Recessions. They’re big, scary, and complicated. I would even argue that this sentiment is more apt than ever, as lettuce is currently more expensive than North Shore avo toast and petrol prices are popping off. To make matters worse, sometimes finance people talk about recessions in a way that you need a Ph.D to understand. This makes trying to get comfy with this topic all the more daunting.
So, if you’re wanting your recession questions answered in a straightforward manner, then you’ve come to the right place. Here’s all the info you need to know about this huge topic.
How Does Raising Interest Rates Slow Inflation?
Inflation is the art of stuff raising in price over time. If this stuff rises too much in price, then underemployed people can’t buy it. If inflation is sky-high while unemployment is sky-high, then these two factors might contribute to a recession taking place. Forbes has stated that a recession is a time when “the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines.”
As per The New York Times, inflation happens when there are too many people with money that want to buy stuff that’s limited edition. For instance, there’s a limited number of houses in Sydney and too many rich landlords, so real estate agents can make the average price of a place nine-jillion dollars.
An interest rate is the amount of money that a lender invoices a borrower for taking out a loan with them. So, if interest rates steeply and suddenly rise, then rich people might stop taking out loans to buy limited edition stuff. According to The New York Times, this means that fewer people are buying said limited edition stuff, meaning that said stuff is in less demand, meaning that said stuff might lower in price. And that’s how raising interest rates can hopefully slow down inflation.
What is a Bear Market?
For better or worse, a bear market isn’t when Winnie the Pooh and Paddington are demolishing a whack of honey off of the New York Stock Exchange’s floor. According to The Latch’s very own Jack Revell, a bear market is instead “a phrase used in financial terminology to indicate an overall downward trend in market returns and a label used to suggest that investors are likely in trouble.” Market trends are currently in such a place that we’re officially in the midst of a bear market.
Fortunately though, while we are currently in a bear market, we’re currently not in a recession or a depression. This means that a bear market isn’t as bad or as scary as these two other terms. But if you want to learn more about bear markets, then Revell’s whole article is A+.
Recessions VS Depressions? What’s the Difference?
Because there’s so much confusion between these terms, Merriam-Webster has had to step up and publish an article that explains the gulf between them. So, according to them, a recession is a business trend that’s characterised by a decline of jobs on offer and a decline of stuff being made. This leads to folks earning less money, and thus being less likely to buy big-ticket items like houses. Recessions are also known to be localised experiences.
A depression, on the other hand, isn’t characterised by a decline. It’s characterised by a Tower of Terror drop. Heaps of industrial production stops, construction sharply declines, there’s widespread unemployment, and international trade isn’t in great shape either. To make matters worse, depressions can have notable global impacts.
Is a Recession on the Horizon?
The American interest rate is the highest it’s been in three decades. It’s unclear whether or not this sharp bump will slow down inflation. If this inflation doesn’t cooperate with rubbish unemployment numbers and some other big factors, then America might have a recession on its hands.
However, if America goes down, that doesn’t mean that us Aussies are going down with them. As Revell said in another brill article, “The US economy is quite different to the Australian one, and their inflation rate is much higher than our own. So, there are hopes that Australia could avoid a recession. The export market for iron ore and gas remains high while our unemployment rate is low which should give us some good protection. In addition, rising wages will also help protect everyday people if the global economy does sink.”
Here’s Revell’s article: Are We Going Into a Recession? It Seems Likely But It’s Not All Bad News
How Does a Recession Affect the Average Person?
As per Forbes, the average person might lose their job and find it tricky to find a new one. Moreover, if you’re lucky enough to keep being employed, then you might receive a pay cut. An individual’s stocks, house, and other assets also might lose value during a recession. It might even become harder for y’all to get a mortgage or a car loan.
How Does a Recession Impact Car Prices and Petrol Prices?
The Kellogg School of Management believes that the price of cars usually decline during a recession. As an economist of theirs, Efraim Benmelech, said in regards to the 2008 global financial crisis, “Many households lost money and equity so they couldn’t afford to buy new cars.” This means that as the demand for them goes down, their price also drops. The Epoch Times outlined that the same thing happens with petrol during a recession.
As we know, petrol prices are staggering at the moment. Here’s some extra info on this topic: Is Petrol Going to Keep Going Up? Here’s What We Know
What Should or Shouldn’t I Do With My Cash During a Recession?
Okay folks, before we go on, let it be known that I’m not a financial expert and this isn’t financial advice. My biggest asset might legit be a Japanese copy of Pokemon Silver. However, I am a mint researcher, so this is what the experts had to say on the following subjects:
1. Should I Buy or Sell a House Before a Recession?
In a piece by realestate.com.au, they state the biggest advantage of buying a house before a recession is that you’re more statistically likely to be able to pay off your mortgage. This is because a job cut and a salary cut could smash you during a recession. However, there are actually some advantages to purchasing a house during such a volatile time. These being interest rates tend to be lower and property prices are typically cheaper.
But what should you do if you’re planning on selling your house? Well, because property prices are higher before a recession hits, it might be your best bet to sell before then.
If you want some extra noggin material about house prices, then here’s a handy-dandy deep-dive: What Falling Property Prices Mean for You
2. Should I Take My Money Out of the Bank Before a Recession?
The financial and investing advice company The Motley Fool believes that during a recession, a bank is a responsible place to keep your money. As they outlined on their website, “Savings accounts are safe places to store your money if you believe you’ll need to access it quickly. That’s important in a recession: You may need support from your savings to help pay bills.” So yeah, if a recession hits, there’s no need to go all doomsday prepper with your cash.