Do we have irrational fears of a recession? %page

Do we have irrational fears of a recession?

Posted by Madison Backhouse on October 25, 2011 Leave a comment (0) Go to comments

As you know, I have been away from the blog since June for a wide variety of reasons (if you emailed or commented, I am slowly working my way through them. Thanks for your patience). The one good thing about this absence is that it gives a little perspective on things.

One of the observations I have made in my hiatus is how our 24-7 news cycle may actually be making us worse investors by ignoring historical lessons (or history simply being downplayed in order for everything to seem new and novel) and, to borrow a political term, creating and/or exploiting wedge issues to draw our attention.

In particular, what I have noticed is the hysteria in which the next recession is being portrayed. To read the experts and to hear our political experts, one would think that recessions are earth-swallowing events that will consume us all. But here’s a list of years in which recessions have begun since 1945:

1949

1953

1958

1960

1969

1973

1980

1981

1990

2001

2007

Remove the last 9 year gap between the periods of 1960-1969 and the 11 year gap period of 1990-2001 and recessions are more or less unavoidable every 4-6 years. If we hit anywhere close to historical pattern, a recession would hit sometime in 2012-2013.

Recessions occur for a wide variety of reasons. To the extent anything good comes out of them, it is generally that the excesses are wrung out of the system and policy mistakes corrected.

Yet, if you read many media outlets or listened to our elected officials, this next recession (whenever it is coming) will be the ultimate end of us. More accurately, it will probably curb advertising (bad for media outlets) and result in politicians being thrown out of office (bad for the political class). But, in the meantime, spinning the next recession as economic Armageddon helps the media by making people pay attention to them and politicians by allowing for the advance of a political agenda through fear.

The hard truth is that recessions are not pleasant but necessary in modern economies. The good thing is that they compel households to more ideal economic behavior by, consciously or unconsciously, focusing on a “needs vs. wants” analysis on household consumption and communicating to our elected officials how we want our tax dollars spent.

At the end of the day, the people who survive recessions the best are those who can set aside the emotions that come with bad times and focus on the task at hand which, for many households, means reining in debt and repairing household balance sheets.

As for this blog, you will see some resumption of normal activity (“normal” being defined as 1-2 posts a week). Thanks for reading.