Analysis
How to survive the recession
By Dr. Abbas Bakhtiar
Online Journal Contributing Writer


Mar 27, 2008, 00:14

�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 deflation.

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 was deflationary.

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 individuals?

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 problem.

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 well.

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 States).

• Persons engaged in gasoline service stations 34 percent
  
  
• State and local government employees: 3 percent
  
  
• Persons engaged in repair services: 18 percent
  
  
• Federal employees: 6 percent
  
  
• College faculty: 32 percent
  
  
• Persons engaged in legal services: 12 percent
  
  
• Persons engaged in liquor stores: 335 percent
  
  
• Public school teachers: 2 percent
  
  
• Persons engaged in second hand stores: 35 percent
  
  
• Physicians: 6 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 companies.

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 fuel.

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 lowest.

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. Thank you.

Copyright � 2008 Abbas Bakhtiar. All rights reserved.