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QotD: Recession or Depression?

October 15, 2008

We are all feeling the effects of the market crash. Some people have lost a lot in the market in terms of 401K and some have lost their jobs as well. So now that we are all into it together, the most important question is – When is this going to end? And the answer can be found only if we knew exactly what we are into? Some say we are into Recession and some say we are into Depression. For a nation (USA) as a whole, we are certainly in Recession and slipping into Depression every single day. For individuals though, it is extremely personal. When you have lost your job, it actually is Depression. If you are cutting on your expenses, lost in 401K and stocks and worried about job, then it is Recession.

So personally we all know what is happening but as a nation we need to analyze. So now that we surely are into Recession as a nation, what is the benchmark for a Depression? A sustained Recession is classified as Depression. So now from the results and stats, we are into recession since last 6-9 months. If this continues for another 6-9months, we would be in depression. Looking at the financial state, we dont see a bottom right now for the market and economy. I think market is going to stabilize around 5000. My assumptions are based on P/E ratios for DJIA companies and I see that 5000 is still an inflated number. But some logical thinking says that markets reflect futures as well so we can say that 5000 seems reasonable.
Now away from the market, how do we know we are stabilizing our life styles, our expenses. we borrow from future in terms of auto loan, home loan and credit card loan. So now we have borrowed enough from future and we need to go into future with less expenses. So we would see for quite some time, people would cut spending and save some more because of the shaken finances. Result? – A very likely Depression.
The other problem that comes with Depression is that people cut back and dont spend long time after the problem is over. So it is not going to be easy for long long time.

So now that I think we are into Recession and going into Depression, what do we need to do? We need to make sure we prioritise our expenses on monthly basis and expenses on spendings that can be avoided. Make sure you know that 2 gallons of Silk Soyamilk costs 1$ less at Walmart. You know what costs how much and where. So now that we have a long time problem in our front, we need to be careful and judicious in what we are spending. And in the end we need to keep each other informed and entertained by cheaper means – BLOGGING:)

– Tarun

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