The Reason The American Economy Is Facing a Recession

One of the first things you learn about the economy is that it is naturally cyclical, and so are the various markets that comprise it. This means that when we are in a boom time, everything is great. There are more jobs, raises, stocks and housing are going up, and business is booming.

But when the times get tough, like they are now, we experience the other end of the cycle: the bust. You also should recognize that everything in the economy is interconnected: corporations, small businesses, the housing market, the stock market, the unemployment rate, the federal government, and people's personal finances. That's why, after the housing bubble burst, it initially affected subprime mortgage lenders and the people who couldn't afford to make payments on their homes anymore, but spread to the commercial and service areas, and now to the job market. The more people who can't sell their homes, the worse the housing market gets, as everyone is in a race to the bottom to make any money they can before they are foreclosed upon.

Once people can't afford to spend money because they are putting it all into their houses (because of the higher interest rates), stores and restaurants suffer. Pretty soon, they don't need as many employees because they aren't getting enough customers. People without jobs don't spend money, and so the unemployment rate spikes. We also have a convergence of difficulties that are inconvenient at best. Specifically, there is a growing demand for oil in the rapidly-developing countries of India and China, causing the gas prices to stay above $4 per gallon. The sheer volume of subprime loans that were approved and are now not being paid back has caused lending giants like Bear Sterns to buckle, and it puts strain on the federal government to bail them out.

And all this while the nation is at war in the Middle East, keeping expenses high, while the Bush tax cuts haven't been bringing in enough revenue. In response to the credit crisis and the housing debacle, the Federal Reserve has kept interest rates low in the misguided attempt to stimulate growth, but this has resulted in it being difficult for most people to keep up with inflation: a whopping 5.6%. Because of this, the US dollar has crashed (causing other countries not to want to invest in our government T-bills and bonds). Oil prices have been forced up because foreign nations demand more dollars when each dollar is worth less, which puts a squeeze on the working class. Shockingly, even the few funds that people could rely on to make money during this bad market--oil and gold--had a dramatic dip recently. The price of gold tends to go up in relation to the devaluing of US currency, hence it being a bear fund. Name an area where you could hope to make money (real estate, stocks, bonds, jobs, businesses, etc.) and you'll be dismayed to find out it's not a pretty picture anywhere.

So will it end? The quick answer: Yes, it always does. But with all of these factors hitting the US at the same time, it might be longer than we'd like. One thing is certain though: if you have any money left over as the economy is about to recover, you should be ready to jump right back into the stock market and into real estate, because it is commonly said that there will never be another set of circumstances like this in our lifetime. The mantra of "buy low, sell high" applies here, and when there are dirt-cheap stocks that are clearly undervalued, and foreclosed homes selling for less than half what they are worth, keep your eyes peeled for the time when everything starts to bottom out. The most important thing to remember is the economy is cyclical, so if it was really bad on the way down, it'll be really good on the way back up. Just make sure you're along for the ride.