�Money is better than poverty, if only
for financial reasons.� --Woody Allen
By now it should be clear to all but the craziest of
optimists that we are in a recession, at least in US. What is not clear,
however, is the severity of this recession and if this will turn into a
depression. A technical recession is defined as the economic decline in two or
more consecutive quarters. This means that the real economy instead of growing,
contracts. This economic decline may involve a general decline in employment,
investment and corporate profits. Recessions can be accompanies by inflation or
Sometimes when people are uncertain about their economic
security, they tend to save, or at least moderate their spending. When the
consumers, that are you and I, refuse to spend money, demand falls below the
supply putting a downward pressure on the prices. This is called deflation. As
an example one can think of housing prices. Today the demand for housing has
suddenly dried-up, putting sever pressure on supply side (sellers) resulting in
a marked reduction in prices (US, UK, Norway, Sweden, etc).
Now if millions of people lose their jobs or think that they
are going to lose their jobs and reduce their spending, the resulting decline
in prices becomes circular. This means that as prices fall, so do the corporate
profits which result in laying-off more people which results in more
unemployment and insecurity which reduces consumer spending. This downward
spiral, if it goes unchecked, results in a depression. The depression of 1920s
One of the most recent deflationary recessions occurred in
Japan. Japan's recession, which started in the early 1990s (US and others also
experienced the same recession), continued into the 2000s, with deflation being
the main problem. Once deflation got hold of Japan it didn�t let go until 2005.
By 2005 the yen had 103 percent of its 2000 buying power. The funny thing about
borrowing money in deflationary period is that it doesn�t pay to borrow money,
even at 2 percent interest, since the asset that one is buying with the
borrowed money keeps depreciating in real value.
Other times, a recession can occur for a short time, followed
by very low economic growth and high inflation. This combination of mediocre
growth and inflation is called stagflation (stagnation plus inflation).
Stagflation was a major problem around the world, especially in Europe in the
1970s. In general during this period the countries suffered low economic
growth, high inflation and high unemployment. Stagflation can occur because of
several factors such as unfavourable supply shock, such as an increase in the
price of oil in an oil importing country (as it is today), which tends to raise
prices while slowing the economy by making production less profitable. Also
both stagnation (recession) and inflation can be caused by inappropriate
macroeconomic policies. For example, central banks can cause inflation by permitting
excessive growth of the money supply, and the government can cause stagnation
by excessive regulation of goods markets and labour markets.
What is coming?
So what should we expect? In general, a recession,
especially a severe one, is deflationary in nature. But if the government tries
to stop the recession or severity of it by pumping money into the economy,
especially the money that is not backed by anything and depreciating in value
(internationally), it increases inflation which will lead to stagflation. Many
economies, the US economy included, today are especially susceptible to this
problem. The problems facing these economies are twofold: one is the general
macroeconomic policies of the governments and the other is the declining supply
of vital commodities.
The government policies in many countries such as the US,
UK, Australia and others have been pro-business and pro-wealthy for a very long
time, especially in the past 50 years. But in the past three decades these
policies have been pushed to the extremes, culminating in the latest tax cuts
to the rich while continually reducing the services to the less wealthy and the
poor. This concentration of the wealth, in itself, should have been a major
concern for the economists and the governments since it increased the ability
of the rich to accept and take bigger risks while, at the same time, reducing
the ability of the less wealthy to cope with the consequences.
Economic bubbles always start with some rich people seeing
an opportunity to make a quick profit. The speed by which the profit is made
encourages the continuation of that activity. More importantly, other rich
people join in. After a while, the rest of the population catch on and want a
piece of the pie. But by this time, the bubble is fully blown and is about to
burst. Just when the average Mr. Smith thinks that he has discovered the sure
way of beating the system, the bubble bursts. By this time, the real wealthy
have taken their money and left, leaving the majority of the population and the
government to clean up the mess. Cleaning will take time, sweat and tears.
Okay, we are going into a recession, so what should we do as
The first thing that you should realise is that the world�s
population is increasing while natural resources are either static or
decreasing. For thousands of years human population was either static or
increased very slowly. As a matter of fact this growth was so slow that the
human population did not reach the 1 billion mark until about 200 years ago.
But suddenly it began to increase almost exponentially. In a relatively short
time -- 123 years -- the population doubled to 2 billion. In the following
decades this accelerated growth continued, so much so that it took only 33
years for the number to reach 3 billion (1960), and only 15 years (mid 1970s)
to reach 4 billion. Today we have crossed the 6 billion mark, and if the
current trend continues, by mid-century we will be close to 10 billion people.
While the population is growing rapidly the main source of
our energy (i.e., oil reserves) is depleting fast. In addition we are running
out of fresh water. Fresh water reserves are being depleted much faster than
they are being replenished. Water, energy and land are the main ingredients of
our food production. A few years ago, the world�s total irrigated agricultural
land began to shrink. If you combine the effects of the increasing population,
diminishing water, food and energy, you�ll get the indication of how things
will develop. In the long-term inflation is a given.
We now know where we are at and where we are heading; so how
can we take advantage of this knowledge.
Things to remember
Before one can talk about investment opportunities, one
should bring one�s economic situation under control. To start with get rid of
your credit card debts. Credit card companies (including banks that support
them) are the worst shylocks that ever existed. They entice you to spend the
money that you don�t have and then charge you unbelievable interest rates. So
minimise your exposure there.
Try to stay healthy. Health care companies are number two in
my list of vampires (after credit card companies). This of course applies to
countries where health care has been privatised. In Scandinavia, Germany and other
places people are automatically insured so health care costs are not a big
Get rid of your gas guzzling car. Petrol prices will
continue to increase and transportation costs will become an important part of
your budget. Similarly, pay attention to your utility bills. We use more and
more electricity, prices of which are rising and will continue to rise for the
foreseeable future. And if you are going to buy home appliances, pay attention
to their energy rating. Change all the light bulbs to energy saving types.
Don�t use dryers so much; not only they use a lot of electricity; they also
wear out your cloths.
Keep away from multi-level marketing, and other such things.
In the end you will lose not only your money but your reputation and friends as
See how the recession will affect your company or your job.
In hard times, the government jobs are fairly safe. So if you are offered a job
in city or federal institution, then take it; even if it pays considerably less
than the private company. Remember that long-term financial security is more
important than the short-term rewards. And while we talk of jobs, let us look
at employment development during the great depression.
The following is the list of fastest growing jobs in US
during the period 1929-1933 (Source: Historical Statistics of the United
engaged in gasoline service stations 34 percent
and local government employees: 3 percent
engaged in repair services: 18 percent
employees: 6 percent
faculty: 32 percent
engaged in legal services: 12 percent
engaged in liquor stores: 335 percent
school teachers: 2 percent
engaged in second hand stores: 35 percent
Investment in stocks
Remember, NEVER invest in stocks with borrowed money unless
you are 200 percent sure of success. Right now the stocks look cheap. There are
some who are urging people to buy stocks before they go up again. Well, it all
depends. First, the bottom has not been reached yet. But if you have cash and
would like to invest, then you have to pick stocks that have a future; that is
to say the companies that you are investing in are going to make money.
Investing in a car company that keeps making gas-guzzling cars is a mistake. On
the other hand, investing in utility companies, especially those that generate
electricity is a good one. We have to look at the world and see what will be in
short supply and which companies will solve our problems; then invest in those
I have already explained that our population is growing
rapidly while our food supplies, along with oil and water, are diminishing.
From this you can see that investment in sources of food, energy, water and
related industries is a good investment. Stocks in the Russian energy giant Gazprom is worth every penny, since it has
direct access to vast Russian reserves, is investing in pipelines to Europe and
is getting into the Iranian oil sector as well. On the other hand Shell Oil
Company is not as hot as Gazprom, since it simply doesn�t have the same access
to the energy reserves.
But energy is critical to our survival. Our societies need
some sort of energy to function. If it is not oil, then gas; if it is not gas
then solar or wind generated electricity. The fact is that all these are good
investment opportunities; all that is except biofuel. Turning corn into fuel is
just madness, especially when we are facing food shortages. In addition,
irrespective of what kind of agricultural product they intend to use, any
available agricultural land should be used for growing much needed food and not
So if you are an investor and are interested in energy then
you should focus your attention on nuclear power and possible alternative
energy companies. But how do we know which alternative energy will become the
norm. Well one thing is clear; whatever that can produce electricity cheaper
than fossil fuel will be a success, be it wind power, hydro-electric, hydrogen
cells, or what not.
Food producing companies are also prime candidate for
investments. Water distillation companies or those companies that have access
to fresh water or technologies for purifying water are also good.
Besides looking at the stocks, you should be aware two
things: in deflationary period cash is king and in inflationary period asset is
king. If you see that inflation is rising, invest your money in real-state and
stocks. If deflation has taken hold then save your money, it is worth more tomorrow.
In periods of stagflation invest in some other country where inflation is
In these turbulent times people tend to rush to gold; if you
haven�t, don�t. There is a bubble forming around gold that, if people are not
careful, will burst. If you see that your currency is under pressure along with
inflation, invest your money abroad. Don�t just rush and buy gold.
In conclusion I should mention that it is rather difficult
(at least for me) to explain the economic situation and answer all questions in
a few pages. I have received a lot of e-mails from concerned readers about what
they should do and where should they invest and even which degrees they should
take. I have tried to answer all these questions in a few pages. I hope that
this article has answered at least some of those questions. In addition I have
directly answered some e-mails and if time permits, I shall answer the rest.
Meanwhile, I hope this article provides those concerned with some answers.
� 2008 Abbas Bakhtiar. All rights reserved.
Dr. Abbas Bakhtiar
lives in Norway. He is a management consultant and a contributing writer for
many online journals. He can be contacted by e-mail at:Bakhtiarspaceemail@example.com.