A Girl’s Guide to Recessions (Part 1)

For those recently out of college, networking is everything, right? So when my friend recently attended a private dinner party of illustrious alumni, she was keen to put her best foot forward. She mentally prepped herself on the recent developments in the presidential race, international affairs, and just in case she ran into freakish people, Britney Spears.
Half-way through dinner, she was feeling pretty good when suddenly, out of nowhere popped the R-word. During a lull in conversation a pompous 30-something guy suddenly said to the guy next to him “So, Tom, are we really heading for a recession?”
Her mind froze in terror: would her dirty secret be revealed? The fact that despite three econ courses she still had no clue what a recession actually was… luckily, she was able to pull of the role of the politely-interested-looking-yet-silent-nodder until the topic once again changed…
Her story got me thinking—how many of us are clueless when it comes to the word recession, knowing nothing except that mentioning it in politics is akin to yelling fire in a crowed theater?
With this in mind, I present, (drum roll if you please), A Girl’s Guide to Recessions

What’s the definition?

A recession simply refers to a greater than normal decline in economic activity throughout a certain economy (in this case, the US), occurring for more than a few months.

How did it happen?

Ok now it gets a bit complex so brace yourself:
A. The overall ratio of how much the average American owes to how much he or she’s makes is %130. Sadly, as most of us found out with our first post-shopping spree credit card bill, when you owe more than you make, things tend to get a bit stressful. You might cut back on eating out or restrain yourself from buying that amazingly cute Coach bag.

B.
You may have heard on the news a huge fuss over the downturn in the housing market last summer. What happened was that the amount a house was worth (think of intro econ supply and demand) dropped suddenly by 8%..
So what’s the relation between the two?
→ Say it’s the end of the semester. You are looking forward to getting some spare money by selling your textbooks back. Your roommate, who’s in your math class, sells her book back for $100—you get excited and plan to sell yours back tomorrow. That evening you go to the mall and treat yourself to $100 cashmere sweater that under normal circumstances you wouldn’t have been able to afford but you know you’ll get the $100 tomorrow so it doesn’t matter. BUT the next day when you go to sell back your book, the price has fallen by %8 and you only get $92 back.
In this example $8 is not really a big deal. But imagine what would happen if you were selling a house you thought was worth $100,000 and suddenly drops by %8. Not Good! Especially if you are one of those Americans who owe more than they make.

C.
Imagine this happening to a whole bunch of people all at once. What happens? They stop spending superfluous money= stores get less money= the owners of the stores spend less money= other stores get less money= You get the point right? This pattern represents an overall decline in economic activity and if it continues for more than a few months it is called a Recession.
Stay tuned for Part 2: I’ll talk about the various political reactions to the current recession and if you should be worried!

Move Over, Lion and Lamb. There’s a New Animal Unison In Town.
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