Recession: “In A NutShell” - “For Dummies” – “Demystified”

Every day in my inbox there are mails from a couple of people asking me to explain as to, what really does the term “Recession” mean. So I finally decided to write this little post explaining what it means in the simplest way possible.

Let’s say I earn 10,000 Rs every month as my income and I am pretty sure that I would not lose my job for the next 10 years. Now if I fancy that new LCD TV in the electronic showroom worth 30,000Rs I would probably buy it on an installment even though it is 3 times my monthly earning. This is simply for the fact that, I am assured that I would continue earning and I can easily pay it off in time. Similarly I would probably not even think twice before you spend 500Rs on a nice meal with my family in a decent restaurant.

Now let’s say, my boss comes up to me and says, “Dennis, your job is not secure and you may probably lose it in the next 6 months”. What is the direct impact it has on me? Fear !! the obvious answer. I would think 50 times before spending 50Rs let alone 500Rs. I would try to save up as much as you can, which means I “Stop Spending”.

If I am the only person who is to lose my job in 6 months it does not matter because, the effect I single handedly have on the economy is insignificant. Imagine half the country is in the fear of losing there jobs in the next 6 months. No one would be ready to spend. This would result in excessive stocks coming in from manufactures and just lying in warehouse’s or shop shelves. This would result in companies reducing their manufacturing, which would result in people within these companies losing jobs. So these people would stop spending. This basically is a vicious circle. The whole economy stops growing. The money is present but it is not changing hand, thus resulting in a recession.

So in simple words recession is an economic fear that is at a very large scale. There are a lot of other factors that are involved of course, but explaining that would just complicate the way this post is structured.

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