankruptcy my cause you to lose the vehicle as that is considered a debt.
The ultimate sign of financial distress is a legal means of a declaration, such as filing bankruptcy.
