Wednesday, May 7, 2008

Benefits Of Economic Recession

With all the doom and gloom talk about the current (or looming, depending on your view) economic recession and housing bubble, I thought it would be nice to talk about some of the benefits that should be realized by these otherwise negative events for a change. An economic recession is not a joyous time for most people, as jobs and wages are cut and belts are tightened, but there are some positives.

The housing bubble, for one, should be looked at as an overall good thing for many people who were priced out of the market. In many parts of the U.S., homes were just flat out getting too expensive; now that they have dropped by double digit percentages in most areas, they are becoming more affordable. Obviously this isn’t necessarily a good thing for current homeowners, but it is certainly a correction that needed to be made.

Another benefit of the economic recession is that it should serve as a wake-up call to investors and consumers alike. Things were going so well that many investors got big heads and took on a too much risk. Consumers on the other hand didn’t bother to save and instead decided to spend every penny they had and then some. The pain people are experiencing now as a result of those actions should be remembered next time a boom and bust comes around. This might be wishful thinking, as it seems people didn’t learn this lesson after the dot-com bust, but hopefully this time will be different.

In addition, I hope that this economic turbulence will force the government to re-evaluate their spending habits and overall budget. The U.S. government is wasting more money than we can even imagine on things which are producing either no, or little, benefit for our country. If the U.S. government were a business, they would have gone out of business a long time ago. They need to figure out which programs are producing significant ROI to the country and cut the programs that aren’t holding their weight.

Lastly, one of the key benefits for investors from an economic recession is that they are often able to buy assets cheaply. Smart investors will look to capitalize on everyone else’s panic and desperation and buy up their assets at a hefty discount. Often times it is possible to actually make more money in a recession than during the boom. Less competition and desperate sellers mean lots of opportunity for investors. The trick is that investors need to make sure they aren’t buying assets which are going to decline in value.

While economic recessions are gloomy times, there are some benefits that can be derived from them. Hopefully you prepared yourself for this economic recession and are prepared to profit from it instead of falling victim to it. If not, then learn from your mistakes and make sure next time you are ready. Regardless of what some people say, there will likely be more recessions in your lifetime. Make sure you are prepared.


Anonymous said...

This is a very good and useful advise. Thank you.

Dike Drummond MD CPC said...

Recessions are an absolutely necessary feature of the Free Market.

As long as you are able to understand market cycles
- everything is ALWAYS either growing or contracting
- It is most definitely NOT "Different this time"

And as long as you not make mistimed investments in the UP side of the economic cycle.

You will do very well in the DOWN side - or Recession Phase.

An example - if you are a residential real estate investor ... right now you can find over 5400 houses on the MLS for less than $20,000 in Detroit alone.

This is a potential bonanza for an investor with
the right business plan
and a good team.

My question now is who has the clearest crystal ball to see when this recession will begin to ease? I say eary 2010.