Special series - how to survive a recession, part 1

Special series on ideas on how to become rich - how to survive a recession, part 1

This is a special series only for this month on my Ideas on how to become rich website. The thing is that my site focuses on ideas on how to make money, case studies on rich people and their ideas, investment ideas and investment knowledge, education with respect to finance, business and entrepreneurship, and the like. Yet there has been no mention of a recession, so I've decided that it's high time that I wrote about recessions and how to survive them.

Actually there are many caveats that I have to state categorically first before delving into the topic on how to survive a recession. The first is that there are many ways of surviving a recession and that there is no one single way of surviving a recession. The second is that sometimes, it is hard to say whether one can or cannot survive a recession, because a recession sometimes makes it hard to know whether or not you will be the one affected when all along you've been fine in your job or in your career. The thing is that the title of the post "how to survive a recession" is actually wrong, because the idea is still that prevention is better than cure. Fourth, the post here on "how to survive a recession" is actually better labelled "what to do with your money during a recession, and in particular this particular recession that the world is facing". Having stated all those caveats, this post and the next post is a foray into the world situation standing as at October 2008, and the collapse of world financial markets and financial institutions in the USA.

The world is in recession at the moment due to the global financial crisis that started in the USA. In my opinion this still highlights the importance of a financial education and the usefulness of blogs like mine where people learn about investment, business, money, financial education and finances in general. How did the world financial crisis of 2008 come about? Here is a summary for those who need a look into the crisis.

In the USA, prior to 2008, there had always been a double deficit of the budget deficit and the current account deficit in the balance of payments. This is the long term factor. The more intermediate factor was the subprime crisis in the USA, which basically worked as follows: many people in the USA borrowed money to buy houses, and normally the mortgages would be held by US banks. However, the thing is that some of the loans were made at subprime (hence "sub and prime- subprime") rates to borrowers who really had no real long term ability to pay back. What the banks did was that they decided to finance all the risks by securitising, which is a fancy way of saying that they passed the risks all to other bank customers - the US banks made the loans that they made out to others into securities and other bank financial instruments, and sold them as "investments" to customers. This made the banks safer in the sense that they did not hold the risks - their customers did. Did I also mention, that property prices went down even though the customers expected prices to continue rising? In economics, after a boom usually comes a bust - after a bull market, there usually comes along a bear market, and that is precisely what happened. People borrowed money to buy houses that they could not afford and the prices of those houses went down, while other people made investments into houses that people could not afford. A recipe for disaster, but that was only the intermediate factor.

The immediate trigger for the crisis, at least in my own personal opinion, and I am an economist by academic training, was the collapse of the Lehman brothers which was not supported (rather, bailed out of their liquidity problems) by the US government. In a nutshell, the US government did not bail out this ailing giant, and that was when the whole problem started. AIG started having problems a while later, and then the whole of the western capitalist system that had criticised communism and criticised "Asian values" and Confucian values as leading to economic disaster also fell ill; in short, capitalism, American style, is also prone to problems and illnesses just the same as communist economic systems and Asian economic systems. Understanding that economic systems in the world all have their own problems and their own pros and cons is already a key step into financial education (i.e. there are many ways to skin a cat, if you get the drift).

The final point to note is that the crisis spread all around the world because suddenly there was a run on banks and a general fall in stock market confidence worldwide. People yanked their money out of stock markets and financial instruments and started putting their money under their pillows. As you should know, the rapid decrease in the supply of money (this is simple demand and supply analysis) soon led to liquidity problems because banks and other financial companies (and companies in general) could not rely on stock markets to raise funds, which in turn affected their investments and even day to day operations, while at the same time, stock prices came crashing down.

I am writing this article in October 2008, and this is one of the biggest world economic crises that I have seen in ages. Yet, this is not the first time that the world has faced such a problem. By now we should be able to overcome such problems because we have seen recession after recession and learnt key facts and key ideas about economics and how markets work. Yet people don't seem to have learnt much and there is still much room for learning and improvement. Do stick here with my site and learn more about recessions as I seek to explore the topic on "how to survive a recession", a key skill that we will need as recessions come and go often in the world economy, and learning about them may give us ideas on how to become rich despite the fact that others are finding money hard to earn.

I don't purport to know all the answers, but let's have a look into recessions, ideas and concepts on "how to survive a recession" in general, and perhaps we can glean some important insights into how to make money when others don't and how to avoid losing money. In addition, we can also attempt to learn about the various options that we have for investment and the various options we have for surviving a recession. Some ideas will be general, and some ideas will be specific, so learn what you must and glean the ideas if you need them. Cheers and thanks for reading!

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