Talks of a U.S. Recession in the Context of a Global Economy

Average Americans hear sound-bites and read headlines alerting us of the doom and gloom of a coming recession in the U.S. economy. How did we get here? Where are we now? Where are we going? A quick glance at the conditions we are currently facing, when put into the context of the past few decades, will hopefully put a silver lining around the dark cloud.

Many factors lead to a recession, but the main one that seems to be in the forefront of everyone's mind, in regard to our current situation, is the housing crisis. Twenty years ago it was much harder to buy a home than it has been in the past decade. Foreign investors came to Wall Street with hundreds of millions of dollars earmarked for mortgages, but with the desire to relax traditional standards (such as strict debt-to-income ratios).

Mortgage brokers, seeing the profit in the volume of loans sold, found funding for those wanting a home who would have previously been denied, while approving others for homes much more expensive than they could truly afford. Eventually, the overspending caught up, and as a consequence, loan-approvals tightened, fewer people are able to buy, builders are left with speculative housing unsold, home-building supply stores lose money, the employees who work in those stores are financially impacted through lay-offs or no increase of income, and here we are. Of course, this is frightfully simplified, but an easy principle to learn from this is: consumers should not try to live beyond their means.

On MLK Day, as Americans celebrated the life of one of its greatest sons, stock markets across Asia, Europe, and even the Land Down Under, took massive nose-dives. Reuters reports that the Nikkei fell 4% and that British markets took their largest hit since September 11, 2001. With Dow futures plummeting over 400 points in response to the collective downfall, it is inevitable that the market will open Tuesday morning to sharp losses.

The pessimism of Wall Street last Friday seemed to prompt the fears that lead to sell-offs in foreign markets today, which, in the financial circle of life, will lead to massive drops in U.S. markets tomorrow. In fact, marketwatch.com, a site maintained by Dow Jones & Company, predicts that our economy is not only headed toward recession, but that it will be worse than the recession of 2001.

But what does this mean for those who do not follow the market with the intense scrutiny of a hanging-chad inspector? Most of our perceptions of how the economy is doing are based on how others say it is doing, not on own financial situations. Analysts tend to personify the market, using phrases like, "The market does not like....." or "The market feels good about.....". What is the market, though? The rising and falling of the market indexes are based on the buying and selling of securities (stocks, mutual funds, etc.) by investment firms (made up of people) and individuals, all having perceptions that dictate their selling and buying patterns.

One thing that should be evident to us is that global markets look to the U.S. for a base, so to speak. Sure, our markets can be affected by large drops in the economies of other countries, but an announcement of a new, improved ipod or an amazing medical discovery can wipe any such losses out in a matter of minutes. Whether we attribute it to the American spirit or the strength of capitalism, our economy has always rebounded -- the Great Depression, the 70's oil and inflation crises, the 1987 drop, and the 2001 drop are all examples of this.

Americans are resilient, largely optimistic, and good producers. This trends toward an improving economy over time (seen in twentieth-century history), given the natural corrections that our markets occasionally make. With the world looking to us, we need to focus on the positives in a historical context. The promise of large-scale declines is what makes for juicy news, however, so that is what rings in our ears most loudly.

But, we can turn potentially panic-inducing headlines of falling stock prices to our advantage. Ladies, when do you most want to buy that favorite purse or hot pair of boots -- when they're on sale! Well, the glass is half-full: stocks may be on sale for the next year or so! Analysts, including marketwatch.com, acknowledge the looming slow-down while simultaneously encouraging investors not to over-react. They advise the average investor to resist the natural instinct to sell slumping stocks. In time, the majority of those will regain and surpass former levels. Further, continue to save in 401K accounts. Your dollars will be purchasing those "on sale" stocks, getting more bang for your buck when they rise again. Continue to pay off credit card debt, as those debts almost always come with high interest rates.

During a time of inflation, experts turn to gold for a healthy return on their money. Gold has risen sharply over the past few months in response to rumors of recession. Of course, in a recession, there will be loss of jobs, bankruptcies, and the like, but for the majority of Americans, their lives will go on as usual. Perhaps those who are not as hard hit by a recession can remember that American spirit and help out the downtrodden.