A few months ago, I had written that the government wanted to cause a recession in order to stop the runaway inflation. Well, now that the government has managed to start a recession, it is worth thinking about what comes next.
Why recession?
Recessions suck. The economy slows down, job losses increase, and people feel poorer because their portfolio value goes down. It is gloomy all around.
So why do we have recessions?
Running the economy is a lot like driving a car. You press on the accelerator to increase the speed. When you press the accelerator too hard, the car might crash. So then you press the brake to slow the car down.
The same is true for the economy. Most of the time, the economy is growing, new companies are being formed, jobs are getting created, and things are looking good. But sometimes, the government presses the accelerator too hard – it prints a lot of money and keeps interest rates too low. This causes the economy to speed up and leads to inflation.
In order to avoid a crash (hyperinflation), the government presses the brakes (increases the interest rates), thus slowing down the economy (recession).
What comes next?
You will hear a lot of predictions from talking heads about how long the recession will be, and almost all of them will be wrong. No one knows for sure how long this recession will last or how bad it will get.
We can look at history to see what has happened in the past:
As you can see from this analysis, most recessions last between a year and two.
Although recessions are bad, they are rare. In the last two decades, we have had only two recessions: the global financial crisis and the covid recession. The rest of the time, the economy has been in growth mode.
Since recessions are rare, we don’t have much experience dealing with them. Hitting the brakes suddenly when the car has been going fast can be jarring.
Hence it is important to prepare now and batten down the hatches for the next year or two. While there are many things you can do to survive a recession, the most important thing is to save money. It is not too late to start saving… maybe cooking more at home and eating out less, canceling unneeded / unused subscriptions, delaying non-essential purchases, etc.
Just like every other recession, this one will end too. Until then, let us hunker down and hope this is a mild recession.