Benefits of Economic Recession

It is so natural and obvious to hear the gloomy negative impacts of Economic Recession, but is there any positive outcome from such a gloomy thing as Recession, which is characterized by loss of jobs and loss of comforts.

To our surprise there is a positive side to Recession. Here are some of the Benefits of Recession:

The Housing Prices
The housing bubble, for one, should be looked at as an overall good thing for many people who were priced out of the market. In many parts of the U.S., homes were just flat out getting too expensive; now that they have dropped by double digit percentages in most areas, they are becoming more affordable. Obviously this isn’t necessarily a good thing for current homeowners, but it is certainly a correction that needed to be made.

Wake-up Call to Investors and Consumers
Another benefit of the economic recession is that it should serve as a wake-up call to investors and consumers alike. Things were going so well that many investors got big heads and took on a too much risk. Consumers on the other hand didn’t bother to save and instead decided to spend every penny they had and then some. The pain people are experiencing now as a result of those actions should be remembered next time a boom and bust comes around. This might be wishful thinking, as it seems people didn’t learn this lesson after the dot-com bust, but hopefully this time will be different.

Rethinking for Government Spending
In addition, this economic turbulence will force the government to re-evaluate their spending habits and overall budget.

Investors can buy assets cheap
Finally, one of the key benefits for investors from an economic recession is that they are often able to buy assets cheaply. Smart investors will look to capitalize on everyone else’s panic and desperation and buy up their assets at a hefty discount. Often times it is possible to actually make more money in a recession than during the boom. Less competition and desperate sellers mean lots of opportunity for investors. The trick is that investors need to make sure they aren’t buying assets which are going to decline in value.

What's the difference between a recession and a depression?

Recession
The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Depression
Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

Difference between a recession and a depression?
So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

Major Causes of the 2001 Recession

Introduction:

the American economy began to show signs of a slump at the beginning of the 21st century. In 2000 the so-called dot-com bubble—the explosion of companies that sprouted up to take advantage of the Internet—burst. Analysts cited many reasons for the failure of these companies. Among them was that investors overestimated the extent to which consumers were willing to buy goods and services online. When venture capitalists—the people and companies that provide money to start-up businesses—became reluctant to invest new funds, the collapse began.

As many Internet companies went out of business, the stock prices of once high-flying companies such as Cisco Systems, Inc., and Lucent Technologies began to plummet. Other large companies, such as Microsoft Corporation and AOL Time Warner, Inc. (present-day Time Warner Inc.), announced that they would not meet projected profits. And just as high-technology stocks fueled the market’s rise, they dragged the market down. Both the Dow Jones Industrial Average and The Nasdaq Stock Market ended 2000 with a loss.

Soon the rest of the economy started to weaken. The National Bureau of Economic Research, a respected group of economists, estimated that the U.S. economy actually stopped growing in March 2001. Manufacturing and employment began to decline. The big automobile companies shut down plants and laid off thousands of workers. As businesspeople traveled less, airlines began cutting back. By the end of 2001, corporate profits had suffered one of their steepest drops in decades.

Many economists believe that the terrorist attacks of September 11, 2001, made the country’s slumping economy even worse. After remaining closed for several days after the terrorist attacks, the stock market suffered a record plunge when it reopened, with anxious investors selling off their holdings. Companies continued to trim workers, accelerating a downsizing that would total more than 1 million jobs by the end of 2001. Unemployment reached 8.3 million in December 2001, the highest in seven years.

What caused the 2001 Recession?

The recession of 2001 had four causes.

1. First, there was the technology boom of the 1990s, which got carried to unsustainable speculative heights.
2. Second, there was a gush of money created by the Federal Reserve Fund which became channeled into higher asset prices (stocks and real estate) rather than the price of consumer goods.
3. Third was the fraud and abuse of corporations, stock brokers, mutual fund companies, and stock exchanges, a systematic corruption of the financial markets rather than merely isolated cases.
4. Fourth was the September 11 attacks, with its devastating losses, followed by the costly War on Terror.