Global Investment Group: Recession Coping Mechanisms

Global investment groups have seen investment as the solution to homegrown recession. Since the 2007 collapse of the subprime market and the resulting economic turmoil worldwide, consumers and companies alike have resorted to different methods of coping with a slowing economy and the effects that come with the territory. It has been said that the most recent recession has created a “new normal,” although whether it will remain as such is yet to be seen.

Slowing of Discretionary Purchases

An example of coping for consumers is cutting back on discretionary purchases. In a recession, companies that rely on consumer spending--such as department stores, online retailers, auto dealers and airlines--see less profit due to decreases in consumer spending and the ensuing pullbacks on their stocks. People spend less on wants (as opposed to needs); they are less inclined to spend money that they do not have. In addition, companies start layoffs because of the slowing economic conditions. Workers who are worried about job security do not spend as much, and the fear spreads to workers in other industries, restricting consumer spending. Typically in recessions, the savings rate goes up as people begin to save money due to the fear that if they lose their jobs, that there may be a significant amount of time before they can go back to work.

Governmental Plans and Drops in Interest Rates

Municipalities and central governments also feel the effects of recession. With less payroll and corporate tax revenue coming in, they also have to cut back. Programs ranging from meals for the elderly to police and fire department staffing suffer since there is less money to go around. In addition, governments attempt to stimulate the economy, as shown in the United States over the past 2 years. Programs designed to put people to work and to provide incentives for business to keep hiring have sprung up. Central banks reduce interest rates in order to entice lending in a recession. This is very important, as loan defaults increase during recessions, and this measure acts as a confidence builder and will allow long-term economic activity to develop. 

 Negative and Positive Effects of Recession

Recessions are without a doubt extremely painful and can manifest and hit home in various ways. The fact that no one can predict precisely when a recession will end is part of the problem. This uncertainty increases frustration for everyone across the board since different segments of our economy and society have become so interconnected. However, it is interesting to note that many small businesses and lasting initiatives by both private and public institutions have come about from serious recessions or depressions. Concepts such as Social Security, the Build America Bond program and the Tennessee Valley Authority came about due to serious economic turmoil.

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