Recession or Depression: Defining Economic Decline

as even savvy market-watchers have difficulty timing a rebound.

Indeed, hard times call for vigilance. And, keeping abreast of events and forecasts is an essential part of survival.  The first step, of course, is to understand exactly what’s happening. Essentially, the collapse of the housing bubble and the ensuing credit crisis have reduced consumer’s real wealth (as their home values fall) and the cut off their availability to easy credit. In reaction, they’ve cut back on spending, putting businesses in a bind. Just this week, there’s yet another new danger: deflation.

That is, broad decline in consumer prices over a prolonged period. Why’s that bad?  In general, falling prices encourage consumers and businesses to hold onto cash in anticipation OF further price decreases. Deflation slows economic activity, which is the last thing the U.S. economy needs right now. Consumer prices in the U.S. fell 1% in October, posted their largest one-month decline in more than 60 years. In the 1990s, deflation took a toll on the Japanese economy, causing a near-decade-long recession.

It’s an understatement to say that the weeks and months ahead will be challenging for president-elect Barack Obama and his team of economic advisers. The concerns are numerous: First there’s the question of how—or whether—to implement an economic stimulus package that will shore up employment. Should Detroit get the bailout it’s looking for?  How is the historic $700 billion financial bailout approved by Congress in October being rethought now? And finally, how will the new administration respond to increasing pleas from consumers for a direct bailout of their own?

John Simons is the senior personal finance editor at Black Enterprise magazine.

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