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Blog : An Idiot's Guide to Recession

May 8th, 2008

When it comes to penny stock investors, there are two ends to the skill level spectrum.

On one hand, there are highly sophisticated and experienced traders.  They know that investing in penny stocks the right way is one of the most lucrative pathways to self-made wealth. 

On the other hand, there are newer investors who don't necessarily have a lot of money to invest, but want to make the most of what they do have.  They are just getting started, and turn to penny stocks while learning the stock market game.

It is this latter group for whom this article was written, but it wouldn't surprise me at all if the first group also learned a few things. 

Lately, you've being hearing terms like 'recession,' 'stagflation', and 'inflation' so often that many of us forget we don't actually know what they mean.  At the same time you might feel like an idiot by asking for an explanation.  For those who can relate, let's get you up to speed.

Recession:  A period of negative economic growth.  This negative growth needs to take place over two consecutive quarters (3 month periods) to be an official recession.  It is measured by the Gross Domestic Product (GDP).

Gross Domestic Product:  This is a measure of the total economic output of a nation.  In other words, how much was the value of all the products and services our country created?

Inflation:  A rise in prices over time.  Prices can go up for a lot of reasons, but regardless of the cause, when things get more expensive than they used to be, that's inflation.

Stagflation:  This is a period of little or no economic growth, coupled with increasing prices. 

Why doesn't anyone know if we are in a recession right now or not? 

This is simply because there is a lag in the data that we use to measure it.  GDP numbers are released many weeks after the period they are actually measuring.  For the second quarter of 2008 (April - June) you won't see the official GDP numbers until July or August.  Only then would you know whether or not we were in recession several months earlier, and how bad or good it really was.

Why is a recession so bad?

The lack of growth of the Gross Domestic Product is not actually that terrible of a thing.  To expect any economy to indefinitely keep a positive growth path is delusional.  However, the more protracted a recession becomes, the greater the chance of it resulting in some bigger problems.

Recessions can result in jobs lost as companies downsize.  Finding new work or switching between jobs may become harder.  Over time, a recession can lead to inflation or stagflation, which decreases the buying power of the money you do have.

So, in general, with strong economic growth, you are more likely to be able to have more.  With a contracting or shrinking economy, you are more likely to be able to have less.  Of course, this over-simplifies the concept, but that is my intention.

I hope this article was brought some of you up to speed about recessions, and all the things that go with them.  Unfortunately, we may all be about to get a real world education in the R-word.