Im not understanding how the economy works and how we come about to being in a recession? help anyone? please.

Question

how is it that we are in "recession" like for example i know stimulus checks were sent out to "boost up the economy" bhut im not really getting the whole thing? like how is it that money circulates and if gas prices go up how do house prices go down. im very confused of how money works and circulates and how it comes to be. im so confused im not even sure how to explain it right. hopefully someone will understand my question! thank you!

Answer 1

I have a degree in Economics.  The entire subject focuses around your question.  I would get a micro economics text and read it.  Then try Macro.

Answer 2

Right bare with me:

Banks over the past few years have been very liberal to who they lend money to, as long as they have houses as collateral. But recently in America (2007) people who should not have been lent to have not been able to pay it back, so the banks seize the houses. But because there are so many the banks simply have lots of houses and no money. So Banks who were irresponsible such as Northern Rock are feared by banks to be lent to, because if they collapse, the lender bank will lose the loan. So banks now don't trade with each other, and so they decide to protect their money and not lend to us. Less money comes in to us, we spend less the economy slows. But it's even worse because the oil prices are through the roof so commodity prices are higher so we have even less to spend hence the immense slow down. Its happening here in Britain, in America, everywhere!

Hope tht helped lol

Answer 3

You're asking a broad question so any answer would obviously have to be general in nature.  But here is my best attempt to give you a quick lesson starting with a couple quick facts:

First, the Dow Jones (as with most market indices) is not a measure of how the economy is doing; it is actually a better measure of how the economy will be doing in 6 months...also, the Dow Jones only measures 30 companies (albeit large ones - the most widely held companies in the US).  So, it is prone to fluctuation.  Most responsible investors and economists prefer using the S&P 500 as a means of aggregate measure and indicator of our economic strength and viability.

Second, a recession is (by definition) a decline in GDP for 2 or more consecutive quarters.  So, the sad news is you don't know whether a recession is really starting until you're already in one.  For example, we are not yet, at the time of my response, in a 'textbook recession' (we may be at the start of one; but we have yet to have a measured decline in GDP for two fiscal quarters).

The idea of the stimulus checks was to put cash in the hands of Americans who both needed it and were most likely to spend it; basically, that the billions the government was spending on the checks would pay for itself by helping to recover the economy more quickly and stimulate spending.  This was actually a half-baked idea (in that it only made some sense...but also had a major tactical flaw).  It made some sense because it is indeed succesfully putting cash in the hands of people who will be most likely to spend it...however, there is no layer of control over what those people spend on so they may be purchasing goods made in China which doesn't help us very much.  But, with gas prices being high, and food costs skyrocketing, the assumption is that people will spend it on necessities.  If they purchase food, there is a better than 55% chance that it is benefitting a US agricultural producer.  If they use their cash to purchase oil, there is a 32% chance it is benefitting a US fuel provider solely.  So, it made some sense but is a risky and expensive strategy to employ and could potentially benefit other economies more than our own in the longrun.

Our dollar was, at one time, connected to the value of precious metals (notably gold) but that's no longer the case.  

Oil has become incredibly expensive for a few reasons: emerging economies like China and India are fuel-starved and trying to purchase as much oil as possible to fuel their booming economies.  That has created tremendous competition for fuel (where we have been, historically, the unchallenged leader in energy purchases and consumption).  Also, the cost of a barrel of oil is traded in dollars; so if the US dollar is weak, the actual cost of the barrel goes up as a result to compensate.  (These are the two largest factors).  There are also commodities / futures traders who purchase stakes in barrels on the assumption the price is going up; then sell if they feel price will go down.  Obviously, right now, everyone is betting on increases.  The notion that it is 'price fixing' by the oil companies is actually something of a 'conspiracy theory' style stretch (though it does happen a bit - it's called cost equalizaton)...in truth, oil is still far more expensive in other regions of the world (like Europe).

Housing prices have dropped because of the lack of available homebuyers.  It seems like stating the obvious; but due to predatory lending practices...and a whole bunch of people getting into risky mortgages (with variable interest rates for example..or interest only loans), the rate of bank foreclosure has increased dramatically (people just couldn't make their payments).  At the same time, the banks see the value of those homes dropping (over 30% in some areas), but are tightening their lending guidelines - so buying a home at a competitive rate (despite the Fed's stated low interest rate) often requires a somewhat sizeable down payment.  And, in a time where the average American is penny conscious (with fuel and food prices high), they are less likely to make a big purchase...or even to have enough cash on hand to make a down payment.

A lot of that sounds like doom and gloom...and in truth, if the US doesn't start rejuvenating our manufacturing base once again OR find new technologies/products to produce, we are headed for economic trouble and 'stagflation' over time leading to an extended recession.  Economies are cyclical and recessions are unavoidable...it's just a matter of when and for how long.  And when the market corrects itself, the recesson ends and the economy starts to grow again.  For those alarmists who say we're headed for another 'Great Depression', don't listen...they don't understand the protections in place that would prevent that level of disaster (and so many foreign economies are linked to our own either through trade or our debt to them, that they have an inherent interest in seeing us not fall into total economic disarray).

Side note: the weak US dollar isn't all bad!  It makes our US-manufactured and exported goods cheaper to purchase (making us more competitive on the open market).  Small consolation but hey...our trade deficit has been rough for ahwile so it's still a silver lining.